According to analysts at India Ratings and Research (Ind-Ra), the lockdown could reduce paper demand in FY21. It also warns of looming import threat due to overseas manufacturers pushing their inventory post normalisation and burst in demand.

In the analysis, Ind-Ra expected a decline in paper demand in FY21, given the hit on demand from packaging, education, corporate and print media sectors due to the nationwide lockdown, continued disruption in industrial production and supply chains for over a month and lingering infection concerns for a few weeks.

Ind-Ra also expected a recovery in demand in the second quarter of FY20 with resumption of education and corporate sectors, driving demand for writing and printing paper (WPP) and a gradual normalisation of manufacturing and logistics, pushing packaging demand. However, the report warned there could be downside risks if the lockdown is extended.

Besides, domestic paper producers have already been facing volume pressure from rising imports, which grew 18% YOY, significantly faster than the growth in domestic demand. "While logistical disruption could provide a temporary relief, the import threat continues with subdued pulp prices and the possibility of overseas manufacturers pushing their inventory amid a weak global demand, post normalisation of logistics," Khushbu Lakhotia, associate director at Ind-Ra, stated.

Supply disrupted
"Despite being a continuous process industry, which is eligible for exemption from the lockdown, most large and many small listed paper companies (around 70% of listed revenue) have suspended operations post the lockdown, due to issues such as state government approval, labour and raw material availability, logistics and demand disruption," Lakhotia mentioned.

A few companies including West Coast Paper Mills and Trident partially recommenced operations last week. Many of the other operational companies manufacture newsprint. 

Plant closures, logistical disruptions hit packaging demand
With the suspension of operations for several industries, disruptions in production of essential commodities, inland transport and export shipments, packaging demand will be hit in the first quarter of FY21. While eCommerce demand for groceries sky-rocketed in Q4 of FY20 due to household stocking, Ind-Ra believes that packaging demand from eCommerce would also remain affected for the next couple of months due to manpower shortage, supply chain issues affecting procurement and logistics issues affecting deliveries.

The online sale of non-essential items, which form a big chunk of the total demand, would remain completely halted until the lockdown is lifted. Despite discretionary purchases remaining affected, Ind-Ra expected growth in paper packaging demand from both industrial and eCommerce segments in Q2 FY20. The packaging segment accounts for over 50% of the total paper demand, followed by WPP at 30%.

Lockdown, infection scare hit WPP, newsprint
Demand for WPP has been hit by the closure of most educational institutions since the beginning of March and a gradual adoption of work from home (WFH) by companies.

"Professional courses could see a higher usage of the digital platform in the near-term. With restrictions and concerns around the Covid-19 pandemic, Ind-Ra expects WPP demand to be the worst hit in Q1 FY21," it stated.

"Demand for newspapers has also declined, with many readers avoiding the printed copy and housing societies banning the entry vendors as precautionary measures, while some magazines have temporarily suspended their editions," Lakhotia stated. "With little scope of a recoup, Ind-Ra expects newsprint demand to decline in FY21."

Demand for tissue papers has risen in the wake of increased hygiene concerns, leading to a 6.6% growth in the wholesale price index of tissue paper. However, the subsequent closure of eateries in March 2020 is likely to have a negative impact in Q1 FY21.

Import threat looms after temporary respite
Paper import, which accounts for 15%-20% of the domestic demand, grew around 18% YOY with a moderation in global pulp prices.

"Ind-Ra, however, believes the imports would get constrained till normalcy is restored in India, post which Chinese manufactures are likely to push the built-up inventory, though rupee depreciation will impact prices. This coupled with a subdued demand environment and high stocks in the supply chain would weigh on paper prices for most of the grades," the report stated.

Global pulp prices to remain subdued
Ind-Ra believes that despite production cuts in several countries and disruptions in logistics, the impact of Covid-19 pandemic on global paper demand will be higher than the impact on supply, keeping paper prices subdued in the near-term. Many Chinese producers have announced plans to cut production in April in the wake of a weak demand.

Some Chinese pulp suppliers have announced a price increase of around USD 30/mt in April 2020, to cash-in on the short-term supply disruption, exacerbated by container unavailability and a rise in shipping costs. Ind-Ra, however, believes that the high inventory levels and weak demand in key consuming geographies including China, the US, Europe will keep pulp prices lower YOY in FY21.

Also, the global pulp price declined around 5% while it was down over 25% YOY after a year of weak demand due to a demand decline in graphic papers in Europe and the US coupled with high inventories. A meaningful recovery is likely when pulp inventories could moderate on account of limited capacity additions and planned supply cuts.

According to Fastmarkets RISI, global pulp shipments declined 5% to 3.8 million tonnes in February 2020, pushing the overall inventory to 42 days of supply after some correction in December 2019. Pulp inventories at Chinese ports increased due to the combined impact of weak consumption and limited outbound logistics, while inventory at European ports was down in February 2020 due to the two-week long strike of Finnish pulp and paper producers.

Cardboard price rise to be tested by demand slowdown
An increase in Chinese recovered paper (RCP) imports due to lower domestic collections, coupled with an increase in packaging demand in the US due to household stocking, led to a significant increase in prices of old corrugated cardboard since February 2020, after a marked decline in 2019. While Chinese domestic RCP collection has been gradually recovering since March 2020, collections in other regions have been disrupted due to lockdowns, resulting in continued lower RCP collections. With a likely slowdown in global demand and a decline in Chinese imports, the sustainability of the recent price rally beyond the immediate period is questionable.

Moderation in margins and credit metrics for paper sector
Ind-Ra expects a contraction of 300-400bps in the EBITDA margins of paper companies in FY21, on account of a lower demand and realisations, likely bottoming-out of raw material prices in FY20 and lower fixed cost absorption.

The agency expects the EBITDA of its rated paper portfolio to decline by around 10-15%, lower than its initial estimates for FY21. However, according to the report, notwithstanding an increase of around 20%, the net leverage of Ind-Ra’s A category and above portfolio would only marginally exceed 2x in FY21, indicating a comfortable credit profile for most of these entities.

However, there could be downside risks if the lockdown is extended. Ind-Ra further believes that small players, producing varieties such as newsprint, kraft paper and duplex board which are low down in the value chain, are more vulnerable, given their inherently weak profitability and credit profiles.