Paper Industry Struggles Despite Price Increases

War, Transport Disruptions, and Rising Raw Material Costs Including Pulp
Corn and Other Auxiliary Materials Also Increase, Showing No Signs of Profitability Improvement

Trends in International Pulp Prices and Corn Futures Prices.

[Asia Economy Reporter Kim Jong-hwa] The paper industry is facing increasing difficulties due to rising international pulp prices and various energy costs. Despite raising paper sales prices, profitability shows no signs of improvement as the upward trend in raw and subsidiary material prices continues unabated.

According to the paper industry on the 13th, the profitability of major domestic paper companies has been deteriorating this year due to delays in major global pulp industry projects and overlapping adverse factors. The main causes include postponed expansion plans of major South American pulp producers scheduled for the end of last year, prolonged strikes at Finnish forestry group UPM-Kymmene, transportation halts caused by severe flooding in western Canada, and the prolonged war in Ukraine. These combined adversities have caused international pulp prices, which were expected to decline, to rebound instead.

According to raw material price information released by the Ministry of Trade, Industry and Energy, the price of Southern US mixed hardwood pulp (SBHK) reached a record high of $940 per ton last month. After hitting $925 per ton in June last year, prices fell to around $650 but rebounded to $655 in December. This year, prices have continued to rise, reaching $675 in January, $725 in February, $785 in March, and $840 in April.

A paper industry official stated, "More than half of the production cost of paper is accounted for by raw material prices such as pulp," adding, "With various adverse factors overlapping, pulp prices continue to rise, and this year, even the prices of subsidiary materials like crude oil and corn have increased, further worsening profitability."

According to the Korea National Oil Corporation's oil price information service OPINET, the price of diesel increased from 1,351 KRW per liter on June 1 last year to 2,071.54 KRW per liter on this day, a rise of 720.54 KRW (53%) in just over a year. Corn, used as starch to help pulp and subsidiary raw materials adhere well, has risen about 30% this year due to the Ukraine war. Corn futures traded at $231.97 per ton on January 3 at the Chicago Board of Trade (CBOT) but rose to $304.41 per ton on the 10th of this month, just five months later. Compared to 2019 before COVID-19, this is more than double the price.

Hansol Paper Factory.
Photo by Hansol Paper

Paper companies have sought to improve profitability by raising paper prices. Hansol Paper and Moorim Paper raised the price of printing paper by 15% starting from the 1st of last month. Both companies had also increased printing paper prices by 7% in January.

The problem is that further profitability improvement through paper price increases is becoming difficult to expect. Paper companies aim to profit from the time lag between purchasing raw materials and their use by raising paper sales prices. Typically, paper companies stockpile raw materials like pulp for 2-3 months and produce and sell paper using cheaper raw materials purchased before the price increase, thereby earning high profits.

This strategy seemed appropriate until the first quarter. Hansol Paper's consolidated operating profit in Q1 increased by 55% year-on-year to 24.6 billion KRW, and Moorim Paper turned a profit with an operating profit of 6.7 billion KRW compared to a loss of 9.8 billion KRW in the same period last year. Hansol Paper's printing paper segment, affected by pulp prices, was in deficit, but profits from the industrial paper segment, unaffected by pulp prices, and temporary exchange rate effects from dollar transactions helped. Moorim Paper recorded profits reflecting the increased paper sales prices.

However, profitability improvement through price increases requires pulp prices to fall, but pulp prices have continued to rise for more than six months, rendering the price increase strategy ineffective. Moreover, external variables such as rising maritime freight, crude oil, and corn prices have increased cost burdens, making it insufficient to reduce losses by price increases alone.

A Hansol Paper official said, "In the second quarter, cost burdens from increased energy costs such as LNG and electricity bills and rising pulp prices still persist," while a Moorim Paper official anticipated, "If external variables such as maritime freight and crude oil prices stabilize, business conditions will improve." Ultimately, second-quarter performance depends heavily on external factors like energy costs, pulp price declines, maritime freight, and crude oil price reductions.

However, there is also hope that the market will stabilize somewhat from the third quarter. A Korea Paper Association official expressed optimism, saying, "Prices are expected to remain steady until the end of June, and from July onwards, pulp prices are anticipated to stabilize downward, positively impacting the market."

This content was produced with the assistance of AI translation services.