Zheshang: The US dollar's interest rate cut cycle and strong pulp prices are beneficial to the integrated leading companies in the paper industry.

Zheshang's research report stated that the Federal Reserve has entered a cycle of interest rate cuts, which may stimulate demand on one hand, and weaken the profits of Brazilian pulp companies that price in local currency on the other hand, thereby allowing pulp companies to control supply and drive pulp prices into an upward trend. The commodity pulp market has been in a tight balance for 26 years, with a focus on domestic self-sufficient pulp production in the future. Against the backdrop of bottomed-out profits in the paper sector and expanding profits in the pulp sector, leading companies with high self-sufficiency in pulp and strong cost control have high profit elasticity. Key points from Zheshang include: The cycle is at a bottom range; a rate cut by the US Dollar strengthens pulp price increases Industry is at a double bottom in terms of valuation and profitability: as of January 16, culture/box/board and white cardboard paper prices are at the 0%/22%/11% percentiles, respectively, since 2015; pulp prices are at a relatively low position at the same stage; due to demand and the pressure of expansion in recent years, the industry fundamentals of pulp and paper are at the bottom of the cycle, with a certain margin of safety. At the same time, the paper sector's leading companies are at historically low levels (with most companies below the 40th percentile). A rate cut by the US Dollar may be a core catalyst: historical data shows a significant negative correlation between pulp prices and the US Dollar index. The Federal Reserve entering an interest rate cutting cycle may stimulate demand on one hand, and weaken the profits of Brazilian pulp companies that price in local currency on the other, thus driving pulp prices into an upward trend. The commodity pulp market has been in a tight balance for 26 years, with a focus on domestic self-sufficient pulp production in the future. Supply: The supply of commodity pulp is slowing down; after 2025, there is limited overseas capacity, with the main increment being the OKI second-phase factory in 2026, which is expected to provide less than 700,000 tons of actual commodity pulp. Self-sufficient pulp is still being put into production. By 2025-2026, the domestically confirmed new pulp capacity is about 6.6 million tons (4.34 million tons in 2025 and 2.26 million tons in 2026), with a majority being vertical integration projects. By the end of 2024, global production capacity for commodity hardwood pulp is about 36.14 million tons, and capacity utilization is relatively healthy at around 90%. Demand: Short-term demand is resilient; from January to November 2025, global shipments of hardwood pulp reached 30.53 million tons, a year-on-year increase of 7%, mainly driven by Chinese demand (up 9.3% year-on-year). Mid-term structural impacts: according to Suzano forecasts, by 2029, due to the production of self-sufficient pulp projects, global demand for commodity hardwood pulp will decrease by 4.4 million tons compared to the original forecast. The proportion of domestic self-produced pulp is increasing, which will to a certain extent suppress the capacity utilization of commodity pulp between 2025-2028. Inventory: Current inventories are at a medium-low level; as of November 2025, global stockpiles of hardwood pulp manufacturers stood at 44.7 days, which is at the 60th percentile since 2015. As of December 25th, mainstream port inventories in China have dropped to 1.906 million tons, decreasing for five consecutive weeks. With low port inventories, expected reduced arrivals in January, and pre-holiday stocking demand, pulp prices are expected to be strong in the first quarter of 2026. Costs: The significant difference in raw material costs makes pulp costs vary greatly, with the cash cost of domestically produced pulp relying on imported wood chips at around $480 per ton, and using domestically sourced wood chips can reduce it to $420 per ton, still at a cost disadvantage of $80-$140 compared to Brazilian pulp mills. Risk factors: Exchange rate fluctuation risks, raw material fluctuation risks, intensified industry competition risks.