Improved prices augur well for paper units

By Ramnath Subbu

MUMBAI, JUNE 2. The paper industry witnessed signs of recovery last year after a poor run of about four years and is now back on track. The recovery became evident more than 18 months ago with improved demand from the government as also for industrial paper from other consumers.

Paper companies had earlier been hit by poor capacity utilisation and poor prices. Prices had reacted significantly while administered input prices had increased leading to pressure on margins. However, with improved realisations and cost cutting measures in place the overall health of the industry improved. There has been some softening of prices by around 20 per cent in the last few months, but still the industry is in good financial shape.

As the demand for paper is related to gross domestic product (GDP) growth the industry's growth was hampered by recessionary conditions over the last few years. Consequently, additional capacity created over the last couple of years could not be utilised effectively. Now, it is expected that the increase in demand will lead to a healthy growth in revenues and the rising prices will have a salutary effect on margins.

Last year, the mills had done well with prices moving up by 15-16 per cent. At present, prices range from Rs. 35,000 to Rs. 60,000 a tonne with writing paper and map litho occupying the lower end of the spectrum and coated art paper the top end. Packaging paper prices - duplex board and kraft - have not gone up and are hovering around Rs. 15,000-20,000 a tonne.

Last year was also good for newsprint and internationally, the U.S. presidential elections saw a jump in demand. Even in newsprint, there are varieties, ordinary and glazed, the latter being imported. ``In India too, newsprint prices shot up from around Rs. 16,000 to Rs. 30,000 a tonne before receding to rule around Rs. 27,000 a tonne,'' said Mr. Chandak, executive director, West Coast Paper.

Mr. Chandak felt that prices would stay high for the next two years, first because of the cyclical nature of the industry and second, ``there is no import threat and there is no consolidation either.''

As such, consolidation in the industry is unlikely to take place unlike in the global industry where mergers and acquisitions have been common. This is largely due to the fragmented nature of capacity with only a handful of manufacturers having capacity exceeding six lakh tonnes a year.

The problems afflicting the industry are mostly price related. Raw material sourcing is one problem and non-pulp inputs are covered by administered pricing.

There are entry barriers in the industry - large investments are required and as such no new greenfield projects are planned. Whatever investment is coming in is for upgradation or expansion of existing paper mills. Though there is still some overcapacity it has come down due to rising production and stagnant capacity.

The industry size is five million tonnes annually. Of this, 50 per cent constitutes mills using conventional raw materials such as wood and bamboo and the other half use non-conventional raw materials such as waste paper and agricultural residues. These constitute around 300 mills and they manufacture paper and board.

While adequate pulp is not produced in India, international rates had shot up last year from $500 to $850 a tonne. However, they have dropped to around $550 now. The import duty on newsprint and pulp is 5 per cent against the WTO bound rate of 25 per cent. Imports rose steadily from 80,000 tonnes in 1995-96 to 2.70 lakh tonnes in 1998-99 and have remained steady in recent years. Import tariff for various grades of paper is at present 35 per cent against the WTO-bound rate of 40 per cent.

Here is a look at some of the leading players in the industry.

Ballarpur Industries' acquisition of Sinar Mas India for Rs. 530 crores is the latest and a major development in the industry. Sinar Mas is an Indonesian company and entered India about five years ago. The Indian unit has a capacity of 1.15 lakh tonnes and market share in the paper and paper-board segment. After the buyout, the combined capacity will go up to five lakh tonnes and Sinar Mas India has been renamed BILT Graphic Papers.

However, the question of sourcing pulp could come up for the company. Earlier, Sinar Mas India could source from its parent in Indonesia. However, there could be some problem now.

ITC Bhadrachalam Paperboards had expanded capacity from 62,500 tpa to 1.82 lakh tpa. Following the infusion of around Rs. 150 crores from ITC, the company has carved a niche for itself in the export market for coated paperboards and specialty paper.

Tamil Nadu Newsprint (TNPL) boasts of being among the most efficient players in the newsprint industry. In 2000-01, the company reported sales of Rs. 596.40 crores and a net profit of Rs. 76.40 crores. Promoted jointly by the Tamil Nadu Government and IDBI, TNPL manufactures newsprint and printing/writing paper with a capacity of 1.8 lakh tonnes annually. TNPL uses bagasse as the main input. It is now going in for de-bottlenecking to enable capacity increase by around 25 per cent.

West Coast Paper Mills (WCPM) has recorded a 88 per cent rise in its net profit at Rs. 28.52 crores in 2000-01 (Rs. 15.20 crores). Sales and income from operations rose 7 per cent to Rs. 351.33 crores (Rs. 328.68 crores). Profits jumped on better realisations coupled with an increase in demand for paper and paper board.

``The industry has emerged from difficult times,'' according to Mr. Chandak ``and there are no foreseeable problems. For the established players, the next two years promise to be good.''

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