Zacks

4 Paper and Related Products Stocks to Watch Amid Industry Challenges

Madhurima Das
9 min read

In This Article:

The Zacks Paper and Related Products industry has been impacted by weak packaging demand of late, as customer spending has been muted due to inflationary pressures. Nevertheless, increasing packaging requirements due to the rising trend in e-commerce activities and steady demand from consumer-oriented end markets, such as food and beverages, and healthcare, will support the industry. The growing preference for paper as a sustainable and eco-friendly packaging option due to environmental concerns will act as a key driver.

Players like Suzano SUZ, International Paper Company IP, Klabin KLBAY and Sylvamo SLVM are likely to gain from the above-mentioned trends.

Industry Description

The Zacks Paper and Related Products industry comprises companies that manufacture and sell paper and paper products. The industry is highly diversified in terms of products, ranging from graphic paper and packaging paper to absorbent hygiene products. Graphic papers, which include printing and writing papers, and newsprint, are utilized for communication purposes. The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It also produces fluff and specialty pulps utilized in absorbent hygiene products, tissues and paper products. The industry caters to a wide array of industries, including food and beverage, farming, home and personal care, health, retail, e-commerce, and transport. The industry players meet customers’ shipping, storage and display requirements with sustainable solutions.

Major Trends Shaping the Future of the Paper and Related Products Industry

Low Consumer Spending, High Costs Act as Near-Term Woes: The current inflationary pressures have been affecting consumers, leading to a lower demand for goods. This has impacted packaging demand, as consumer priorities have shifted toward non-discretionary goods and services. Customers have been trying to lower their elevated inventories, impacting packaging demand. The companies in the industry had to cut down production levels to align with customer demand. Moreover, the industry is witnessing rising costs for transportation, chemical and fuel, and supply-chain headwinds. Thus, industry players are increasingly focusing on pricing actions and cost reduction, and resorting to automation in manufacturing to boost productivity and efficiency.

Digitization Hurts Paper Demand: The transition to digital media has been eroding the graphic paper market for some time now. The same remains a persistent threat to the industry. Paperless communication, the increased use of email, less print advertising, more electronic billing and fewer catalogs dented graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses took a hit from the pandemic-led shutdowns. However, the demand picked up on the reopening of schools and offices.

E-commerce & Consumer Products to Support Packaging Demand: The industry’s considerable exposure to consumer-oriented end markets, including food and beverages, and healthcare, ensures steady growth in earnings. With e-commerce, packaging gained the utmost importance, as it has to maintain the integrity of the product and be durable to withstand the complexity involved in delivering the product. Per Statista, global e-commerce revenues are projected to witness a CAGR of 11.2% from 2023 to 2027, representing a major growth opportunity for the industry. In 2022, e-commerce accounted for nearly 19% of retail sales worldwide. The same is expected to be 25% by 2027. India is expected to lead retail e-commerce development, seeing a CAGR of 14.11% between 2023 and 2027, closely followed by Brazil, Argentina and Turkey, with growth of 14.07%, 13.63% and 13.57%, respectively.

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