Pulp is Canada's best bet in China

Don Roberts is Managing Director and Senior Paper and Forest Products Research Analyst with CIBC World Markets Inc. He specializes in international commodity markets, and has collaborated with a number of international forestry organizations to gain a global perspective on the paper and forest products sector. He is consistently ranked by institutional investor surveys as one of the top equity analysts covering the global paper and forest products industry.

Mr. Roberts says he has no doubts that China will continue to provide a market for Canadian pulp. “Although Europe remains the largest single consumer of market pulp, Chinese imports have risen by approximately 150 percent over the last five years, with Canada being the largest supplier. There could be an added opportunity for Canada if China decides to invest directly in Canadian mills to upgrade them and produce the fibre it desperately needs.”

According to Mr. Roberts, “Few countries have as strong a mercantile philosophy as China and their forest products sector is no exception. But to maintain this approach, China will require fibre and water, two resources that are not found in sufficient quantity within its own borders. How China deals with these shortages will ultimately determine how much of an opportunity its development will offer for Canada.”

Currently, China’s main sources of imported virgin fibre are the Russian Far East and Southeast Asia, where illegal logging is widespread. To address the illegal-logging issue, the Chinese government has claimed it supports certified wood, but how this may translate into action remains unclear.

A potential future source of fibre for China lies in its own plantations. However, Mr. Roberts stresses that there is significant uncertainty about China’s plantations as there is a large discrepancy between what is observed on the ground and what government reports is on the ground. “They assert that they will be self-sufficient by 2020 to 2030 but many pundits are skeptical; current plantations are not very successful and growth rates are far below targets.”

China is also a large consumer of recovered paper and will continue to make increasing use of it as a fibre source in the foreseeable future. This rise in consumption will likely cause a global shortage of recovered paper and will eventually drive up the price. According to Mr. Roberts, “if the price of recovered paper rises enough, it could make Canadian virgin fibre even more interesting.”

There is an important link between the issues of water unavailability and fibre scarcity. It has been widely reported that China’s water reserves are low, creating shortages in some parts of the country—not surprising, given that China has eight percent of the world’s freshwater but 22 percent of its population. Mr. Roberts adds that “what people may not realize is that China has many processing plants that consume water very inefficiently, such as non-wood fibre paper mills and older recycled-based mills (85 percent of China’s pulp production is from non-wood fibre). If China decides to close off these water hogs—as much as 25 percent—it could mean a huge need for pulp in the near future.” This would mean that China would need to be a major importer of pulp, which would again offer opportunities for Canada.

Despite fibre and water availability issues, the Chinese have become clear net exporters of paper and allied products. “This is most true in the case of boxboard and the coated grades of paper. However, this may soon be true even for newsprint, due to a 23-percent increase in Chinese capacity in 2006 and a further 17-percent rise next year,” says Mr. Roberts.

Due to the rapid rise in both its consumption and capacity, the Chinese paper and forest products industry will continue to be the fastest growing in the world. Mr. Roberts concludes “in spite of the inevitable future restructuring of this sector, and the associated reduction in the number of companies, China will continue to dominate the changes in supply and demand in the global paper industry.”