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The Indian Paper Industry accounts for about 1.6% of the world’s
production of paper and paperboard. The estimated turnover of the
industry is Rs 35,000 crore (USD 7 billion) approximately and its
contribution to the exchequer is around Rs. 3000 crore (USD 0.6
billion). The industry provides employment to more than 0.37 million
people directly and 1.3 million people indirectly. The industry was
delicenced effective from July, 1997 by the Government of India; foreign
participation is permissible. Most of the paper mills are in existence
for a long time and hence present technologies fall in a wide spectrum
ranging from oldest to the most modern.
The mills use a variety of raw material viz. wood, bamboo, recycled
fibre, bagasse, wheat straw, rice husk, etc.; approximately 35% are
based on chemical pulp, 44% on recycled fibre and 21% on agro-residues.
The geographical spread of the industry as well as market is mainly
responsible for regional balance of production and consumption.
The operating capacity of the industry currently stands at 12.75 million
tons. During this fiscal year, domestic production of paper and
paperboard is estimated to be 10.11 million tons. As per industry
guesstimates, over all paper consumption (including newsprint) has now
touched 11.15 million tons and per capita consumption is pegged at 9.3
kg.
Demand of paper has been hovering around 8% for some time. So far, the
growth in paper industry has mirrored the growth in GDP. India is the
fastest growing market for paper globally and it presents an exciting
scenario; paper consumption is poised for a big leap forward in sync
with the economic growth and is estimated to touch 13.95 million tons by
2015-16. The futuristic view is that growth in paper consumption would
be in multiples of GDP and hence an increase in consumption by one kg
per capita would lead to an increase in demand of 1 million tons.
The increasing demand for paper brings with
it new challenges of economies of scale, efficient usage of resources,
need to develop and expand sustainable use of fibre, and value chain
management, etc. Despite the fact that the Indian Paper Industry holds
its importance to the national economy, unfortunately it stands
fragmented.
Paper sector is dominated by small and medium size units;
number of mills of capacity 50000 tons per annum or more is not more
than 25. Less than half a dozen mills account for almost 90% production
of newsprint in the country. There is a growing need to modernize the
Indian mills, improve productivity and build new capacities.
In India, the paper industry is primarily
rural based with close linkages with farming community. Over the years
it has evolved into an agro-based industry from its earlier character of
a forest-based industry.
Myth and The Reality:
While all pervading myth that continues to slur the image of the
industry is that it perpetually uses forest raw material and
consequently denudes natural forests of the country, the truth is that
over the last decade, industry led farm/social forestry have brought
around 0.5 million hectares under pulp wood plantations, mainly degraded
marginal lands of farmers. At the current estimate, wood based segment
of the industry uses 80 per cent of the total requirement from farm
produced wood. In particular, IPMA member mills have been actively
promoting agro forestry with private land holders/farmers to meet
imminent raw material needs in a sustainable manner thereby, positively
impacting the Greening India mission of the Government. Also, the
industry initiative has created major employment in the remote areas in
close proximity to the manufacturing facilities thereby, helping rural
development.
Global Scenario:
Globally, paper industry has realized a linkage between production of
paper and the farming community thereby infusing huge capital in
agricultural economy. The USA, Latin America, Scandinavian countries,
Australia, Japan and neighboring Asian countries viz. China, Indonesia
etc. all have been quick to create conducive land use/forestry policies
to encourage large-scale production plantations and attract mega
investments in pulp and paper/paperboard manufacturing and in the
process creating millions of jobs.
India Imperative: In
order to replicate success stories of major global players in the field
of Production/ Industrial Plantation, IPMA continues to advocate for
atleast 2% access to degraded forestland on lease. It is IPMA’s firm
belief that besides facilitation of social/farm forestry on
private/revenue waste lands, if paper mills are permitted to grow
pulpable wood in the radius of 150- 200 KMs to their facilities on the
available degraded forest land as well, it would hugely help mills to
achieve cost competitiveness in terms of wood and freight and would
also, help generate employment, create wealth for the rural poor and
lend protection to environment. In this context, IPMA has pleaded for
adoption of Multi Stakeholder Partnership (MSP) model propounded by MoEF
for afforestation of degraded land.
The Indian paper and paperboards industry
has potential and also capabilities to service the growing demand in
domestic and international market and also to create huge employment
avenues in the rural-India through agro/production forestry and at
mills, provided the competitiveness of the value chain is encouraged by
the government.
Major Deterrent – Fibre Deficiency Wood:
India's wood resources are limited therefore, cost of wood is much
higher in global comparison. Since there is conspicuous absence of
Government's enabling policies favouring industrial/production
plantation, securing future wood supplies will be Industry's biggest
challenge. Wood based segment of the paper industry meets its current
wood requirements mainly through social/farm forestry and supplements
with purchases made from the State Forest Development Corporations. Bagasse/ Straw: Though
annual availability of agro residues is large yet, this may not be able
to sustain the future growth of the Industry, taking due account of
quality of paper required, environmental issues involved, etc. Moreover,
bagasse is increasingly used by sugar mills for co-generation of power
and no more easily available to the paper mills as raw material. Waste Paper: Recovered
fibre consumption is going up globally. In India about 850,000-1,000,000
tons of waste paper is being currently recovered annually. The recovery
rate works out to about 20% which is much lower in comparison with 65%
recovery achieved by many global players. Low recovery is on account of
alternate use of paper in wrapping, packing, etc. The utilization rate
of recovered fibre is only 47%. Paper mills are heavily dependent on
imported waste paper which commands exorbitant price due to inadequate
availability. India needs a well-defined and aggressive system for
collection, sorting, grading and utilization recyclable waste paper to
contain imports. Energy Cost:The
Government of India has recently withdrawn core sector status hitherto
enjoyed by the paper industry. Cost of coal is escalating and prospect
of availability of quality coal is diminishing. The steep price rise in
coal has resulted in escalation of cost of production of those mills
which happened to be dependent on imported coal for generation of
steam/power. Also, power purchased from the grid is proving expensive
for the industry. Certification:Forest
stewardship council certification is becoming a non trade barrier for
Indian paper companies. As bulk of the raw material is obtained from
farm and agro- forestry, IPMA is of the view that it would not be
practical for huge number of farmers involved in social/farm forestry to
group and obtain the FSC certificate for their produce. Though the farm
forestry is a sustainable model promoted by the paper industry, the FSC
principles and criterions are difficult to satisfy. IPMA is monitoring
the move set afoot by the Government of India to establish Indian Forest
Stewardship Council to help the process of certification.
Developmental Challenges
Enhancing Industry’s competitiveness to face global competition
Economies of scale
De-fragmentation of industry
Modernization of mills
Building new capacities
Meeting incremental demand of paper
Productivity/quality improvement
Creation of robust raw material base
Environmental upgradation and green technologies
Setting mechanism for collection, sorting, grading and utilisation of recyclable waste paper
Raghupathy - Papertech 2013 Indian Pulp & Paper Industry World Class
India's Paper Industry to Grow at 6-8%/year, but Faces High Input Costs
July 2013 - With a total consumption of 11.60 million metric tons (MT), the Indian paper industry accounted for less than 3% of global paper demand. The per capita consumption of paper amounts
to around 10 kilogram (Kg), which is significantly lower than world
average of around 58 Kg and even the consumption levels of some of the
other developing nations.
While the market size and per capita consumption are relatively
low, they have exhibited a rising trend over past several years from 7.3
kg in 2008 to 10-11 kg in 2012. The total paper consumption has grown
at a CAGR of around 6% over last decade with none of the last ten years
showing a decline in consumption demand.
The long-term demand outlook for the Indian paper industry
remains favorable driven by increasing literacy levels, growth in print
media (particularly in the vernacular languages), higher government
spending on education sector, changing urban lifestyles, as well as
economic growth. Given that these factors are likely to be sustained,
the paper industry is likely to continue growing at a rate of 6-8% in
the medium to long term although there maybe aberrant years given the
cyclical nature of the industry. In addition, the preparation for
general elections will provide further boost to paper demand in FY14.
SUPPLY
On the supply side, the industry saw significant capacity
additions of 1.6 million MT during FY09-FY11 (about 15% of domestic
paper capacity in FY09) particularly in the printing-writing paper (PWP)
segment. The bunching of these capacities resulted in over-supply
scenario during FY11 and FY12 as these incremental capacities could not
be absorbed
in the market. As a result, most players saw significant built-up of
inventories as well as pricing pressures in FY12. But with steady growth
in demand, the market has now started absorbing these incremental supplies and the inventory build-up that was noticed in Q2 and Q3 FY12 is absent now.
Most of the paper mills that expanded capacities have achieved
operating rates of over 80% in FY13. Further, the industry has gone slow
on new capacity announcements. As per CMIE Capex, only five new
projects have been announced in the last four quarters (Q1-Q4 FY13) with
an investment of Rs. 3 billion. However, some of the capacity
expansions which were announced earlier are already on track and are
likely to be completed by FY14. ICRA expects about 0.35 million MT of
capacities to be added during FY14 and about 0.3 million MT in FY15 (as
against current capacity of about 13 million MT).
Even after assuming a conservative
demand growth of 6% per annum, ICRA expects about 0.7 million MT of
additional demand to be generated each year; hence the new capacities
will be absorbed in the market, although there may be temporary supply
pressures in some quarters.
PRICING
On the pricing front, PWP prices in coated segment have been
affected due to cheap imports from China. The imposition of anti-dumping
duty by United States and Europe on Chinese coated paper resulted in a
diversion of cheap Chinese imports to India, thereby creating a surplus
situation in the domestic market. This put pressure
on domestic paper prices as the landed cost of Chinese imports was Rs.
4000-5000/MT lower than the prevailing domestic prices in June 2012.
Although depreciation of Indian rupee has protected domestic
manufacturers who announced price hikes during Q4 and Q1 FY13, in Q2
FY13 the companies had to resort to price cuts by Rs. 1500-2500/MT to remain competitive with Chinese imports.
Stiff competition from imported Chinese paper has continued to
result in pricing pressures on coated paper segment. Though domestic
paper companies have tried to raise prices to pass on the rising raw
material and other costs, they have not been able to fully pass on the
rising costs to the customers.
In the uncoated PWP segment, prices have been hiked in the last
one year to cover the increase in input costs. Several leading paper
manufacturers have undertaken a series of hikes post November 2012 as
the start of new session in schools pushed up the demand for uncoated
paper. Going forward, preparation for general elections will also
support paper demand to some extent.
In the newsprint segment, the domestic prices have remained
stagnant Rs. 28000-32000/MT in different markets over the last one year
despite rising cost pressures. The international newsprint prices (USA
market) have also remained stagnant at around $610-630/MT since Dec 2010
mainly due to muted demand in these markets. Though international
newsprint prices have remained stagnant in dollar terms, the
depreciation of Indian rupee has led to rise in prices in rupee terms.
This has provided some pricing advantage to domestic players to raise
prices, although the superior product quality of international newsprint
and rising cost pressures faced by domestic manufacturers has offset
this benefit.
RAW MATERIALS - FIBER
Raw material availability continues to remain a key concern for
the industry. The wood availability for pulp making has been constrained
on account of government regulations on captive plantations by paper
mills. The availability of wastepaper has been limited because of low
collection levels due to alternate uses of such paper in other
applications such as packaging.
The collection rate of wastepaper in India is limited to around
20% of the total paper consumption in the country as compared to around
55-60% levels in developed countries.
Further the quality of wastepaper available from the domestic
sources is generally of inferior quality. As a result, the companies
have to depend on imported wastepaper, exposing the mills to movement in
international wastepaper prices.
For the industry players based on agri-residues, the availability
has been affected by cycles in agricultural produce as well as
alternate use of bagasse in power generation.
INPUT COSTS Apart from issues regarding availability and quality of raw
materials, the paper mills have been affected by rising input costs. The
prices of key raw materials such as wood and chemicals have increased
consistently over the years. Further, increase in domestic coal prices,
reduced availability of low cost linkage coal has increased the power
and fuel costs for paper companies. Though international coal and pulp
prices have declined, this benefit has been largely offset by
depreciation of the Indian currency. The domestic coal prices have
consistently increased over the years. In May 2013, Coal India Limited
revised the price of low-grade coal by an average of 10%. Paper
manufacturers have increased prices over the last two years to pass on
the costs, but the price hike has been insufficient to absorb the costs.
GROWTH RATE
The paper industry reported robust growth in revenues during
FY08-FY13 driven by steady growth in consumption levels and increase in
realizations. This period also saw steady increase in the cost of inputs
such as wood, chemicals, coal etc.
Over-supply scenario, rising cost pressures and increasing
competitive pressures from imports made it increasingly difficult for
the paper mills to pass on these cost increases. As a result, the
operating profitability of the industry came under pressure in FY12. The
average operating margins of the companies in ICRA Sample* declined
from 21.96% in FY08 to 15.87% in FY13.
Though pricing flexibility has improved marginally with an
improvement in demand-supply dynamics, the profitability of paper mills
continues to remain under pressure due to rising costs of raw material,
coal and chemicals. Further, high depreciation and interest costs on
account of debt funded capital expenditure undertaken by the industry
have resulted in pressure on net profitability of paper companies as
reflected by decline in net profitability from 11.34% in FY08 to 1.44%
in FY13 for companies in ICRA sample. The funding of capacity expansion
projects through bank borrowings led to increase in gearing levels of
paper companies from the lows of FY06. High gearing levels (in the range
of 2-3 times as on March 31, 2012) coupled with decline in
profitability has put pressure on the debt coverage indicators of the
industry.
OUTLOOK
Going forward, ICRA expects the paper industry to continue
growing at the rate of 6-8% in the medium to long term although there
may be aberrant years given the cyclical nature of the industry. The low
per capita consumption of paper provides tremendous potential for
growth in paper demand.
Further the capacity addition program has now come to an end and
there has been a considerable slowdown in new project announcement and
completion. With the recent capacity additions coming to completion, any
fresh announcements is unlikely in the near term and with gestation
period of about 24 to 30 months for new capacities, supply side
pressures have started easing.
Assuming a moderate growth of 6% per annum, the market would
expand by approx. 0.7 million MT annually, which would be sufficient to
absorb the new capacities that will come up in the next 2-3 years.
However, the favorable demand-supply dynamics may not immediately
translate into higher profits for paper companies. The cost for most of
the key inputs is currently at a very high level and domestic coal and
wood prices are still increasing at a rapid pace. The ability of the
companies to pass on these costs will remain the key to profitability.
Companies with better cost and capital structures and a diversified
portfolio of products would be better placed to endure the pressures in
the medium term.
Chandra Shekar Reddy - Papertech 2013 Indian Pulp & Paper Industries
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