Demand for Premium Paper Products Is on a Tear

Wood Pulp Prices Rise

The price of wood pulp, which is used to make a variety of paper products, is increasing sharply because of a unique set of circumstances. Since December 1, Bleached softwood kraft pulp futures have surged by 48% on the Shanghai Futures Exchange and currently cost about $1,037 per ton.

Analysts say that if these trends continue paper products companies could see slimmer margins in the coming months. These companies include Kimberly-Clark (KMB), the maker of Kleenex and Huggies diapers, as well as Procter & Gamble (PG), which owns Charmin and Bounty. Meanwhile, pulp makers like International Paper (IP) and Canfor Pulp Products could get a boost.

Changing Consumer Habits Impact Pulp Market

There is currently particularly high demand for softwood pulp, which is made from coniferous trees that are too small or knotty to become lumber and is used to make premium bathroom and kitchen paper products. Because consumers are spending more time at home, demand for these products has climbed.

Though the toilet paper shortage that occurred in the early days of the pandemic is a thing of the past, the market is still very different than it was a year ago. Demand for bulk toilet paper and paper towels used in restaurants and offices has plummeted. These products, which tend to be cheaper and scratchier, are made from recycled material. Softer, premium bathroom tissue and towels, which people tend to use at home, are made from new pulp. This is why new pulp prices are rising.

A Bubble or a Long Term Trend?

Pulp prices are also up because the US dollar is weak, which means it is cheaper for companies in China and elsewhere to buy the commodity because it is priced in US dollars. According to the Wall Street Journal Index, which compares the dollar to other currencies, the dollar has fallen 5.6% over the past year.

Analysts are trying to determine whether the spike in pulp prices is a bubble or a long-term shift. Though some of these trends may only impact pulp prices in the short term, bullish investors in pulp believe that the commodity will stay popular because companies focused on ESG goals may turn to biodegradable paper packaging instead of plastic and foam. Graphic Packaging Holding Co (GPK), a paper packaging company, believes that roughly $5 billion worth of plastic packaging will be replaced with paper each year going forward.

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