Turmoil in the paper turf

What happened with the world paper industry
Let us look at the status of the world paper industry, beginning with the total production of paper and paperboard just before the pandemic and immediately after that. (Source: Statistia.com)

Key takeaways
●    From the figures above, since 2015, it is apparent that overall production of paper and paperboard has declined steadily since 2017 by over 3%, in the face of declining consumption. In 2020 the total world market for the paper was worth USD 350 billion, which is likely to increase only marginally in 2021 to USD 352 billion. Without definite production statistics for 2021, we can estimate the overall world production to reach around 405 million MT. Only a marginal change. 
●    As per Fortune Business Insight, this overall demand for the global paper and paperboard will increase marginally to USD 354billion in 2022 and grow at a CAGR of only 0.72% until 2029, signifying no significant demand growth in the world paper market.
●    However, within this limited growth spectrum, there are significant changes in the fundamental character of the world market for paper and paperboard. While, since 2015, the packaging segment has increased by 5%, the graphic segment has reduced by 7%, a major shift without much impact on the overall volume.
●    Therefore, there is nothing to show a major increase in actual demand in the world paper and paperboard market, neither in the recent past nor in the near future, except for segmental change, which is shifting the demand.
 Hidden behind these statistical changes in the world paper and paperboard industry, far more profound changes have taken place in the operational characteristic of this industry, the world over, during this period:
●    It started with significant supply chain disruptions all around, beginning from early 2020 and through to early 2022 ( China’s covid related lockdown ), adversely impacting the world paper industry in terms of sourcing of significant inputs, including raw materials like pulp, waste paper, chemicals, and energy, all of which saw significant price rises, leading to hike in production costs for the world paper industry. We shall discuss the specifics of the rise in fibre costs later in the discourse.
●    The rise in the energy cost during this period, by 2.5 times in comparison to the cost prevailing before the pandemic, together with the current conflict, aggravated the difficulties for the world paper industry in its overall production costing.
●    Similarly, chemical prices, such as that of caustic rose by 100%, according to a stalwart in the paper industry, adversely affecting the overall costing
●    Together with the rise in input prices, the pulp sector saw major cartelisation among the pulp producers, giving them enormous power to dictate pulp prices in the world fibre market.
●    The outcome of this disruption is a substantial rise in the overall production cost for paper, without much prospect of any future reduction.
●    Yet another area of world paper industry operation seeing significant cost increase is the factor of wage rise, which is taking a very critical shape now.
●    In line with these increases, a major consolidation has taken place among paper producers of the world, which has helped the paper makers to pass on the burden of these increases to the users. However, the world paper market has not seen any major demand spurt, in the overall.   
These structural changes were contributory to other changes that were already in motion, even before 2020 disruptions, like:
●    increased emphasis on sustainability,
●    increased emphasis on digital analytics for staying ahead of laggards,
●    increased focus on eCommerce and online business,
●    increased demand for packaged food,
●    increased emphasis on alternate B2B sales model. 

All these factors together gave a greater fillip to significant changes in how the world paper industry operated. On the one hand, on the supply side, the production cost increased so substantially that any reversing of this trend is beyond the realm of practical expectation, leading to an enormous spurt in the end product pricing making the world learn to live with a new reality level, in terms of pricing of paper and paperboard. 

On the other, for the demand side, consequent upon, pandemic, war, e-commerce, online shopping and inflation, all in unison, altered the focus of the world paper industry towards more remarkable growth through increased emphasis on the supply of paper and paperboard for packaging purposes, which, as projected by Fastmarket, is likely to see an upswing @ 3.1% per annum during 2022-26. The graphic segment, however, at the same time, will continue to remain subdued in comparison.

What happened to the Indian paper industry?
Even though the Indian paper industry’s contribution stands at only about 5.7% of the total world production of paper and paperboard and has one of the lowest per capita consumption bases in a population touching 1.40 billion, for the first time, the world paper industry trends have come to touch the Indian paper industry, too, never seen previously.

But, before we delve into that, for a better perspective, let us look into a brief comparison between the pre and post-pandemic status of the Indian paper industry:

Four major takeaways from the performance of the Indian paper industry as shown:-
●    Marginal growth in the overall production of paper and paperboard in last two years.
●    Substantial growth of exports for the Indian paper industry in the last two years, from 1.66 million tonnes in 2019-20 to 2.85 million tonnes in 2021-22, a staggering growth of 71.7%. Needless to say, the bulk of this growth has come about during challenging years for the world paper industry.
●    In line with the world trend, reduced share of graphic paper.
●    Increased share of packaging segment in both overall production and exports.
Having looked into the overall performance of the Indian paper industry, we now need to look at the dynamics that were in operation during this period in this industry :
●    The severest blow that befell the Indian paper industry during this period was the result of supply chain disruption, leading to an enormous rise in raw material input costs, more so for those producing paper from market pulp and waste paper, both indigenous and imported.
●    For example: softwood pulp prices increased from USD 650 to USD 1100/ADMT CIF, hardwood pulp prices rose from USD 550 to USD 960/ADMT CIF and BCTM pulp went from USD 450 to USD 850/900/ADMT CIF.
But, since only about a little over 4 million tonnes of paper and paperboard are based on virgin fibre, the bulk of which is from integrated mills based on indigenous fibre, the price increase for imported pulp had no major impact, except only for about 1,50,000 to 2,00,000 tonnes of pulp procured from outside the country.   
For waste paper users, prices were shooting up, too, with an added problem of extremely erratic shipment, creating difficulties for a larger number of Indian paper mills in sourcing their raw material and enhancing their production problems. And since 71%  or roughly above 14.5 million tonnes of India’s paper production is based on waste paper, this spurt in waste paper prices adversely affected the cost structure of the bulk of India’s paper mills.
●    Similarly, the cost of other inputs too, like caustic (100% increase) and different chemical prices, shot up enormously for the paper industry in the country.
●    Along with these cost increases, another significant increase to adversely hit the Indian paper industry is the energy cost, which, according to a stalwart of the Indian paper industry, increased 250% vis-a-vis pre-pandemic period. Here one needs to bear in mind that energy cost accounts for 13% of the Indian paper industry’s cost compared to 8% of international players. (kanvic.com)
These cost increases are weighing heavier on Indian paper makers owing to the falling rupee value against the USD, which, on the other hand, is helping the paper export from India to reach a new high.  
While all these cost escalations were hitting the Indian paper industry on the supply side, the demand side too, underwent marked changes.
●    In line with the world trend of increased emphasis on e-commerce, online buying, and the fad for packaged food, the demand for paper and paperboard meant for packaging has grown substantially, leaving behind the demand for graphic paper, which saw further erosion of production through the transfer of assets to the production of packaging paper, and paperboard. Meanwhile, the demand surge in the packaging segment helped contribute to greater demand in the paper market in India.
●    Another demand side factor is the growth of B2B interaction in the Indian paper industry. Considering the volatility in the supply situation and the pricing, users felt it necessary to interact more and more with the producers directly to avoid uncertainties.
●    At the same time, looking at the price volatility and the uncertainties in general, the trade started avoiding holding stocks with themselves, thus eliminating the pipeline stock, which made the producers meet the market demand from regular production, giving them a feeling of increased off-take.
●    To crown it all, during this period, the world economy was majorly impacted by inflation and the measures adopted by different countries to tackle the same, by implementing fiscal changes, including raising interest rates. Almost all the countries in the West went for these measures. The US too fell in line, leading to a rise in demand for the US dollar, thereby raising the value of the US dollar vis-a-vis world currencies, including the Indian Rupee, substantially. This, in turn, opened up an enormous opportunity for the Indian paper industry to export its produce to markets outside India. India-made paper and paperboard became price competitive in the world market when the traditional paper markets worldwide were undergoing major price increases for reasons, as we have seen in the preceding paragraphs. This helped around 12% of paper and paperboard produced by the Indian paper mills to get diverted to outside markets, in itself a milestone for the Indian paper industry, thereby creating that much-needed supply gap and keeping the demand alive in the domestic market.

In combination, all the above factors have helped increase the demand sentiment in the Indian paper market. However, the extent of the time frame for continuity of this opportunity, remains a matter of conjecture. Yet, from regular interactions with a few major paper mills during this period, one feels that this export opportunity has for sure provided much-needed succour to the Indian paper industry in the face of continued cost increases and provided this industry with the luxury of enjoying a gap between the demand and supply and thus use this as a plea to heat the market, domestically.

Taking advantage of this tail wind in favour of increased demand, much to the chagrin of the domestic end users, the paper industry in India put through repeated price increases and other measures not precisely in the realm of good business practice. Prices of paper surged, depending upon the grade, from 50 to 60%, sometimes 80-100% compared to the pre-pandemic level.

For the paper industry in India, this, however, is a matter, one feels, of making hay as long as the’Sun Shines’, which, as it appears, presently, could continue for some time, as long as the inflation reigns high all over, interest levels are up. USD value vis a vis world currencies remain high unless any other calamity engulfs the world.

There is a reason why the example of hay-making is necessary. It is primarily to caution the paper industry in the country, which would do well to bear in mind that with a per capita consumption base of only 15kg of paper, a domestic demand surge could remain a distant dream. And when that is tagged with very high food prices, as it is now and likely to remain so, for the foreseeable future, within the Indian context, together with a high level of retail inflation; there could hardly be any solidity of demand in the domestic market for paper and paperboard. Within this milieu, if the export market suffers a setback consequent upon the recession which has started setting in all over the world, the Indian paper industry will need to fall back upon the domestic market, making the demand and supply gap evaporate and opening up a turf war within the Indian paper industry for a share in the limited domestic market space ultimately leading to a reverse price war. This scenario is all the more likely since the country has had no reason to have a heightened demand except for the opportunity arising from the plastic ban.

At the same time, backtracking of the international market remains a possibility, especially when we consider that there has not been major growth in the world paper and paperboard market in terms of either production growth or demand growth. Any minor downward trend may spoil the export possibilities for the Indian paper supplier.

In order to appreciate the fragility of the current level of heightened demand in the Indian paper market, one should bear in mind that not all paper companies have benefited uniformly from this surge, which is evident from the study of the financial results of 12 paper companies. As Dr Ashok Kumar of Pudumjee Paper Products says, “The extent of loss in EBIDTA margin and PBT have been different for different companies.” These have many reasons depending upon the raw material being used and imported, grades of paper being produced, flexibility in product switch, and export potential. For example, as Dr Kumar further adds, “the companies manufacturing good quality tissue paper and packaging boards performed better than others due to export even though the margins were lower, but the export orders ensured running the machines which helped….”. The sentiment expressed in these words is very clear that the present level of demand surge should not be taken as a standard for the Indian paper industry as a whole; rather, it will depend upon how efficiently the Indian paper mills manage the supply as the demand sides.

Taking advantage of this brief period of sunshine, the Indian paper industry should draw up plans to balance its growth with sustainability, ensuring for this industry a better long-term future without depending upon short-term opportunities. It is to the credit of the Indian paper industry that it has already taken quite a few steps in this direction, like the increased use of recovered paper for raw material, which has reached a level of around 70%, reduction in the use of forest-based fibre to the level of about 21%, reduction of water usage from 200m3 to 50 m3per ton of paper and reduction of energy usage by 20%. Despite all these achievements, the Indian paper industry still has a long way to go to reach the level of other major paper-producing nations of the world in the matter of efficiency of utilization of available resources towards better sustainability.

This effort towards making the Indian paper industry more sustainable will get an additional impetus through adopting a closed loop or circular economy operation, for which an industry like paper is best suited, right from raw material procurement to reusing the waste in its system. Faced with an immense crisis for procuring much-needed inputs for production, like fibre, water, and energy, timely adoption of this process will help the Indian paper industry’s future well-being. Therefore, adopting this system could be considered urgent for the Indian paper industry.

Meanwhile, the plastic ban has become a major boon for the paper industry in the country, and it should exploit this opportunity to its utmost to firmly lay down the path toward real long-term growth for this industry. But, this can happen only if the industry puts its heart and soul into taking over the space vacated by plastic. One must add that efforts have already begun in this direction in earnest, by people like Ved Prakash of Yash Papers or organisations like ITC-PSPD. While we salute these endeavours, it should be said that this missionary zeal is still very limited compared to the opportunity presented to this industry by this ban. Let us not miss the bus.
From now on, the watchword for the Indian paper industry should not only be sustainability but sustainability with recreation. In this lies the benefit for this industry and the end users.

PR Ray is an industry veteran who has been a part of the paper industry since 1970.