Operations and Workforce Management
The paper industry had a robust last decade with integrated pulp and paper mills like ours, enjoying high levels of capacity utilisation and operating margins. Before December 2019, with capacity utilisation at over 100 percent, the focus of operations and workforce was predominantly on achieving higher productivity, undertaking further capacity augmentation programs, and so on. The operations and the workforce in the paper industry mostly had a vibrant positive outlook.
However, from January 2020 onwards, among various areas concerning industries and economies, the greatest impact from COVID-19 shockwaves have been on human resources — fear and uncertainty. Institutions were finding their own ways to assure the employees and retain their spirits. In our company, we continued to approach the employees and all other stakeholders with high levels of empathy, to allay the fears and uncertainties in their minds. As a sign of this, we went ahead with our normal increments, annual appraisal cycles, and promotions. We did not let go of people.
Supply Chain Management
Before January 2020, the supply chain strategies across most industries and companies had been stable and consistent.
The supply shock started in China and the demand shock was felt globally amidst lockdowns and other COVID-19 disruptions, the US-China trade war, shortage of containers, exorbitant increase in logistics cost, and unsustainable levels of increases in prices of commodities like coal. All these factors have fundamentally disrupted the supply chain strategies of the industry. The impact of these factors in the paper industry, which already is suffering from the lack of adequate domestic demand, has been far more severe.
Since March 2020, the paper industry’s both inward and outward supply chains have been disrupted. The industry is yet to recover fully to pre-COVID levels. There has also been a severe demand- compression due to the continued lockdowns across the country, closing down of educational institutes, commercial establishments, and downstream printers, publishers, converters, stationery services.
The work-from-home practice resulting in offices remaining closed has only driven down paper consumption. The printing and writing-the segment in which our company actively operates has been worst affected by COVID-19.
The packaging/paperboards segment has been the exception to this trend, witnessing a strong demand recovery. Companies like ours have recognised this to be a growth area and are accordingly making investments to alter or create capacities to address this growing market.
The recent announcement on the opening of educational institutions, in various states, is welcome news. The demand recovery in the printing and writing segment is very important for the industry to return to pre-COVID levels of operations and margins.
Operating profit margins in the paper industry have shrunk significantly and are yet to return to pre-COVID levels. Companies like ours, who address export markets, are able to take leverage out of the faster recovery in the US, Middle East, and other developed economies. Though the export sales in the current financial year have grown significantly to help the plant run at more than 90 percent capacities, the net sales realisations are largely impacted by exorbitant logistics costs which are 2-3 times the pre-COVID levels. These are now at unsustainable levels. The impact of higher logistics costs coupled with issues on container availability has resulted in a significant increase in the cost of most input materials. For example, the present price of coal is nearly three times the pre-COVID levels. Effectively, energy costs have doubled on this account. The cost of most chemicals has seen a significant increase.
Due to the adverse demand situation in the domestic market, the industry is not able to pass on the cost-push to the market and is absorbing the cost-push in full. This has led to very low margins. The demand in India for printing and writing paper has to recover and the logistics costs have to come down to normal pre-COVID levels for the operating margins in the sector to improve.
Expectations from the Government
A lot of initiatives to support the industries, mainly the small and medium enterprises have been launched by the government. The central and state governments need to have a coordinated plan to improve the speed of vaccination coverage. Lockdown is no more a solution; it is no longer a strategy to contain the virus.
Activities in the economy, across sectors, should increase substantially. Travels and meetings have to come back with full momentum. Educational institutions should function uninterrupted. These can happen only if the fear of the virus goes out of people’s minds and the confidence comes back. For this, a faster vaccination drive should be the main priority for the government. Ensuring vaccine availability across all pockets of the country is the key.
We, in our company, have ensured 100 percent vaccination of all our employees and their families, including temporary workmen. We are now working with primary health centres to have the people in the nearby villages vaccinated. This is going to be our priority area over the next six months.
The government should also play a more active role in curbing duty-free imports. We, in the paper industry, have been affected for a long time by the duty-free import of paper. The government has to set up measures to establish a level playing field for the industry.
On the global economic front, the prospects are improving for the world. However, it is likely to be uneven and dependent on the effectiveness of vaccination programmes and public health policies. South Korea and the US are reaching pre-pandemic per capita income levels after about 18 months. Much of Europe is expected to take nearly three years to recover. The Indian economy may also take a similar timeline to get back to pre-pandemic levels.
With new education policy coming into effect, a gradual rise in education spending by the government (20 percent higher spend) and increased thrust on education are likely to support demand for creamwove and maplitho (60-65 percent of printing and writing segment) over the medium to long term. The demand for copier paper (20 percent of printing and writing segment) is expected to increase at 3-4 percent CAGR through fiscal 2025, primarily on account of moderation of spends on stationary by corporates due to focus on digital-based commercial. The demand growth for coated paper is expected to remain moderate at 1-2 percent CAGR led by a slowdown in the circulation of magazines and newspapers.
Within paperboard, the consumer packaging segment (40-50 percent of volumes), is expected to clock 5.5-6.5 percent CAGR up to fiscal 2025, driven by a rise in demand for FMCG, pharmaceuticals, cosmetics, and apparels. The rise in urbanisation, emphasis on hygiene through increased government thrust (via initiatives such as Swachh Bharat), and steady rise in healthcare and hospitality demand will lead to a rise in demand for tissue paper consumption. Amongst the various grades, containerboard, tissue paper, followed by carton board will witness higher rates of growth. However, the outlook in the short term depends on faster vaccination, the opening of educational institutions, commercial printing seeing momentum, and an increase in social activities.