During a technical session – an important part of the 52nd annual conference of Federation of Paper Traders Association held during 21-23 September 2013 –
Mr. Yogesh Agarwal, Managing Director and Chief Executive Officer, Ballarpur International Graphic Paper Holdings B.V., gave an insightful lecture on the current trend in Indian pulp and paper industry, intelligently collating and interpreting the information available to paper merchants in India, thereby giving a positive prognosis about the future of the Indian paper industry. Here are a few excerpts from his lecture.
Get the Bigger Picture
Mr. Agarwal said, “Many Indian paper merchants are not sure of the issues related to the pulp and paper market – issues such as price fluctuation, impact of depreciation of the rupee and rising import of wood chips on business and so on. One keeps gathering unrelated pieces of information about such issues and happenings from various sources and is more often than not unable to interpret them and get a larger picture of the future of paper business in the country. To have a proper understanding of the existing paper business scenario in our country and of the shape of things to come, we need to take a look at the changing structure of the global pulp and paper industry, mainly because the paper industry as a whole has become quite integrated in the world economy. So, whatever happens in, let’s say, Asia, South America or for that matter North America in the area of demand and supply and fluctuations in the value of the rupee against the dollar affect our pricing, our demand and supply. Again, many companies in India face the challenge of raising capital in foreign lands and rupee depreciation makes their challenge even more daunting. Depreciation of the rupee matters a lot to us as most of our materials come from places outside India – from countries such as Brazil, Vietnam, Thailand and Australia; and the currencies of these countries play quite a decisive role in determining our volume of production – especially when the rupee depreciates.”
Growth of Demand for Paper and Paper Board across the World
Data on global consumption of paper and paper board during 2012 reveal that the world’s total consumption of paper and paper board was 385 million metric tons, including newsprint, packaging board, writing and printing, specialty, tissue, etc. India’s share of the total consumption was 3 per cent, which is around 12 million metric tons. Our share of the world’s population is 17 per cent, but our share of the total consumption is not even close to 17 per cent. In contrast, China’s share of the world’s population is 20 per cent and its share of total consumption of paper and paper board is 21 per cent. In India, there exists a huge gap between the country’s population and its paper consumption. The per capita consumption of paper and paper board in North America is 236 kg; in China, it is 62 kg; and in India, it is 10 kg. It may also be mentioned that in India, an increase of 1 kg in per capita consumption makes an increase of 1.2 million metric tons of paper! India therefore presents a lot of scope for growth in demand for paper; this growing scope augurs well for the further expansion of the Indian paper and paper board industry.
“India will continue to consume paper for writing and printing purposes. Despite the growth in electronic media, it will continue to see growth in this area in the next ten to fifteen years. This is a major reason why paper companies outside India want to be active in India… . So, Indian pulp and paper companies will be manufacturing more in the coming years as compared to the previous year,” said Mr. Agarwal.
Table 1 shows the trend in demand for paper and paper board in places such as North America, Western Europe, China and India – major producers and consumers of paper and paper board.
Demand for Writing and Printing Paper during 2011-2022 – A Projection
Forecasts suggest that the demand for paper and paper board, which is 378 million metric tons in 2011, will reach 465 million metric tons by 2022. There is an upward trend in demand for packaging paper, but a downward trend in demand for printing and writing paper. By and large, the demand for writing and printing paper in mature and developed economies has been coming down. In the next 10 years, the North American writing and printing paper market, which has been the largest writing and printing paper market in the world, will be reduced by 30 per cent; the demand for writing and printing paper in North America will de-grow; it will be around -2.7 per cent per annum by 2022. So far, the demand in North America has declined by 33 per cent. The demand for writing and printing paper in Western Europe will also de-grow; it will be -2.3 per cent per annum. In Japan, the demand has declined by 21 per cent; and in Western Europe, it has declined by 28 per cent. The combined decline in demand for writing and printing paper in North America, Western Europe and Japan has been 20.5 million metric tons, almost twice the size of the Indian paper market. Most of the developed countries will witness negative growth in demand for writing and printing paper by 2022. While the global paper and paper board market will grow by 74 million metric tons from 2011 to 2022, global writing and printing paper market will grow by 1 million metric ton only.
The downward trend in demand for writing and printing paper in mature and developed economies can be attributed to the rise of the electronic media, such as the Internet and ebooks. The demand for ebooks has been rising since 2009. It touched $6.17 billion in 2012. Newsweek, the second largest circulating magazine in USA, has ceased to exist in print. This is just the beginning of a trend. Magazines such as Time and The Economist may also cease to exist in print soon. Interestingly, while the electronic medium is having a huge negative impact on graphic paper, it is having a positive impact on outer and inner packaging. The global paper board companies around the world will therefore have much more to cheer about in time to come.
While most of the mature and developed economies will witness major negative growth in demand for writing and printing paper by 2022, India will witness the highest growth in all writing and printing grades. During 2012-2022, India’s Cumulative Annual Growth Rate (CAGR) of writing and printing paper consumption will be 5.7 per cent annually. Indian paper companies must regard this upward trend in demand as an opportunity to build quality machines, develop world class technology and enhance technical expertise.
Market Pulp: Demand and Supply
Paper and paper board companies must also keep themselves abreast of developments taking place in the area of pulp – a major raw material for paper industry. “Originally, the wood that went into the making of pulp consisted of the residue wood that came from lumbering industry. This is what happened in the USA and Canada – places where paper manufacturing started in an industrial fashion. Over the last ten years, pulp manufacturing has moved to plantation wood – mostly to South America; and that has changed the equation. Our dependence as an industry on lumbering industry, which is the housing sector, has come down considerably. So, the dynamics of our business have completely changed… . Pulp manufacturing has moved to places close to the forests, namely South America. As a result, currency play has increased. South America’s currency or Vietnam’s currency seen in terms of US dollar now matters a lot to paper companies. Forex has become very critical to our business… . Currency play has become an important variable in our business. Within 12 months, we saw the price of pulp rising from $500 to $800 per metric tons. In today’s paper industry, management has taken a back seat. Today’s paper companies are more interested in keeping themselves abreast of developments taking place in areas such as energy (coal), pulp and wood and in predicting the prices of these materials than in increasing managerial competence,” said Mr. Agarwal.
Looking at the global pulp capacity in recent time, Mr. Agarawal pointed out that, to quote him, “the global market pulp capacity in 2012 was 60 million metric tons and over the years hardwood has replaced softwood, thereby shifting the geographical base of production from North America to South America.” He also said that raw material for pulp has shifted from the historic lumbering industry residue to hardwood plantation meant for pulping only. “Most of the hardwood has moved to South America. So, South America’s share would increase from 48 per cent (16 million metric tons) in 2012 to 61 per cent (38 million metric tons) in 2017 – a growth of 137 per cent. As a result, many pulp mills are coming up in South America… . Softwood is coming mainly from Eastern Europe, but its volume is not as big as that of hardwood coming from South America. By 2016, China will overtake Western Europe as the destination for market pulp… the 2002 share of China’s market pulp shipment was 0.4 per cent and by 2016 its share of market pulp shipment will be 37 per cent. By 2013, Latin America will overtake Nordic as the source of market pulp…the 2002 share of its market pulp shipment was 20 per cent and its 2016 share will be 45 per cent.”
Woodchips: Demand and Supply
According to Mr. Agarwal, paper and paper board companies in India should also be aware of the current trend in global demand for and supply of woodchips, as woodchips are important to today’s paper business. “If you look at the import trends, Asian woodchip import is expected to touch around 21 million Bone Dry Metric Tons (BDMT) in 2013. Of which 90 per cent is hardwood. Till 2006, it was only Japan that used to import woodchips. Of course, there were small importers as well… . Japan has reduced its woodchip import by half. All the growth in the Asian hardwood chip market in recent years has been due to expanding Chinese demand. China’s share of the Asian hardwood chip import in 2007 was I million BDMT; and in 2013, it is 7.8 million BDMT. Its CAGR of woodchips is 49 per cent. To be precise, China was only exporting wood chips, not importing them. Till about 2003, China was exporting woodchips. However, in 2013, it imported 8 million tons of woodchips. Today, China is the second largest woodchip import market in the world, after Japan. This big change took place within a short period of five years. It is a structural change in the global paper and paper board industry,” said Mr. Agarwal.
“Countries in South East Asia have rapidly become a dominant source of woodchips for Asia. In 2010, Vietnam’s share of global woodchip export was 24 per cent; by 2010, it rose to 32 per cent. However, Australia’s share fell from 27 per cent to 16 per cent during the same period,” Mr. Agarwal added.
Table 1: Growth of demand for paper and paper board in North America, Western Europe, China and India
Growth of Demand for Paper and Paper Board
The North American market is sliding continuously – from 105 million metric tons in 2007 to 84 million metric tons in 2012; it lost 21 million metric tons (20 per cent) of the market. In the next couple of decades, North America will reach a dead-end with a less than 1 million metric ton market and modest growth in packaging paper and tissue. In the next 10 years, North American writing and printing paper market (-21 million metric tons) will be reduced by 30 per cent, that is, 1.5 times the size of the current Indian writing and printing paper market will get wiped out.
The Western European market declined from 97 million metric tons (2007) to reach 77 million metric tons (2012), a loss of 20 million metric tons (21 per cent). In addition, the Western European writing and printing paper market (-21 million metric tons) will shrink by -22 per cent in the next decade, that is, a market more than the size of the Indian writing and printing market will get wiped out. Besides, newsprint is reaching the dead-end. Packaging and hygiene grades will see modest growth.
Unlike North America, Western Europe and Japan, China has seen sustained growth over the past two decades across all paper grades. China’s share of the global paper and paper board demand increased from 15 per cent in 2007 to 21 per cent in 2012, while the total volume grew by 25 million metric tons (45 per cent) in the same period. In addition, market growth for all grades is assured for China through 2022 and packaging and tissue lead the growth.
The total volume in India grew from 8 million metric tons in 2007 to 12 million metric tons in 2012 – a growth of 4 million metric tons, which is 50 per cent. India will see the highest growth in writing and printing grades across all regions of the world, and market growth is assured for India through 2022. Per capita consumption will be 17 kg. by 2022 as compared to 10 kg. in 2012.
Indian Paper Industry: Global Positioning and Challenges
Speaking about the trend in demand for paper in India, Mr. Agarwal said, “In 2012, the global consumption of paper was 385 million metric tons, whereas India’s consumption in the same year was 12 million metric tons. India’s per capita paper consumption is 10 kg as compared to the world’s average of 54 kg. The total volume grew from 8 million metric tons in 2007 to 12 million metric tons in 2012, a growth of 4 million metric tons, which amounts to 50 per cent. During 2011-2022, India will witness the highest growth in writing and printing grades in the world and market growth across all grades is assured in this period. India’s growing printing industry and growing literacy rate are the main demand drivers for writing and printing paper. Not surprisingly, some of the paper companies in India have started investing more in their business. In 2006, the Indian print market was worth $11.3 billion; in 2011, it rose to $20.1 billion. During this period, commercial and promotional paper materials – the largest application – covered 15.3 per cent of the market; labels, the highest growth application, 16 per cent; and directories, the lowest growth application, 9.7 per cent. By and large, our business is looking up and will remain brisk for quite some time. In the last three to five years, most of the paper companies in India have made good investments and the industry has entered the consolidation phase. The market has responded well so far, and happier times are ahead for our industry.”
Although Mr. Agarwal forecasted a bright future for paper companies in India, he highlighted the challenges facing the Indian paper and paper board industry. “Over the last two years, the cost of raw material has gone up by 80 per cent; the cost of chemicals rose by 50 per cent; and the cost of energy has gone up by 16 per cent. But the good news is that prices have stabilised of late. They have reached their highest level. This price rise has given our farmers a huge incentive to grow more wood for the industry. This year’s plantation, for example, is three times more than that of last year’s. So, we are seeing a positive trend in this area as well.
“The other challenge comes from fragmentation in the area of raw materials. Like our markets, our raw materials are also fragmented. So, if you want to run a mill of, let’s say, half-a-million-ton capacity, your average radius of raw materials – getting wood, etc. – is approximately 200 km. If you do the same in places like South America, Japan, Thailand and Malaysia, your average radius would be less than 100 km. Setting up a mill in India is therefore more difficult than doing the same in the aforesaid countries, as in India, raw materials come from places that are many miles away; and sending finished products to distant places is also not cost-effective. Running a paper mill in India may thus not turn out to be a very profitable affair. In these circumstances, all we as paper manufacturers can do is keep optimising our business. We need to find the ‘sweet spot’ of our business, so to speak. Many people in our industry think that producing more means higher profits, but that is not true. It is necessary to find the optimum level of production. We should think of optimisation, not maximisation. Also, Indian paper manufacturers should give more attention to quality than to price, mainly because ‘brand’ value matters a lot. They must see to it that their brand stands out from the rest. They must concentrate on where they want to be ten years from now; and they need to start working for it,” Mr. Agarwal advised.
Competition from Chinese Paper Companies
Giving some more useful advice to paper manufacturers in India, Mr. Agarwal said that paper companies in India need not worry much about fighting off competition from Chinese paper companies, as China, like India, is deficient in fibrous raw material. Mr. Agarwal said, “The good news is that China, like us, is deficient in fibre. The fibre that China uses is bought at the international price, so China’s cost-base is not lower than that of ours. Chinese paper companies may be more efficient than our companies in terms of productivity, but they cannot get the two main raw materials for paper production – coal and wood – at prices lower than the prices at which we get the same materials. This means that China doesn’t have a head start in paper business. We need to remember that in commodity business, the lowest-cost producer finally wins the race. Even if China grows its own wood, the cost of this wood would not be lower than the cost of wood coming from, let’s say, Vietnam. Paper companies in India need to keep track of all that is happening in the area of cost of production; and they must keep the cost of production as low as possible.”