We are looking at the pre-Covid levels in the range of 40-50% for coated and wood-free paper. On the packaging segment, the numbers are robust in the range of 60-70%.
For coated and uncoated segments, we are expecting this number to go above 50% in September 2021. As I see it, in the first half of August we will have to bear with this kind of 40-45 % of business. Once the festival season begins, we will see a pick-up in demand in coated and uncoated paper. We will easily cross 50%.
The print business is improving, but will not return to former levels due to the switch to digital outputs, which grew during the pandemic. Textbook tenders from the major states will see a partial return to books and textbook sales.
About commercial print, some segments have continued to struggle, and we don’t expect a return to pre-pandemic levels anytime soon. One huge area of concern for the commercial print segment is the slump in writing and printing segment. This is because of the restrictions on school and colleges, and the boom in online education. This has impacted the demand for notebooks and textbooks. Book and notebook print firms have not been able to print the number of notebooks, which was required in a normal non-Covid situation. Moreover, government restrictions on printing calendars and diaries in government departments and PSU companies is also making matters worse.
The good news is that the vaccination drive is on. We are expecting normalcy in the second half of 2021 as well as additional demand during the Diwali season. This will also lead to a good demand in the writing and printing segment. At FPTA, we are expecting a better second half compared to the current April to June quarter.
In the coated segment, there has been a major demand pain because a lot of catalogues and brochures, which are traditionally used in the marketing, have gone online. It is inevitable that some of this requirement has permanently gone away, as a lot of corporate companies and marketing departments have become comfortable about deploying an online brochure as compared to a physical version. Therefore, coated paper will see a permanent demand impact.
On the positive side, the overall coated market is much larger than the Indian production of BILT and JK together. There is a lot of dependence on imports. And so, the hit will be felt on imports of coated paper.
The rural demand
I'll compare the first and second Covid wave. The first wave was a city phenomenon. The upcountry and villages were cut off from the cruel impact of Covid-19. And so, last year, the tier 2 centres generated a lot of demand, be it FMCG or other goods. Also, there was good demand, since many Indians chose to migrate to villages from the big cities. Even today, what I am hearing is that demand is picking up on the back of robust activities in rural segments. Added to that, sectors such as construction, consumer durables and two-wheeler sales are seeing demand. Domestic travel and tourism are also witnessing an unleashing of pent-up demand.
In the second wave, the small towns and villages were impacted because of the pandemic. In 2021, we saw a bounce-back in the major cities. A major reason has been the vaccination drive, which was comparatively less in the smaller towns. Another reason is that the second lockdown lingered on longer than anticipated.
Our data suggests short-term plateau, but a demand increase in the long-term. However, as I have said earlier, the commercial print segment will see permanent demand hit of 10-15%
Today, the price gap between coated and uncoated paper is almost Rs 20/kg, with uncoated at Rs 53/kg and coated at Rs 70-72/kg. Usually, the cost of coated paper is lower than uncoated paper. So, the gap would not last, and once the demand increases, the gap will shrink.
The gap is not viable. As I have mentioned, the writing and printing campaign has been adversely impacted by the educational segment. And so, with schools and colleges shut, the writing and printing paper sector was the worst-affected, as it contributes to 60% of the share in the segment.
The paper dealers of India
The 10,000 paper dealers of India are the foundation of the print industry. The numbers are mind boggling. We have 10,000 firms. This includes wholesale and retail and the big paper merchants. Of this, almost 70% are traders who operate from small shops/offices. They serve as "a link" between a converter or printer and a wholesaler or stockist. As we understand it, this segment has been adversely impacted due to sluggish sales of 25% during the pandemic months. Now it must be a moderate 40-45%.
With this kind of operational numbers, the wholesale importers and the local mill agents are seeking direct orders. They are ready to pass on the price benefits to the printer or converter. The servicing agents who are sandwiched in between will not be able to survive with the present margins.
Secondly, there are a lot of government compliance, rules, and regulations, which have been introduced in the last two years – things such as TDS and TCS. It becomes onerous for a single person organisation where the owner is handling sales and managing the account engine to keep track of these compliances.
Therefore, we see a lot of people exiting the business. The traders at the bottom of the pyramid will shut down the shops or they will hand over the business to a bigger player or there could be a merger where they hand over the business and ask for a portion of the commission. These are firms with a turnover of Rs 5-10 lakhs per month. Please bear in mind, paper is a very high turnover business.
This is similar to the pattern in the commercial print industry, where firms with single-colour or two-colour offset presses are heading towards closure (worst case scenario) or consolidation (best case scenario).
Trends and trajectories: A lesson for all
The situation during the past 12 months has been painful. Firstly, there is the daily uncertainty. Then bracing for bad news. So, it was important to ensure the messaging was correct. Not only with my team, but also my customers.
What happened in August-September 2020 was that the prices kept falling. The reason: there was a lot of paper inventory built-up due to the lockdown. So, the paper trade community had built inventory. Now, the traders in the community started competing. They wanted to liquidate the stock and get out without burning the bridge. There was a lot of fear about what would happen next.
From September 2020 onwards, the international scene altered. The international paper mills spoke of soaring costs. They attributed it to pulp, energy and packaging materials, along with sharply rising freight rates because of global logistics constraints. And so, pricing saw a spike. That's how the cycle turned. There was a major shift in the pricing from the lows in August 2020 to the new highs in February 2021. The paper traders who had not sold their stock at a loss in 2020 accrued the benefits of the price increase. Simultaneously, demand started picking up. It boosted sales.
15 months with Jay Raj Fine Paper Company
In my company – Jay Raj Fine Paper – we have a portfolio of 70% fine graphic papers and 30% coated and other commercial grades. We found it very challenging, because fine paper took a major hit. So, our demand had nothing to do with pricing. There was no demand. For example, wedding cards went out of the system. Likewise, catalogue and brochure (premium segment) went out of the system, along with the hotel stationery segment. It was in October 2021 that we notched up 20-30% of the original demand. We were able to liquidate some of our stocks.
In my company, we started discussing our future. One thing was clear. The packaging segment was performing above par, be it duplex board, FBB mode or kraft segment. Therefore, we explored this space. In June, we started enquiring with some foreign mills in the US and Europe. We got some kraft consignment orders. Luckily, there was a very good demand pick-up in the kraft segment, be it recycled or virgin. In addition, there was a price increase of 50-60%.
My company got a good boost from the kraft segment. We started looking at the covering material and gray boards. That's how we managed to survive the last year. Hopefully, in the future we will retain a strategy of 30-40% coated paper, 30% packaging and the balance will be fine art paper.
Here I want to address a grievance that the printer and converter community have about paper dealers. There is a misconception that paper traders have reaped enormous benefits during the pandemic months. The statistics vary, but all kinds of numbers are doing the rounds. What I would like to say is that the paper trading community does not determine the prices. The prices are determined by the paper mills and manufacturers. Also, there are factors such as demand-supply, shipping costs, input segment, and government levies.
Almost all the paper traders were working with 40-60% turnover of our ops. And we were absorbing the shocks and jolts from the imported paper mill or local manufacturer. We bought what they sold. And we had no chance to sustain that type of pricing. My point is that paper traders cannot determine the pricing. The pricing – as any student of economics will tell you – is demand-supply driven, and to an extent, external, such as the shipping costs and pulp costs.
About the next few months, I am very bullish. One reason is: we are at rock-bottom right now. Of course, there are behavioural pattern changes in terms of print usage for 7-8 verticals, which needs a re-look. But there are segments, which will perform well. For example, the hygiene industry is a sunrise industry for paper. The kind of tissue papers being used in India is unprecedented. Also, there is a boom in packaging grades. Due to the awareness among generation Z, the eCommerce players are having to opt for sustainable green packaging. This has provided new revenues. Finally, due to the new educational policy, the paper traders’ community is expecting a good demand in the educational segment.
Finally, I would like to say, all of us have gone through major pain in the last one-and-a-half years. It's a question of one more quarter. And then, we will emerge from the lowest depths of hell with flying colours. I'm very optimistic about the future of the print and packaging industry in India.
Hiren J Karia is Hon Secretary at FPTA; and partner in Mumbai-based Jay Raj Fine Paper