The paper and paper products industry has been growing year by year, and the year 2009 revenues for the industry were about 24,500 Crores which is about 1.9% of the global paper products production. The Global paper and paperboard consumption is around 400 MMT. Global demand is expected to grow to 420 MMT by 2011. The emerging economies are contributing significantly to the growth of the global paper industry and are the largest consumers of paper. The share of Asian consumption of paper and rose from 28% to 36% in the last three years.
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Asian countries are expected to contribute 50% of the paper consumption in the next 5 years which would mainly be contributed by largely populated countries like India, China, Thailand and some other emerging economies like Singapore and Malaysia. In terms of volumes or size, India is the 15th largest paper consumer in the world and 1arge amount this paper consumed is imported. India has one of the lowest per capita paper consumption of less than 10 kg. If we compare this paper consumption with other emerging economies like Japan which has a per capita consumption of 250 Kg, China has around 45 Kg. Considering the geographic reach of the country and the large population there is immense growth prospects in the paper industry. In India the paper consumption would be driven by the news and education industry. Although the demand for paper in India is rising at a healthy pace, constrained domestic supply has restricted volume growth of the Indian manufacturers.
The Global paper prices have also shown an increasing trend due to an increase in the over all cost of production. The price which was around 420 Dollars per ton in 2009 increased to around 550 Dollars in January 2010. The Global paper industry was also impacted by the reduced production capacity of Chile and the temporary closure of some mills in Canada. This sudden fall in production lead to a demand supply gap significantly increasing the prices and leading to stagnation.
The industry experts are confident on the growth of the industry and hence the production major “China has announced aggressive plans for reaching around 4.3 million tonne of pulp and paper capacity by September 2010. “
The Indian paper industry is highly fragmented. According to estimates, the total number of mills varies from 500 to over 1,000. The top five producers account for 15% of the total paper capacity in the country. The high level of fragmentation in the Indian paper industry is largely because of policies adopted by the government. In the 1970s, the government granted excise concessions to small agro-based mills that resulted in a rapid growth in small mills and, consequently, enhanced industry capacity.
The Indian Paper Industry:
Total paper manufacturing capacity exceeded 8 MTPA, while major paper mills plan to add about 2MTPA of capacity in the next three years. Capacity utilization has been falling since CY07, and this trend is likely to continue in CY09. However, it is likely to remain better than in some embattled sectors of the economy, supporting neutral outlook for the paper sector in CY09. However, if sluggish demand growth continues in the medium term, causing capacity utilization to reduce further, the sector outlook might be affected.
Over the last few years, the total number of paper mills has declined. Most mills that have closed down are small units, which have shut down because of increased pressure on their cost structure and lower demand for their low-quality paper. However, the industry’s capacity and production have been growing, with larger players adding capacities and operating efficiently. The capacity additions are expected to be more than the incremental demand in this segment. Setting up a paper business calls for a substantial capital outlay. A new, integrated unit with captive power, and in-house pulping facility and a co-generation plant will require an investment of Rs 80,000-100,000 per tonne of paper output.
The Industry Segmentation
Broadly, the paper industry can be segmented into two segments-paper and paperboard (writing, printing, packaging and tissue), and newsprint. The growth in India is significantly contributed by the news print industry.
Writing and printing paper business can broadly be divided into four segments-coated wood-free, uncoated wood-free, copy paper, business stationery and creamwove.
Writing and printing (W&P) paper includes varieties of paper, normally under 120 GSM (grams per square metre), that are used primarily for writing (stationery) purposes and printing (books, notebooks, application forms, etc). The various varieties of W&P paper starting from the lower end of the value chain are creamwove, maplitho, copier and coated paper. While high-quality paper segments have been garnering a greater share, low-quality segments still account for a major share of the market due to a higher base. To a large extent, growth in demand for paper in this segment depends on population growth, level of literacy, public and private spending on education, level of business activity and growth in the printing industry.
Industrial paper includes kraft paper, duplex boards, grey and white board, and MG paper. This paper is used for various industrial purposes. Different varieties of paperboards include coated/uncoated duplex, chromo and triplex boards. Kraft paper is available in various varieties, differentiated by properties of strength and grammage, among other criteria. Consumption of industrial paper is closely linked to growth in the packaging industry, industrial production, development in packaging technology and substitution by other materials.
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Speciality paper includes tissue paper, fine art paper, business card paper, photo paper and greetings card paper, which find various specific applications. It contributes to a very small percentage of total paper demand. Consumption of specialty papers is linked to the standard of living as well the per capita income of the masses due to their high value products.
Newsprint is mainly used in the printing of newspapers and magazines. Although used for printing purposes, newsprint is considered a separate end-use category because of the marked difference in its production process as compared with other W&P varieties of paper. Besides, newsprint is consumed in very large volumes vis-à-vis other varieties of paper.
Raw Material: The Major Problem For the Industry
In India, three main sources of raw materials are used to manufacture paper: wood/bamboo, agri-residues such as bagasse, and wastepaper. Wood accounts for 36% of production, while wastepaper and agri-residues account for 32% each. The primary raw material used by the paper industry is wood. Softwoods are not used in India, as they are not easily available. (Softwoods cover 6-7% of the total forest area in India.).
To meet part of its raw material needs the industry has to rely on imported wood pulp and waste paper. At present about 60.8% of the total production is based on non-wood raw material and 39.2% based on wood. Due to the limited availability of wood, agro-based raw materials and waste paper are used as substitutes for manufacturing paper. However, paper so produced is of lower quality as compared with paper manufactured using wood. The pulp and paper industry consumes a large amount of energy and water. In India, energy costs account for 15-19% of net sales for paper companies.
The cost of power has increased since the availability of power being unreliable and the industrial segment cross-subsidizing power to other segments. Steam accounts for 80% of the energy requirement of a paper mill, power accounts for over 20% of the total energy requirement. The ratio of steam to power and the total energy consumption varies across different paper units because of factors such as the type of paper produced, type of pulping process, the basic raw material, and the age and size of the plant. An average paper mill consumes around 1.5 tonnes of coal per tonne of paper produced. Paper units require coal with low ash content and a heat value of 4,500 KCal/kg. If coal is of an inferior quality, the volume of coal required increases and efficiency of boilers decreases.
Some paper units have installed fluidized bed boilers that can use inferior varieties of coal efficiently. However, such boilers cost Rs 35-100 million. Wastepaper is one of the most largely consumed raw materials in India. Imported wastepaper accounts for 45% of the total wastepaper consumption. The quality of domestic wastepaper is lower than that of imported wastepaper, mainly due to improper collection facilities. Over the next 5 years, the consumption of imported wastepaper is expected to increase, and nearly 50% of the wastepaper requirement is likely to be imported.
Business Strategy for Banks:
Although factors such as increasing government spending on education, higher disposable incomes and improving standards of living will support growth in paper demand in India in the medium to long term, lower general economic growth will moderate paper demand growth in the short term. The research findings suggest that growing conservatively amid neutral outlook, although some concerns about consumption growth, capacity utilization and profitability are emerging.
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