Trends to Watch, Strategies to Consider
In July Confederation of Indian Industry (CII) & IPMA jointly organized a conference on the theme “Making Indian Pulp & Paper Industry World Class”. This initiative addressed some of the key issues relating to performance of Indian Pulp & Paper Industry in general and particularly improving the energy efficiency, which helps to achieve the world-class standards.
“Economic growth of any nation is mainly dependent on the growth of power sector”
It is a well known fact that economic growth of any nation is mainly dependent on the growth of power sector. Though the govt. of AP has been putting all out efforts to augment the power generation capacity from about 11000 MW to 16335 MW in the past 5 years, the abnormal increase in demand, transmission corridor constraints & unprecedented fuel crisis, particular shortage of natural gas in the last 2 years, has affected the power sector. Entire nation is facing power shortage and AP is also no exception. Due to the severe shortage of natural gas alone, around 2000 MW of gas power plants in the state have become idle which forced power utilities to impose power cuts, though it was painful.
It is pertinent to note that this year, the state has witnessed power demand crossing 300 MU per day, as compared to last year demand of 270 MU per day. The per capita electricity consumption in the state, which is an indicator of the improved standards of lifestyle, has also crossed 1000 unit mark (1090 KWH), which is well above the national average of 879 units. The state of Andhra Pradesh has been putting special efforts to enhance the installed capacity to meet the power requirement of the consumer, particularly the industrial sector. Power utilities believe that the economic development of the state is linked with the growth of the industry and this growth in turn is very much linked with the betterment of the power sector.
The Pulp & Paper Industry is an intensive power consuming industry and a small percentage of improvement in energy efficiency will reduce the substantial overall cost and increase the predictable profit. I am glad to note that, Indian pulp and paper producing industries have already accepted the challenge to improve their energy efficiency and have begun to reap the rewards of energy efficiency investment with less payback periods.
“We have to inculcate lot of things and this is just the beginning”
“The objective of this Papertech is to facilitate the continuous improvement in the performance of the Indian pulp & paper sector and help each other to move to world-class standards. Today, some mills in India are closer to world-class standards. But, most of the mills in India you will find are much smaller as compared to rest of the world. Things have changed dramatically in the last few years because of the technology is being adapted as per the size and concentrated to environmental sustainability. On the issues of water and energy we have to find our own solution. 20 years back there was a time when 300 cubic meter of water was used to produce per ton of paper and now some mill use 4 cubic meter of water for per ton of paper. Way back the energy used was 1500 units per ton but now it is less than 1000 units. We have come a long way but is it adequate? – that is a real question. We have to inculcate lot of things and this is just the beginning!”
“We mills kept on expanding without giving much of the thought to – from where the raw material will come”
When Papertech was initiated 7 years back to make the paper industry a world class industry it was not realized it will go through one of its difficult period in the history of the paper industry. Starting from the year 2009 when we got the first major shock in form of energy prices when Coal India raised the prices by 30-35%. If we had not prepared ourselves through various initiatives it would have been difficult for the paper industry to survive. We should try to introduce more and more renewable energy in our generation. Today we are facing great difficulty in touching about 50% of our energy requirement through renewable whereas some most efficient mills in west are touching about 70-75%. So, there is a big gap of 20-25% and that renewable energy is much cheaper than the fossil fuel. In fact it will reduce the impact on the environment too. For example the wood contains 14-15% of the bark. When the wood gets into the pulping mill and the 14-15% of the bark left behind can be used for firing up the boilers, which can save energy cost.
Then 2 year back came the second shock in the form of high raw material prices. We all thought that lets expand because there was an increase in consumption of paper and paperboard. Though people say that paper is not required in future and we will have paperless offices. But my experiences, says that paper will remain there in India if not outside in terms of packaging, tissue, copier etc. We mills kept on expanding without giving much of the thought to – from where the raw material will come. We didn’t undertook the job of planting trees and today we landed ourselves in trouble and for the first time India has started importing wood in the country. And the byproduct of that is the viability of the paper industry came at stake. It is also related to energy as we are incurring so much of transportation cost in shipping wood from Australia, South Africa and Vietnam etc. Had that wood grown in India, farmers would have got good money out of it.
Now the third shock, which hasn’t came yet but I can see it coming in next 5 years that is availability of water. There is going to be a war on water in this country in the next few years. Look at the weather we get high rainfall for weeks and then rest of the years it nothing. For example when we started our mill 25 years back near river Godavari the water used to touch both the banks for 5-6 months in a year but now it touches only for 2-3 months at the time of rainfall. The flow in the rivers has come down. The demand of water is increas-ing, population is increasing and the cost of water is also increasing. As far as paper industry is concerned on an average we use 100 cubic meter/ton of paper. Our water cost comes around Rs. 4-5 and we are very comfortable. But imagine if the government raises the prices of water from 5 to 30 leading to straight increase of 2500 per ton of paper. We are already struggling with our profitability. So it’s better that we gear ourselves and be ready. We need to take care of environ-ment, energy, water and raw material – this is what will help in the sustainability of the paper industry. We don’t have to do this for the sake of the environment but we have to do it for ourselves. If we recycle and reuse we will be benefiting the environment automatically.
“Their is no surprise that lot of companies from developed economies are watching India with keen interest”
I will talk more on the macro level while the industry is dealing with technical and strategically challenges. There were some structural changes taking place in the world, which were impacting the Indian pulp and paper industry. Papertech is aimed to disseminate the information related to latest trends and technology related to water, energy, and environment performance improvement, share best practices and provide networking platform to all the stakeholders.
Today, I would like to touch upon the different dimension, which is structural changes witnessed by the pulp and paper globally and its ramification on Indian pulp and paper industry. One big change that globalization has brought into the world is networking of various economies relating to availability of raw material, markets, technology, capital, talent and currencies. In India till 4-5 years back we were quite isolated with regard to custom duties and paper being more domestically produced and consumed. As we became import and export based, more and more currencies of various countries started playing role in the profitability and the viability of the industry. So, the point being made is that integration has an impact on us. The vibrations of any major impact on any of these variables can be felt and disturb the working of the industry in other parts of the world.
In the writing and printing (W&P) sector for example from the peak of 105 million tons in 2007, the demand of W&P has come down to 92 million tons in 2012, a decline of 13 million tons, at a global level in just 5-6 years. Just to put this number in perspective, the current size of Indian W&P market is around 4 million tons, which means that in the period of 5 year, more than 3 Indian W&P markets have been wiped out at a global level. This number becomes more dramatic, if we consider the fact that this decline is to the tune of 18 million tons, in the developed world. The growth of 5 million tons, in developing world has what helped to soften the blow of this demand decline. This demand, decline in the developed economies and the growth in emerging markets have irrevocably changed the power equation of the industry. That demand growth has been followed by the increased share of manufacturing capacity.
In 2011, the manufacturing capacities were poised almost equally between developed and developing economies. North America, Western Europe, Japan, and Oceania added around 2 million tons and rest of the Asia, Eastern Europe, Middle East, Latin America, and Africa also added 2 million tons. However, for the next decade the capacity expansion are heavily skewed in the favor of developing economies where 87 million tons, is expected to come by 2022, in developing economies. In contrast, Western Europe, North America and Japan will shrink to 8 million tons. Looking at the optimistic side of the equation the truth is that around 60% of the world population even today living in geographies which are growing in plus 5%. So, we need to be optimistic as we are living in the part of the world that is growing at plus 5-10% in the next 10 years. Specifically, talking about India – the GDP is projected to grow at 6-8% per year till 2020, which is 2-3 times higher than the world’s average, unlike the more mature world economies, which are dependent on import of goods and services.
Indian economy is majorly dependent of its vast domestic market, which is going to be fueled by 270 million middle class households by 2020. With only 10 kg per capita consumption against the world average of 54 kg, Indian markets leaves lot of headroom for consistent growth. Also, with large population base and increase of 1 kg would mean an increase of 1.2 million tons. India also vows for one of the largest and youngest workforce pools across the globe. As per CII world factsheet the median age of Indian population is 25 years as against 40 years of developed economies. Not only this, India also hold the pool of largest working population and it does so at a very competitive hour wage rate. With the wage rate of half a dollar per hour, India’s position as a low cost location is pretty secure as compared to some of the other emerging markets like Malaysia, Russia etc. These are neither high on innovation and over a period of time have lost their cost advantage and in the business terms they are called stuck in the middle. Their is no surprise that lot of companies from developed economies are watching India with keen interest. In future, one would see emerging of competition from such international players both from market and manufacturing point of view. Sooner or later Indian paper industry will enter into a consolidation phase, which will change the historical order of merit of companies in India. Coordinates of some of the Indian companies would change and this would be precipitated with various reasons like valuations, environmental compliance or simply the commercial viability.
Another paradox situation is where there is market in the world there is no raw material and vice versa. And this has given the birth to a bunch of new business model of being a non-integrated paper unit. Where the paper units are closer to the consumption market and pulp manufacturing is near to the forest. For example, North America contributed 48% of the market pulp in the total supply of market pulp in 2012 whereas on paper manufacturing side its share is only 4%. As per a study, by 2016 China will overcome the Western Europe as a destination of market pulp garnering more than 37% of share in world pulp shipments and their share was just 4% in 2000. So, this the dramatic change that has happened in the last decade. The deficiency of raw material has shaken the cost equation rudely. In India, wood prices have almost doubled in last one year and competition for raw material has intensified to the unprecedented levels. For the first time, in the history of the Indian paper industry import of wood has become reality. And, this import of wood is not only to feed the incremental capacities of pulp but also the existing capacities.
With global wood prices settling around USD 200 per metric ton on daily basis and China becoming the largest importer of the wood chips. One can expect, Chinese going out and do plantations globally which would lead to appreciations in plantations and valuations. Another focus area would be environmental sustainable development of business. In the coming years one would see the concentrated effort of the industry towards improving water and energy emission footprints. Availability of sustainable raw material would be high on the agenda of industry.
Considering that Indian paper industry is highly fragmented and majority of units are small in scale & size and have outdated technology. So, it will be difficult for small manufacturer to comply with the stringent environmental regulations. Indian paper industry will also see some fundamental changes on go to market side. Publishers and printers would start valuing the convenience of buying, JIT, large SKU’s and availability of special SKU’s etc. Market would seek distributors having their own converting facilities, having their own brands and majority of their business will move to e-platform. The time and energy of the sales force will move to more of consultive selling.
I would like to conclude by saying that while Indian paper industry continues to grow by 6-8% Y-o-Y, one can expect structural changes from point of view of sales, technology, productivity and interface etc. Such structural changes obviously challenge the existing business model but on the other hand open up the new range of business activities for progressive players either from India or abroad.