Dagong Global Credit Rating Group Co., Ltd (hereinafter referred to as “Dagong”) released Dagong’s 2018 Credit Outlook for the Global Paper Industry On February 11th, forecasting the credit risks in global paper industry amid the economic recovery in 2018.
In 2018, the global paper industry will continue to be in a period of recovery and rising profitability. Under the dual pressure from the change in consumption structure and from higher environmental costs, the demand for newsprint and printing & writing paper will shrink further, while the boom in the packaging paper industry will go on, and the household paper industry will maintain a stable growth. As a result, most companies will maintain their profitability through product diversification, while a small number of them, unable to make timely adjustment in their product structure, may suffer increasing credit risks.
Dagong’s main points are as follows:
I. Due to the uncertainty of economic recovery and impact of Internet media, there is still a contradiction between supply and demand in the paper industry, which will remain through the period of its structural adjustment.
Uncertainties in the global economic recovery will continue to dampen the market demand for the paper industry, which is still in the middle of a profound adjustment. In 2018, it is estimated that economy will continue to rebound in the United States and Europe, while growth will slow down in developing countries. The expected demand will be weak for the paper industry, when there is still an oversupply in the market. As the boom in Internet and new media are estimated to further weaken the demand for newsprint and printing & writing paper, the demand for packaging paper will increase. As some small and medium-sized enterprises (SMEs), deeply affected by the demand fluctuation in the market, show a poor ability to tolerate risks, large paper companies can mitigate their risk by accelerating the adjustment of their product structure.
II. Rising environmental costs will exacerbate the pressure of competition and continue to force companies to upgrade. The industry concentration ratio will increase further.
As governments continue to strengthen environmental protection, rising environmental costs will force some SMEs to even exit the paper business. The industry’s concentration is likely to increase further. Differentiation in the degree of industrial development will result in different regulatory focuses in different regions. As the European paper industry continues to evolve its model for sustainable development, and US paper industry will increase the default costs for polluting enterprises. The pattern of competition in Europe and the US will remain basically stable. In China, leading companies are likely to strengthen their position amid the industry’s further consolidation thanks to the large-scale mandatory promotion of environmental protection. There will be much improving space for the industry concentration of Chinese market in the future.
III. Globally, the industry’s overall profitability will improve and the main impetus from the Asian region. In Europe and the US, the industry will continue to stabilize its profitability by displaying strong cost control ability. Yet, due to differentiation in product diversification, some traditional paper manufacturers will face increasing pressure on their profitability.
In 2018, the China-led Asian market will continue to be the main driving force for the steady growth of the global paper industry. Leading Chinese companies can resolve the raw material price fluctuation risk through economies of the scale and relatively strong cost control ability, while its SMEs will continue to lead an uphill battle for survival. In Europe and the US, the major paper manufacturers have early completed the vertical integration of the forestry, the pulp, and the paper sectors, therefore they will demonstrate a strong ability to control raw material cost and present little volatility in their profitability. The packaging paper and household paper companies are expected to report a high level of profitability, when the profit of the printing & writing paper companies and other traditional paper companies will suffer from a shrinking market demand.
V. In 2018, the profitability of leading paper companies in China is expected to increase continuously, but these companies may face the possibility of debt risk expansion. The overall credit risk of European and American paper companies has little change.
In 2018, for the Chinese paper industry, raw material prices will remain high, product structure will undergo some adjustment, and capital investment will increase, especially in environmental technologies, which will result in higher debt financing and debt repayment pressure. SMEs will face rising credit risks due to their weak profitability and financial capability. In the short term, the debt of leading companies will remain in a relatively high level, and their debt repayment ability will be under pressure. However, in the medium term, as product structure adjustment is fulfilled as planned, the layout of clean production line is completed, and industry-wide competition comes to stabilize, the leading companies will see an increase in profitability and be able to relive their debt load. The credit risk of European and American paper industry will not change much; strong cost control ability of major paper companies will continue to stabilize its profitability and provide a fundamental guarantee for its debt repayment. Major risks will be concentrated in a few companies with printing & writing paper as their main product and already suffering from a heavy debt burden.