Supplement -- Asia Gears Up for Renewed Growth

After suffering from difficult economic news, the Asian paper industry is poised to rebound. Paper companies look to expand their operations.

Asia’s rapid economic development in the 1980s and early 1990s propelled the region into prominence and greater importance in world trade matters. The unabated growth levels generated interest from the international community.

Businessmen in and around the region continue to keep close tabs on the “tiger economies,” despite their battle against the current development crisis. This is simply because Asia now plays an influential role in the global economy.

Early this year, the World Trade Organization (WTO) reported that global trade slowed in 1998, after unusually strong growth in 1997. It said that both trade volume and quantity fell. The rate of growth in volume of exports slowed from more than 10% in 1997 to 3.5% last year, while output growth slipped by 1% to 2% in the same period.

This, according to the WTO, was due mainly to trade contraction in Asia. Import volumes decreased by about 8.5%, impacted by Japan’s contraction of 5.5%. Commodity prices also fell sharply in 1998. While oil prices fell by 30%, non-oil primary commodity prices fell by 15% on a yearly average basis.

But the depressed trade conditions appear to have bottomed out and a moderate recovery is expected this year. Signs that Asia is recovering have been shown—stock markets are rising and some currencies are stabilizing.

Because the growth of the pulp and paper industry is closely linked with the overall development in domestic economies, industry players expect the industry to pick up.

MARKET POTENTIAL

With more than half of the world’s population living in Asia, the potential for growth in paper consumption is enormous. Even though there are more developed economies with relatively high per capita consumption in the region, there are also a group of countries with large populations and a much lower per capita consumption. For example, Thailand, Vietnam, Indonesia, the Philippines, China and India have immense potential for growth in paper demand.

Last year’s apparent consumption was much lower than in 1997, which saw an unusually high level of growth. On a global level, it was close to 300 million metric tons, with strong performance in Europe and North America. In Asia, China accounted for more than half of the total recorded for the region.

As an indication of the low consumption levels in 1998, domestic consumption in Indonesia was down by 65% from the previous year. Domestic consumption in Thailand was about 15% lower than in 1997. Because of the fall in demand, imports from the traditional markets of the U.S., Canada and Finland into the region dropped.

Overall, wood exports from the U.S. to Asia, including Japan, plummeted more than 40%. The decline in sales to Asia from Canada led to a two-thirds drop in ship-ments of pulp, containerboard and newsprint. Pulp exports from Finland fell by more than 9%.

With more than one billion people, China alone clearly has the potential for substantial growth in the pulp and paper trade. While most Asian countries are implementing crisis control measures, China is maintaining high GPD growth rates and is  steering away from pressures of currency devaluation.

If these factors are maintained in the country’s economic development policy, China will reach its target of 34 million metric tons of paper and paperboard demand by next year and continue to attract foreign investments.

The number of new offices and manufacturing plants that are being set up by foreign pulp and paper companies has surged in recent years. These ventures were also supported by the government’s plan to modernize its pulp and paper industry, from one that is predominantly state-owned to a market-type industry. This has led to rebuilding, the installation of new machinery and change in ownership, which brought about greater activity in paper production.

More opportunities are abound in China as the industry continues to restructure itself to meet changing demand. It aims to produce about 30 million metric tons of paper and paperboard by next year, followed by 38 million metric tons by 2005.

The industry also plans to increase paperboard imports to six million metric tons and seven million metric tons in the same period. The import level in 1998 was about five million metric tons.

Domestic consumption is expected to reach between 35 and 36 million metric tons by the year 2000 and a further 45 million metric tons by 2005. A considerable increase in demand for all paper grades in 2005 is also expected: newsprint (2.3 million metric tons), printing and writing paper (10.4 million metric tons), box board (7.5 million metric tons) and corrugated paperboard (8.4 million metric tons).

In light of these recent projections, the industry has drawn up measures deemed essential to meet the increasing demands:

· Increasing raw materials, especially wood pulp, from the current 13% to as high as 22% in 2005.

· Changing the ratio 53:47 for paper and paperboard, with a higher proportion of paperboard.

· Creating more pulp and papermaking companies with annual production capacities of 100,000 metric tons.

· Drawing more foreign investments in the form of joint ventures.

· Increasing the use of technology to raise efficiency and to produce higher-grade paper.

· More attractive tax packages from the government to boost papermaking activity and import of raw materials.

An increase in production capacity in China will push Asia’s share of the global papermaking capacity to more than the current 29%, even though its mills are located in a more distributed environment and they have an average capacity of 7,000 metric tons.

In contrast, the more developed Japanese industry produces an average of 2,300 kilo metric tons and has a higher capital outlay. The average mill capacity in Japan would, however, have slipped by now.

The Japan Paper Association reported that both production and shipment in 1998 did not reach the targeted 30 million metric tons. Moreover, consumer demand and consumption of paper and paperboard have languished at dismal levels.

Japan’s recovery is important for the rest of the region and the world because it determines the return of consumer confidence and demand for forest products. Although no one knows about its prospects, many industry observers say it is recovering. The government is offering tax cuts, both personal and corporate, to boost its economy.

In the rest of Asia, the International Monetary Fund says financial reforms are progressing well, especially in South Korea and Thailand. The aid package aims to achieve about 5% economic growth in South Korea next year, although imports are not expected to pick up in the next two years.

The fate of the industry in Indonesia is less certain, as much depends on the politics in the country and the outcome of the pending election. However, industry observers feel upbeat about growth. They say though domestic consumption decreased to about 35% last year, operating rates remain high due to enhanced export opportunities.

CHALLENGES

On the other hand, not all pulp and paper producers are in the doldrums. The export-oriented companies in particular have enjoyed the weak exchange rates. Many have enjoyed higher comparative advantages from the low-cost production in their local currencies and exports of products in the more expensive dollars.

The drop in the Indonesia rupiah, for instance, is benefiting bigger companies, such as Sinar Mas, Raja Garuda Mas and Barito Pacific. It helps to pay part of the raw material and labor costs, bringing down overall operating costs. As a result, companies such as Asia Pulp and Paper, Indonesia, and Siam Pulp and Paper, Thailand, have reported higher sales volumes in 1998. The former registered an increase of 19.5%.

In the first quarter of this year, sales of kraft paper and printing and writing paper at Siam Pulp and Paper increased about 5%  and 9%, respectively, as compared with the same period last year.

Although the Thai Pulp and Paper Industries Association has made modest projections for the consumption and supply of paper between 1999 and 2002, Siam Pulp and Paper is confident that there will be strong growth in the second quarter of 1999.

In addition, Sinar Mas is continuing to expand, modernize and construct new mills, while other projects have either been canceled or delayed. This is a positive point for them as long as the currency exchange rate remains in their favor. But, in the longer term, these producers must sustain their competitiveness. In this regard, industry analysts expect the economic crisis to bring about changes in the industry structure.

An obvious trend is the series of mergers and acquisitions at the global level. More alliances are being established in the pulp and paper industry, where either Asian companies are bought out by foreign ones or new companies are jointly set up by Asian, European or North American investors. These ventures, according to the parties concerned, provide a strategic solution to enhancing the competitiveness of their respective companies.

The way the alliances are managed varies, but the primary aim is to inject some stability in production volumes and prices, in order to capture a wider market. For example, Siam Pulp and Paper recently announced it is seeking a strategic partner for printing and writing business.

 “This is because we could not lead the company to become a regional leader,” says a spokesperson for Siam. “Due to our sub-scale size, although we have a significant market share in Thailand, we need a strategic partner to lead the business to become regional.”

Existing alliances include the Pan Asia Paper Co., UPM-Kyemmene-APRIL, StoraEnso, the Malaysian Newsprint Industries, SCA and MoDo, as well as Valmet-Rauma and Ahlstrom-Kvaerner Pulping on the machine supplier side.

SECURING FIBER SUPPLIES

In the search for profitability, paper producers have to deal with another pressing issue – the question of a sustainable supply of raw materials. As such, more paper producers are taking steps to secure fiber supplies.

The forest cover in Asia is concentrated in just a few countries, namely Indonesia, Thailand, New Zealand, Australia and China. Due to this, a growing number of paper producers from outside these countries are developing fiber supplies there, which has contributed to the drive for better forest management practices.

Japan, for instance, is making good progress in this area. According to the JPA, Japanese paper companies now control about 200,000 hectares of planted forest outside the country. And they have plans to double the total area by the next decade. Currently, Oji Paper is the biggest owner of planted forest land, spreading across Australia, New Zealand, Vietnam and Brazil.

Finish company Enso (before it became StoraEnso) is also actively looking overseas for its fiber supplies and has been making Indonesia its focus in the last few years. The company recently announced that it has acquired about 30% of the shares of PT Gudang Garam’s development of about 300,000 hectares of industrial timber estates (HTI) in West Kalimantan, Indonesia.

The purpose of establishing HTI is to ensure that pulp mills and communities in the surrounding areas will enjoy mutual prosperity. Under the regulations, HTI owned by communities/cooperatives have a 20% share. This will increase by 15% each year, with the aim to reach 55% in 35 years so that the sizes will be comparable with those owned by pulp mills.

Indonesia Pulp and Paper Association chairman Mahmud Mansur says the HTI pulp program has been the “darling of the government.” It stipulates that every mill must cultivate its own forest for pulp production and that it has to use logs from its own planting. Pulp projects are given empty forest areas where previous concession holders have cut trees. New pulp producers have to plant, cut and replant for their pulping purposes.

“By doing this, we can expect the forest cover of 141 million hectares to be recovered,” Mansur says.

In the meantime, all 13 HTI pulp projects that have been committed are progressing into their second or third year. In total, the projects cover about three million hectares, giving a total potential pulp capacity of about 6.5 million metric tons per year. The industry is also negotiating with foreign companies for partnership in developing these projects, due mainly to financial limitations. Apart from benefiting from the financial muscle of foreign partners, the local firms stand to gain from the transfer of modern, high-tech equipment. This will help further develop Indonesia’s pulp industry, which according to industry analysts has remained stable despite the crisis.

 In 1998, pulp capacity reached about four million metric tons, an increase of 35% from 1997. Indonesia also managed to export about two million metric tons of it. Due to the exceptionally high level of exports, the domestic demand did not decline sharply. But the increase in exports lowered the level pulp supply for the domestic market, which resulted in higher imports of pulp. The volume of imports rose by 15% to reach one million metric tons, while domestic demand also increased.

 

THE FUTURE

Asia has the potential to attain its previous high growth levels, but it must address macro-economic pressures and any financial sector disruption, which affect economic conditions. The region can also rely on abundant forests, trade liberalization and the will of governments to invest in developing their economies, human resource base and quality of skills of their labor forces for the resumption of its growth.

The article was reprinted from PaperAsia, a monthly publication focusing on the Asian paper, paper and forest products industry.

 

 

 

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