Escalating trade tensions between China and the U.S. have led to worries that a global economic slowdown will reduce the demand for pulp and paper products.
The past two years have been stellar for Indonesia’s pulp and paper stocks. But that hot trade has since fizzled as concerns surrounding slowing global growth and the U.S.-China trade spat depressed demand in the sector. Shares of PT Indah Kiat Pulp & Paper and PT Pabrik Kertas Tjiwi Kimia soared more than 1,000% in the two years leading up to 2019 — making them the best performing stocks on Southeast Asia’s benchmark MSCI Asean Index. The surge was partly due to the price of Chinese pulp sky-rocketing in 2017, China’s ban on U.S. waste paper import for a month in 2018 and tax breaks for new plants in Indonesia.
Now, investors have flipped the script on these stocks. Escalating trade tensions between China and the U.S. have led to worries that a global economic slowdown will reduce the demand for pulp and paper products. Investors have also moved from cyclical stocks to defensives, making both companies less attractive in the current macro environment.
Among the worst performers on the regional benchmark index this year, Indah Kiat has tumbled 14% after a 114% gain in 2018. While its affiliate Tjiwi Kimia fell to the lowest this year on May 17, after posting a 280% increase last year. Both companies are owned by Indonesian conglomerate Sinar Mas.
“There was an euphoria in the past because of rising pulp prices, cheap valuation and tax holidays for new plants from the government,” said to Willinoy Sitorus, an analyst at PT Trimegah Sekuritas. But now, investors are flocking to large caps — generally seen as a safe haven — amid uncertain times with a trade war still in the picture and slowing global growth still a concern, he said.
And the mood may be getting darker. The price of pulp could face further pressure into the third quarter of this year due to seasonally weak demand and higher producer inventories, Citigroup analyst Juan Tavarez said in a report published June 20, citing a call hosted by the firm with a former commercial pulp industry veteran. What’s more, underlying demand in China is “ok” but there’s no appetite for restocking ahead of what tends to be a slower period.
“It’s been a perfect storm of negative headlines for pulp over the recent month, driving ongoing uncertainty in the market,” Tavarez said in the report. “Don’t expect a sharp rebound in prices given inventory overhang and limited downtimes.”