The COVID-19 pandemic

The coronavirus's impact on forest products markets

Impact: Global markets

by Lasse Sinikallas, Director of Macroeconomics

Almost overnight, the trajectory of the global economy has changed completely. Heading into 2020, there was some minor lingering concern about continued deceleration in China. However, the US economy was demonstrating underpinnings of strong growth, Europe was muddling along as expected and the slowdown in China seemed to be easing. The consensus outlook was for a stable first half of the year, before seeing an acceleration in the latter half of 2020 and into 2021.

The COVID-19 pandemic has changed that picture drastically. Now, China is in the very early stages of recovery after implementing draconian measures to contain the virus. The delayed response in the US and Europe is quickly evolving into a similarly strong and all-encompassing response. The economic impact from these measures will be exceptionally disruptive, and has increased the likelihood of a recession significantly. The global economy has already showed signs of substantial slowing, and the downside risk has risen exponentially in terms of both likelihood and severity.

The pandemic's impact will be particularly significant in Europe and the US, where consumer demand has been the key driver for economic growth in recent years. With consumption down and business interactions significantly limited due to restrictions, curtailments and quarantine, major economic growth contributors are missing. The service sector is likely to be one of the most vulnerable, and its potential problems could cause the rebound in growth to be somewhat slower than expected.

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Impact: Pulp markets

By David Fortin, VP of Fiber

The global pulp market, which was gradually recovering in early 2020, will likely be weaker for longer as a result of the pandemic.

After a year of weak demand due to the accelerating decline in graphic papers in Europe and the US, and bloated producer inventory levels, the pulp market had tightened considerably by early 2020. Substantial supply-side curtailments and consumer restocking had enabled producers to work excess inventories back to balanced levels. Supply disruptions were also piling up in early 2020, and were on pace to equal nearly 2 million tonnes for the year.

However, the astonishingly rapid spread of COVID-19 and subsequent policy responses could more than offset these supply-side disruptions. Consumer restocking in late 2019/early 2020 could allow buyers to further put off any new orders. The increase in reported producer inventories in January could be just the beginning of an extended move upward, and inventories at the ports in China have already jumped higher and are approaching the record levels reached last year.

The pulp industry has been dealing with supply chain disruptions, beginning with inbound logistics in China, that have reverberated outward, creating bottlenecks throughout the supply chain and limiting the availability of containers for ocean freight and driving up shipping costs.

As China is such a huge part of the global market, accounting for 36% or 24 million tonnes of global market pulp demand in 2018, its difficulties will reverberate worldwide. Supply chain bottlenecks in China are slowing the delivery of both final products to consumers and pulp from the ports. Lackluster demand recovery in China, along with ominous economic conditions in the US and Europe, could delay any meaningful recovery in the pulp market until the second half of the year.

While prices have already fallen below the high end of the industry cost curve, slack demand and supply chain bottlenecks coupled with limited market-related downtime could push prices even lower. As a point of reference, net prices for NBSK delivered to China fell to a low of $490/tonne during the financial crisis in early 2009. We are still quite a distance from those depressed levels, but the Shanghai Futures Exchange pulp contract for May has slid to a US dollar equivalent of $546/tonne, $15/tonne below the cash market, indicating further downward pressure on prices in the near term. 

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Impact: Recovered paper markets

By Hannah Zhao, Senior Economist for Recovered Paper Markets

The supply side of global recovered paper markets has been and will continue to be impacted significantly by the COVID-19 pandemic.

Chinese domestic RCP collection was interrupted substantially in February, as most regions in China were locked down to stop the spread of COVID-19. Chinese government ended these dramatic lock-downs region by region as the epidemic slowed down in March, and Chinese domestic supply has recovered gradually since then.

However, as the virus spread from Asia to Europe and North America, collection has been disrupted in areas hit hard by the outbreak, such as Japan, South Korea and Italy. Depending on how long the pandemic will last, RCP collection is expected to be disrupted in most regions over the next couple of months.

In 2018-2019, global RCP markets had been struggling with sharp declines in Chinese imports, increasing restrictions on imports from other Asian countries, and weak domestic demand in Europe and North America. RCP prices had stayed at very low prices for most of 2019. Recovered paper demand held relatively steady in early 2020, sustained by the paper packaging segment. Strengthening US domestic demand, and the uptick in Chinese RCP imports caused mainly by the shortfall in Chinese domestic supply, had combined to push prices up significantly in North America and Asia, while prices in Europe appeared relatively stable. However, if the global economy heads into a recession, a demand slowdown will be inevitable and the recent price rebound posted in Asia and North America will end.

The COVID-19-related slowdown is likely to increase the RCP surplus in global markets. Chinese RCP imports plunged by about 15 million tonnes between 2017 and 2019. Domestic RCP demand in the major exporting regions, US, Western Europe and Japan, showed little increase or even a decrease during the same period. For instance, US domestic RCP demand dropped by 2.4% in 2019. The decline in Chinese imports and the slowdown in domestic demand in the major exporting regions resulted in a very weak RCP market in 2019. With RCP imports into China expected to drop another 4 million tonnes this year, if the decline in US domestic demand accelerates just one percentage point to 3.4%, it will result in 5 million tonnes of surplus RCP needing a market.

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Impact: Paper packaging markets

By Ken Waghorne, VP of Global Packaging

While the COVID-19 pandemic has cut demand for many forest product segments, packaging paper and board is a notable exception.

As seen in Asian markets in January, and then in European markets as the virus spread, the immediate impact of the US response to the pandemic has been a shock to the supply chain. Panic buying led to a run on items in many retail stores, and images abound of store shelves empty of merchandise. However, consumer goods remain abundant further up the supply chain, and it seems that retail outlets will once again have plenty of merchandise once the panic buying abates.

There is the potential for shortages to develop later this year, especially as many manufacturing facilities curtail production. However, a more significant factor could be delays in deliveries of intermediate goods from around the world, especially China, which was the first country to take draconian steps to control the virus.

A notable effect of virus control efforts is a steep drop in away-from-home (AfH) consumption, in favor of at-home consumption.  Many state and local governments have begun to implement bans on large scale gatherings to restrain the spread of the virus. Closures of sit-down restaurants are expected to have the most significant impact on packaging demand, since a considerable amount of packaging is used in the transport of goods to away-from-home food establishments.

However, people still need to eat, and any losses in the away-from-home segment will be offset by increased spending on food consumed at home. The chart at right shows our preliminary projections of how spending patterns may shift during the next year.

We anticipate that overall consumer spending on foods, and consequently industrial production of processed foods, will contract modestly during the middle of the year. One reason is that meals at sit-down restaurants tend to be higher-value than foods consumed at home. Another is that the sharp reductions that are occurring throughout the service sector of the economy are going to lead to reductions in personal income, which traditionally lead to reductions in spending. The most severe reductions are typically in luxury products, including some of the service sectors that are being forced to close, but consumers also shift to more modest food consumption patterns when they are tightening their belts.

Empty store shelves, and long periods of work-at-home, may lead to accelerating penetration of e-commerce into traditional retail outlets. Food in particular shows substantial room for online growth, as people seek some alternative to the food they normally splurge on at restaurants.

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Impact: Asian paper and paperboard markets

By Beth Lis, VP of Asian Paper & Packaging

Turning to Asia, the view is far from rosy. COVID-19 seems to be coming under control in China with the number of new cases declining each day, reaching the important milestone of no new internal cases on March 19. Generally, reports suggest China is getting back to work across much of the country, with logistics and operations moving toward normal, but the industrial segment has a big hole to climb out of as demonstrated by the low PMI readings in February. The pace of the recovery at this point is unclear, with mixed reporting and new shocks daily, but the industrial segment seems likely to remain underutilized in the near term.

Consumer confidence has no doubt been damaged, and spending expectations have been hit by concerns over jobs and salaries. The Chinese government is implementing measures to support the economy, but its efforts will now need to address the evolving impact on export industries, in addition to bolstering domestic demand.

Other countries in the region also have issues. Japan's economy was already suffering from the impact of the consumption tax increase at the end of 2019. And India has been struggling in recent quarters due to sluggishness investment and consumer expenditures. With poor global conditions, the export-dependent economies of much of the rest of the region look vulnerable.

Under these circumstances, market conditions in Chinese paper and board markets have been very fluid, changing weekly. The outlook for graphic paper markets corresponds to the global discussion above. Specific to China, demand is predicted to remain weak, with advertising and commercial printing hurt by reduced activity in the exhibition, tourist, restaurant and real estate sectors. The uncoated woodfree market currently faces producer inventory build-up and uncertain schedules for school-related printing.

On the packaging side, containerboard markets are likely to remain dampened—tailwinds from rising e-commerce deliveries notwithstanding—due to weak consumer sentiment and headwinds in markets for merchandise exports. Fiber availability adds uncertainty to the supply side of the equation. Weak consumer sentiment will also hurt boxboard demand due to its strong dependence on packaging of consumer goods. This gloomy outlook for China extends to graphic paper and packaging in other Asian markets.

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Impact: Tissue markets

By Esko Uutela, Director for Global Tissue Markets

The global tissue business has been hit by contradictory developments due to the COVID-19 outbreak, which have resulted in disparate impacts on the consumer and AfH tissue segments.

At first, many mills were forced to close in China, including all mills in Hubei Province. Meanwhile, larger companies were able to restart PMs outside of Hubei, to replace the lost production as consumers rushed to purchase toilet paper. Reports followed from Hong Kong and Australia documenting panic buying of tissue products. And in Hong Kong, the panic grew to such a level that a lorry loaded with toilet paper was hijacked.

When the virus started to spread to other regions, so did the panic buying and hoarding of tissue. Retailers in North America and Europe found it necessary to limit the amount of tissue purchased per customer to keep the shelves in their tissue aisles stocked. In Germany, three trucks that belong to a famous tissue supplier with one of the country's oldest brands were hijacked by people desperate for toilet paper.

Tissue producers suddenly needed to utilize all their reserve capacity to respond to the burst in demand. Consumer tissue mills in North American and Europe have been running at their capacity limits for the past couple of weeks.

Consequences for the tissue industry differ by segment. The tissue market may have recorded one or two record sales months, but will the trend continue? Could there be much less demand from retailers in two to three months, or will consumers keep their home supplies at higher levels than they have previously? This is shaping up to be a banner year for consumer tissue producers, but most likely home storage levels will be reduced again.

In contrast, the AfH tissue business will suffer drastically this year. Very little traveling, vacant hotels, restrictions on dining out, closed schools and people working from home instead of offices are all factors that will depress demand in the AfH tissue segment in 2020, especially during the first half of the year. The only potential bright spot for the AfH segment is increased consumption by the medical care industry, but this is a rather small AfH application.

In summary, we expect disparate trends for consumer and AfH tissue. Consumer tissue is likely to experience a slower second half, offsetting the peak demand during the first half, while the AfH business could see a rebound in the last half of the year.

Read more at COVID-19 and tissue markets

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Impact: Graphic paper markets

By Derek Mahlburg, Senior Economist for Graphic Paper

Global graphic paper demand seems to be facing a worst-case scenario. As in a typical recession, the negative economic impact of social distancing, travel curtailments and school closings will dampen print advertising and consumer spending.

This weakness will be compounded pandemic-specific factors, such as a massive reduction in printing at offices, for conferences and other business purposes, and at schools and universities. Many universities in North America and Europe have already shuttered their doors for the entire spring semester and will shift completely to online learning, and primary schools and workplaces are also closing as local communities, by choice or by mandate, attempt to buy time for medical services. Although some instruction will probably be delivered via paper packets and some business printing occur in home offices, the reduction in uncoated freesheet usage will be much larger than in a typical recession.

The prospect of poor demand comes at a difficult time for the global graphic paper industry, as operating rates are already low. Global graphic paper demand sank 5%, or 6.0 million tonnes, in 2019, compared to only a 2.7 million tonne reduction in capacity. This cut operating rates to 85.6%, the second-lowest level ever outside of 2009. With demand likely to plunge again in 2020 and coronavirus so far showing no signs of disrupting production even in Italy, downward pressure on prices and operating rates will increase even more.

Oversupply will be further exacerbated by the cloudy outlook dimming the appeal of conversions. Producers may delay clearly needed closures in the expectation that demand, artificially depressed by social distancing and closures, will recover back to previous levels once normal activity can resume.

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Impact: North American wood products

By Jennifer Coskren, Senior Economist for Wood Products

Following what had been a very strong start to the year for most wood products markets in North America, COVID-19 has the potential to turn the industry on its head.

Housing starts hit a cycle high of 1.63 million units SAAR in December, and posted another strong month in January, hitting 1.567 million units. Mild weather likely had an out-sized impact on the monthly housing data in December and January, providing an unexpected jolt to wood products demand during the seasonally slow winter building season, which also sent product prices higher.

Despite abnormally warm weather being credited in large part for improved market conditions, sentiment had started to grow more positive as employment and wage growth remain resilient and mortgage rates are near record lows. There has also been tightening on the supply side of the market.. Rail disruptions and a prolonged strike at large lumber producers in Canada constrained supply, as have the massive cutbacks in OSB and lumber capacity that were undertaken in 2019.

Optimism among wood products producers prevailed until early March. This is now threatened by the arrival and rapid spread of COVID-19,  as reflected in the collapse of lumber futures prices this week and a substantial softening in the cash market for many wood products.

While interest rates continue to plummet to record lows, which should make home ownership more attractive, these moves are in response to expectations of extreme drops in  consumption across a broad swath of economy. Some may perceive this as a prime buying opportunity, but many others will be adversely impacted by the impending wave of layoffs, pay cuts and a crashing stock market.

The spread of COVID-19 will also dramatically impact the US supply chain for home builders and will almost certainly constrain construction activity. China, which is still reeling from the impacts of COVID-19, is a major source of building materials to the US construction industry. Worker shortages will also escalate as employees get sick or are distracted caring for children or loved ones affected by COVID-19.

Our prior outlook for North American wood products demand to grow by 2-3% in 2020 is now far too optimistic given the unprecedented demand and supply shocks COVID-19 is inflicting on the industry. We now expect housing starts to fall from 1.3 million units in 2019 to 1.23 million units in 2020, while real spending on remodeling activity will plunge by 3% for the year.

The poor performance in residential construction will pull wood products demand down by 3-5% in 2020, and we caution that there is significant downside risk to this forecast if the impact of the virus is not contained in the coming months. This drop in demand will almost certainly spur temporary and permanent curtailments of wood product mills in high-cost regions like the BC Interior and the Pacific Northwest, affecting the livelihood of potentially thousands of workers in the wood products industry.

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Impact: Nonwovens

By David Allan, Editor, Nonwovens Markets

Not enough masks. Media reports are constantly warning about a shortage of masks—not to mention other medical garments, as well as coronavirus test kits. But these days, seemingly every newspaper is printing instructions on how to make yourself a mask. But why is there such a shortage?

Read Nonwovens technology plays key role in the world’s response to COVID-19

Perspective on the unknown

In presenting our perspectives here, we have tried to momentarily put aside the serious health risks the pandemic presents to focus on our area of expertise, the economics of the forest products industry.

We do not pretend to be epidemiologists. The situation is extraordinarily fluid, with major news breaking daily. We recognize that planning in this type of environment is challenging to say the least, as is forecasting. The goal posts continue to move, and the economic impact of the global pandemic becomes more dire daily. The economic disruptions emanating from the social upheaval the pandemic has placed on the world will be severe and will ripple through all industries.

However, the ultimate impact on each individual forest products segment is not uniformly negative, with tissue and packaging markets receiving a tailwind, at least for the time being, from increased tissue usage and expanding demand for home delivery services.

There are myriad risks associated with a looming global recession and we will continue to do our best to include the latest news in our analysis, and provide regular timely updates reflecting our current views on these evolving markets.


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