The highest price?  Oversupply, war and China cooling lower expectations for pulp and ores prices

The highest price? Oversupply, war and China cooling lower expectations for pulp and ores prices

A possible fall in the prices of commodities such as pulp and paper, steel and ore is starting to appear more and more in the analysts’ scenario, creating expectations about the future behavior of quotations and their impact on publicly traded companies.

In the case of paper and cellulose, there are more indications of an imminent drop in prices, while in the steel and iron ore sector, there are doubts about the real capacity of China to consume these products.

The slowdown in economic activity in Europe, due to the war between Russia and Ukraine, and the timid growth in consumption of pulp and paper in China, have put the sector under pressure. In addition, there is an expected increase in the supply of pulp in the coming months.

There are signs of improvement in the supply chain, long after facing the logistical bottlenecks caused by the pandemic. This will release a large stockpile of pulp in 2023, enough to replenish the stock of a product that has been in decline recently.

In addition, two major projects in the sector, one by Arauco (Projeto Mapa) and the other by UPM in Uruguay, will start operating after experiencing construction delays, creating new opportunities for the supply of pulp in the market.

BBI estimates an oversupply of pulp at about 1.1 million tons in 2023 and about 2.1 million tons in 2024. Bank of America reports that investors are concerned about oversupply in this sector.

In this way, a series of bets began on the short-term price reduction of paper and cellulose.

In the case of the core, which has reached $790/ton, Bradesco BBI now estimates, a decrease in 2023 to $610/ton, and in 2024, it will be reduced to $500/ton. For krafliner paper (used for packaging), the organization sees a dip of about $200 in its current price over the next 12 to 18 months.

China consumption forecast

With regard to steel and iron ore, the issue is closely related to the consumption of products in China and the production of steel in the Asian country.

Chinese market demand has been a great thermometer to gauge the global trend of the sector, and Thursday (25) announcement of an additional stimulus to the Chinese economy worth $146 billion did not reach its practical effects.

The estimated average iron ore price by Itaú BBA, which was $115 per ton for 2022, has fallen to $90 per ton for 2023. The corporation reports that iron ore prices are currently, on average, $107/ton, versus $140 per ton in the first half. In addition, the bank expects a 10% to 15% decline in domestic steel prices for the coming year.

According to BofA, investors consulted by the bank believe that maintaining the iron ore price above $100/ton is mainly related to supply, as the sector giants’ production figures in the first half were below 1 million tons/ton. In the first half of last year.

BBA points to the significant decline in China’s steel production as the main reason for the decline in global iron ore prices.

Bank of America said investors have expressed concern about deteriorating property markets in China, which accounts for 30-35% of steel demand in that country.

The market believes that the resources released by the government so far are insufficient to complete all the projects, and there is no hope of getting a full contribution.

Meanwhile, Chinese steelmakers have increased their iron ore consumption over the past two months, according to MySteel data, indicating an increase in steel production. But current iron ore stocks in plants are at 20 days of consumption, well below the historical average of 27 days.

Change your target price and recommendation

Amid the expected decline in pulp and paper prices, BBI has revised its target price for SUZB3 from R$80 per share to R$56 per share.

In addition, it re-rated the company from outperforming to underperforming. For Klabin (KLBN11), the bank changed the outperformance recommendation to neutral, with the target price reduced to R$27/share (previously it was R$37/share).

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In the steel and iron ore sector, BBA maintained its superior recommendations in Gerdau (GGBR4), Usiminas (USIM5) and CSN (CSNA3). Regarding the target price, the values ​​are also preserved, but the price is the same for 2023 given the scenario.

In the case of Gerdau, the target price is BRL 34 per share; For Usiminas, target price remains at R$15/share; Finally, for CSN, the target price is R$17/share.

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