Last month we asked rhetorically if a correction is under way in the general stock market. Now, looking at the PM40, one might say it is, at least in our sector. However, don't ask us, ask yourself--you readers are the experts.
However, let's just say that there is a correction going on and we are the experts. What would we tell you that would be good defensive plays in pulp and paper?
Corrugated packaging, especially corrugated packaging with a high recycled content, is one good one. Corrugated packaging should be able to withstand the winds of mild or stiff recession with the best performance of the paper grades. During the Great Recession, corrugated packaging came through just fine. There has been expansion since then, but the market seems to have absorbed it well. As long as the overnight delivery services and Amazon continue to grow, so will corrugated packaging. Additionally, recycled fiber tends to follow the pricing of linerboard and medium. Declining prices of the end products push the prices of recycled fiber feedstocks down. Our bias: we have liked corrugated packaging components, especially basic linerboard and medium production for over twenty years.
The next best market in our opinion is the private label, high recycled content tissue market. Consumers move to private labels in tough times. In fact, they have been stuck on private labels since about 2008. Recycled products here enjoy the same ability to put pressure on feedstock prices as do the linerboard and medium producers, with one little caveat. That caveat is that recycled fiber for tissue does not come from the tissue market, for obvious reasons. Hence, the recycled fiber in tissue is subject to some pricing pressures not related to tissue.
These are our current thoughts, and we are certainly glad we don't have to make them official. We'll leave that up to you professionals.
