The Chinese government has imposed much stricter quality restrictions on imported cardboard, started at beginning of March this year. Under this new restriction, import cardboard will only be accepted with contamination rates below 0.5%, rather than the 1.5% previously applied, even stricter than the 1% contamination rates introduced by US government. The volume of the imported waste paper dropped 54% yoy in March under the new measure, while the total volume of waste paper imported in Q1 dropped more than 49% yoy. We expect there would be a 30% yoy cut in waste paper import quota this year, which could drive up both waste paper prices and paper product prices. In fact, the prices of the paper product have been solid in FY18Q1, normally a weak season for the paper industry. Cardboard paper and corrugated cardboard are the two categories of products that with the greatest demand within China’s paper industry. The average prices of cardboard paper in Southern China increased by 7.31% yoy to RMB 4,800/ton in Q1, while the average prices of corrugated cardboard rose by 5.07% to about RMB 4,100/ton across China in the same period. With the expectations of lower volume of imported waste paper, widening differences between domestic and foreign waste paper prices and industry leaders are getting more import quota, the new production capacity should have a minor impact to the paper industry. Since the paper mills offer nearly the same prices on their paper products, leading companies with more import quota have relative advantages on cost efficiency since waste paper consists of more than 70% of the product costs. Paper prices are expected to rise in more solid form in July and August amid industry peak season. We recommend investors to accumulate industry leaders on weakness.

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