PAPER MAKERS INDIA: PAPER MAKERS INDIA

PAPER MAKERS INDIA

PAPER AND SOCIETY

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 VVVVVVVVVVVVVVVVVVVVVVVVVVV SREE OHM ASSOOCIATESS Consulting, Marketing and Service of Business and Industries K.MOKAN DASS - Chief Executive NO.3Q, DHANALAKSHMI NAGAR, ATHUR ROAD, THURAIYUR-621010 TRICHY DT., TAMIL NADU. INDIA Contact-919443358235/sreeohmassoociatess@gmail.com