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APRIL: “Our business will grow and evolve if we achieve strong results for our triple bottom line – People, Planet and Profit”

Mr. AJ Devanesan, COO, APRIL

APRIL started up its biggest single pulp line in the world to produce 1.5 million ton per annum of bleached kraft pulp in Rizhao, Shandong Province of China during mid-2010. In addition to featuring some of the most advanced environmental protection technology, facilities, and control & management systems in the world. The mill is smell-free and the effluent is almost colourless. Recently APRIL has announced a new USD 4.6 billion investment which will be used to increase pulp production of the Rizhao mill by about 1 million tons and production of paper and paperboard by 2.4 million tons.

We had an interview with Mr. AJ Devanesan, COO, APRIL on various subjects including APRIL’s Chinese facility, Indian paper industry synopsis, challenges & opportunities in addition to global industry scenario etc.

Paper Mart: As an international pulp & paper company, how do you look forward for the Indian market?

AJ Devanesan: India is one of the fastest growing markets for us, as its paper and board demand per capita has grown by CAGR 6.2% p.a, from 2.9kg in 1990 to 9.8kg in 2010. This is promising, however India is still lagging behind other growing economies like China and Indonesia where per capita paper consumption in 2010 was 66.2kg and 27.9kg respectively. Clearly there is significant room for development and we anticipate a continued healthy growth rate for the industry.

There is also scope for domestic manufacturers to improve their quality and increase capacity, with the copier segment, tissue & speciality, packaging & certain grades of coated paper like medical grade, fuelling future industry growth. The Indian market is currently highly fragmented, so consolidation in the near future would be highly beneficial for the industry. We expect future market developments to come from new products, introduction of world standard technologies, as well as the aspirations of major domestic players. All these should go far to improve the rating of this undervalued industry.

PM: What opportunities and hitches do you find in Indian paper industry?

AJD: Generally, the growing economy and particularly the service sector will fuel demand, which is expected to cross 20 million tons by 2020. With increases in average income, customers have become more demanding for quality products, meaning they are now ready to pay a premium for higher quality. With demand for improved quality and increased product segments, Indian paper manufacturers will have a great opportunity to increase their share of market. FDI in the retail sector should also further boost demand for packaging and coated paper. New government initiatives related to education such as “Right to Education” & “Sarva Shiksha Abiyan” should also be a boost to the printing and writing segments.

On the downside, the cost of energy as well as wood and pulp, constraints in water supply, and the lack of proper environmental protection facilities at manufacturing plants, are major limitations. To support the industry, the government must relook relevant policies on industrial tree plantations. Of course, significant improvements in infrastructure such as ports, roads and railways need to be made, in addition to improvements in distribution and delivery costs.

PM: Elaborate your plans for India.

AJD: We have been a major supporter of the Indian paper industry with our raw material (pulp) for the last two decades. We have always kept our options open for participation in the downstream market and have explored possibilities of strategic alliances and partnerships. We have noticed the presence of overseas companies in domestic markets and of course have our own interest to participate in partnership with national players.

PM: Take us through your new pulping facility in Rizhao and the new paper machine.

AJD: APRIL SSYMB, as we are known in China, is based in Rizhao, Shandong Province, the province with the 3rd largest GDP in China. To give you some background, Phase One of annual production capacity for BHK pulp was 315,000 tons and 170,000 tons for high grade ivory board. We invested RMB 11.3 billion (INR 78 billion) in Phase Two, which began construction in 2008 and started test production in mid-2010. Phase Two has a production capacity for bleached kraft pulp of 1.5 million ton per annum, making it the biggest single pulp line in the world, in addition to featuring some of the most advanced environmental protection technology, facilities, and control & management systems in the world. The mill is smell-free and the effluent is almost colourless. This establishes new industry benchmarks for scale efficiency and environmental performance. We are especially proud to have reached full capacity utililisation by the 10th month of operations. Our pulp facility is also home to the World’s largest Recovery Boiler (7,000 tDS/d acacia).

We recently announced a new RMB 30 billion (INR 208 billion) investment for Phase 3, which will be used to increase pulp production of the Rizhao mill by about 1 million tons and our production of paper and paperboard by 2.4 million tons. The expansion includes development of a second production line for high quality paper board and additional high quality paper production capacity.

PM: What are the three most important factors for your company to realize rapid growth?

AJD: Firstly we need to broaden our plantation base to strengthen our supply and market leadership. Secondly, a solid pool of talent to sustain and grow our business, and thirdly, a strong focus on product diversification, for example, to new pulp species, tissue and board products.

PM: Sustainability is the buzz word today. Being a forest based industry and considered as a polluting industry too, how do you ensure sustainable operations at APRIL?

AJD: To us sustainability is not a buzz word; it is a fundamental part of a successful business. Sustainability is embedded in everything we do – from identifying and setting aside high conservation value forest (HCVF), to making our mill energy efficient, to ensuring that local communities where we operate share in the benefits of our growth through development opportunities. This makes good sense from a business, social and environmental perspective.

In fact, far from being a “polluting industry” as being considered for paper industry, APRIL is very much part of the solution in addressing major sustain-ability challenges through best-in-class forest management practices in Indonesia, where the bulk of our plantation development is located. We are also proud to establish global industrial benchmarks in environmental performance that others can follow.

PM: What are major changes you foresee happening in the structure of the global paper industry?

AJD: The global paper industry is experiencing some structural changes. Firstly, the correlation between world GDP and global paper and board demand was historically as high as 1.2x during 1985-2005. So theoretically paper and board demand would increase by 1.2% if world GDP increases by 1%. But that correlation is now expected to reduce between 2005-2020, chiefly due to technology impacts from changing consumer behavior, which is favouring electronic substitution (e.g. devices such as computers and iPads). Secondly, global paper and board demand are expected to grow modestly by 1.5% p.a from 2007 to 2025. Thirdly, the center of gravity is shifting from North to South, from West to East, similar to many other industries. The established players are all using older, less efficient and high cost operating facilities that simply cannot compete with the newer players and their modern, efficient large-scale facilities, which are also far superior from an environmental performance perspective.

PM: What are the major causes of concern for the pulp and paper industry in the near future?

AJD: Paper – The Paper industry is expected to experience a challenging period in near future. In North America & Europe, paper producers will enter summer months resulting in seasonally slower paper demand. However, paper producers are more disciplined and will manage their paper supply accordingly in order to match this lower demand, by doing market related downtime to support paper prices at certain levels in these regions. Higher pulp prices, higher energy costs and relatively low paper prices will also impact the profitability of paper producers, especially the small and medium sized ones.

In China, over 1 million tons of additional wood-free paper capacity are expected to start up during 2H 2011. This additional capacity in the market would create extra supply, which may negatively impact the supply demand balance in the wood free paper grade. Also, shortages in water and electricity supply are likely to cause operational difficulty for paper mills.

On Pulp side, though the paper market will face challenging times in the near future, the fundamentals of the hardwood pulp market are still balanced. There is no major additional hardwood pulp capacity until the end-2012. A higher than historical price gap between hardwood pulp and softwood pulp prices can encourage paper producers to shift some of their softwood pulp consumption to hardwood pulp to create additional demand in that area. Cost push factors like higher energy costs and weakening US$ (vis-à-vis pulp producer’s local currencies like rupiah, rias, pesos etc.) will increase production costs for pulp producers hence creating a higher floor in pulp prices.

PM: As President & COO of APRIL, what are the three main objectives you have for the coming years?

AJD: Our business will grow and evolve if we achieve strong results for our triple bottom line – People, Planet and Profit. Being part of the solution on wider sustainability challenges in a way that not only benefits our business but also meets societal expectations, will continue to underpin our right to operate. Ensuring that we excel in delivering terrific products and service for our customers, in combination with achieving people and planet goals, will generate strong returns for us as a business. Currently, we are planting about 200 million trees a year, numbers that will keep growing. Lastly, continuing to attract and retain the right people is key for a stronger future.