Challange in Paper

Opinion
Sections
Executive summary
The demand-supply scenario
- Paper industry to witness firm demand
- Supply
1
3
3
11
2.0
Costs and prices

- Costs
- Prices
15
15
20
3.0
4.0
5.0
Credit profile
Key success factors
China to determine global paper industry dynamics
25
29
35
1.0
01
02

Demand methodology
Will the industry really face a shakeout post 2010?
10
12
1.0
01
02
03
04
05
06
07
08

India: Population and literacy rate
Writing and printing paper: Demand
Co-existence of paper and media
Growth in industrial paper and industrial GDP
Indias foreign trade
Growth in export-import
Rising imports
Operating rates
4
5
6
7
7
8
9
13
2.0
Costs and prices
01
Raw material costs
17
02
Cost comparison
17
03
Hardwood prices
18
04
Pulp prices
18
1.0
Boxes
Figures
Continued...
CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES
continued
Figures
05
Wastepaper: Landed cost
19
06
Domestic wastepaper prices
19
07
Capacity utilisation
21
08
Writing and printing paper prices
22
09
Kraft paper (waste-based) prices
22
10
Kraft paper (wood-based) prices
22
11
Duplex board prices
23
12
Industry operating rate
23
13
Coated paper: Landed costs vs domestic prices
24
3.0
Credit profile
01
Operating margin
25
02
Net profit margin
25
03
NCA/Total debt
26
04
Interest coverage
26
05
Trends in OPM for paper companies
26
06
Trends in NPM for paper companies
26
07
Credit profile
27
4.0
Key success factors
01
Player-wise capacity (2003-04)
29
02
Player-wise operating margins (2003-04)
30
03
Player-wise raw material break up
31
04
Raw material cost
31
05
Player-wise operating costs (2003-04)
32
06
Player-wise margins (2003-04)
33
07
Player-wise net cash accruals/total debt (2003-04)
33
08
Player-wise RoCE (2003-04)
33
5.0
01
02
03
04

Production (2002-03)
Global capacity growth
Raw materials
Wastepaper consumption
36
37
37
38
05
Wood pulp consumption
38
continued
II
continued
Tables
1.0
01
02
03

Paper: Variety-wise demand forecast
Paper: Player-wise production forecast
Paper: Producer-wise capacity additions
4
11
11
2.0
01
02
03
04
Costs and prices

Paper: Raw material demand forecast
Demand and supply of wood
Trends in domestic prices
Sensitivity to imports
15
15
21
24
5.0
01

Paper and paperboard consumption
35
III
III
Executive summary
Paper industry on the growth track
The paper industry has been growing at a steady rate over the last few years and is likely to continue on the same
path. The profitability and credit profile of the domestic paper industry will improve marginally as the demandsupply gap narrows. However, the pace of improvement will be slow.
CRIS INFAC believes that the stricter implementation of elemental chlorine-free (ECF) norms, which will entail
high capital costs for players, will exert considerable pressure on medium-sized and small players. In addition,
most small players in the industry are currently dealing in low-margin, low-end varieties of paper, which are
highly competitive segments. Consequently, they have limited flexibility in terms of raising prices. Interest costs
are expected to increase with a number of players incurring capital expenditure on making their facilities ECF
compliant and for expanding capacities.
At current duty levels, imports are not expected to constitute a considerable threat and given the steady growth in
the demand for paper, domestic producers are expected to perform well. Larger players like Ballarpur Industries
Limited (BILT), Tamil Nadu Newsprint and Paper Limited (TNPL), ITC and JK Paper, who have a considerable
advantage because of their size, product range and brand value, will continue to dominate the industry.
Demand-supply gap to shrink

The domestic demand for paper is expected to grow at a compounded annual growth rate (CAGR) of 6.3 per cent
from 5.7 million tonnes in 2004-05 to 7.8 million tonnes in 2009-10; supply is expected to increase at a CAGR of
3 per cent. Strict enforcement of pollution control norms is expected to restrict supply, as huge investments would
be required to meet these norms, resulting in fewer capacity additions, especially by smaller players who will be
constrained by the lack of adequate capital. With demand expected to outpace supply, CRIS INFAC expects the
demand-supply gap to contract over the next few years, resulting in operating rates of up to 96 per cent by 200910.
Domestic production is also expected to grow at around 6 per cent in line with the increase in domestic demand
and the marginal growth in exports over the next 5 years.
Moderate improvement in prices with growth in volumes

An improvement in the demand-supply scenario and an increase in volumes is likely to increase paper prices
moderately by 3-5 per cent in 2005-06 and 2006-07. International paper prices are also expected to remain firm
owing to the increase in input costs.
Input costs to rise

In India, the availability of wood is expected to remain constrained, resulting in higher input prices in the medium
term. Pulp prices, which peaked in mid 2003-04, have been declining over the past year. They are expected to
stay firm at $550-600 over the medium term on account of adequate supply in the global market with around 2
million tonnes of pulp capacity expected to come on stream in Brazil and Chile by January 2006. Imported
wastepaper prices are expected to rise due to an increase in demand, especially from China. Bagasse costs were
high last year due to a deficit in sugarcane production. Availability of bagasse is expected to improve with an
increase in the production of sugarcane, resulting in a moderate decline in prices as compared to last year;
however, overall bagasse costs are likely to remain high.
Financial and credit profile to remain stable

Steady growth in demand and limited capacity additions will enable manufacturers to pass on a part of the rise in
input costs. An increase in prices will lower the impact on cost structures and margins. CRIS INFAC expects
paper companies to maintain a stable credit profile in the short-to-medium term. However, any improvement in
profitability will be slow, as companies would be required to fund plant modernisation and install equipment for
chlorine-free pulping facilities.
Threat of imports negligible in the medium term

India imports around 0.19 million tonnes of paper annually, which is around 3 per cent of the total domestic
demand. Most of the imports are in the coated paper and speciality paper segments. In the coated paper segment,
imports account for 20-25 per cent, while in the speciality segment, imports make up nearly 50 per cent of
demand.
Imports are negligible in other varieties of paper. Also, most of the imports are in the form of stock lots, as
foreign companies have a limited presence in India. In the medium term, the threat of imports is not very
significant, as the price differential between domestic and international prices is high. Also, the lower variety of
paper generally used in India (like creamwove) is not manufactured globally.
China: Strong growth in domestic consumption to limit its export potential

China is one of the fastest growing economies in the world and is the second largest consumer of paper and
paperboards. In 2004, its demand for paper was 53 million tonnes; demand is expected to grow at a CAGR of 5-6
per cent over the medium term.
To meet the ever-increasing demand for paper, both Chinese and international producers have been developing
new projects, with around 20 million tonnes of capacity having been added during the last 5 years. Although
Chinas demand for paper has been growing phenomenally, the growth in supply is soon expected to outpace
demand, resulting in overcapacity. This could pose a threat to the Indian paper industry, as China could start
exporting to India due to its geographical proximity and Indias growth potential.
However, the threat of Chinese imports is not of immediate concern, as Chinas growing consumption is
expected to limit its export potential in the short-to-medium term.
1.0
CRIS INFAC expects demand in the paper industry to remain buoyant over the next 5 years. While growth in the
writing and printing (W&P) segment will be aided by the governments increased focus on education and
achieving higher literacy levels, the industrial paper segment will receive a much needed boost from increased
consumerism and growth in foreign trade, primarily exports. Demand for newsprint will be boosted by higher
growth in paper circulation and pagination.
Paper industry to witness firm demand

The demand for paper has been growing at a steady 6 per cent and is expected to grow at a CAGR of 6.3 per cent
over the next 5 years.
The demand for paper is closely linked to the economic growth of a country. With Indias economy looking up,
CRIS INFAC expects the demand for paper to grow in sync with its gross domestic product (GDP) in the medium
term.
The domestic paper industry comprises three distinct segments W&P, Industrial and Newsprint. Growth in
each of these segments is governed by different factors.
The major drivers for growth in the W&P segment are education, population and increase in corporate spending
on stationery. This segment is expected to grow at a CAGR of 5-6 per cent over the next 5 years. Growth in the
industrial segment depends largely on the industrial activity in the country. With the industrial sector looking
buoyant, demand for industrial paper is expected to grow at a CAGR of 6-7 per cent.
The demand for newsprint is largely dependent on circulation and pagination, which, in turn, depends on
advertising revenues. Although the demand for newsprint has been growing at an average rate of 5-6 per cent, the
entry of new players is expected to result in increased circulation and pagination in some metros. This will
contribute to higher demand for newsprint; demand is expected to grow at over 8 per cent. Although CRIS
INFAC expects this growth momentum to continue, the domestic newsprint industry is not expected to benefit
significantly from this growth, as imports are not expected to decline.
Paper: Variety-wise demand forecast

('000 tonnes)
Table 1
2004-05 E 2005-06 F 2006-07 F 2007-08 F 2008-09 F 2009-10 F CAGR (per cent)
Writing and printing paper
2,181
2,307
2,441
2,583
2,727
2,880
1,887
1,987
2,091
2,202
2,311
2,428
5.2
1,185
1,235
1,288
1,344
1,398
1,455
4.2
Maplitho (including unbranded copier)
575
605
634
665
698
734
5.0
Branded copier
127
147
169
192
215
239
13.5
Uncoated paper
Creamwove
Coated paper
5.7
294
321
350
381
415
452
9.0
Coated chrome paper
114
123
133
143
154
166
7.9
Art paper
101
113
127
142
159
177
11.9
6.4
Art boards
Industrial paper
Kraft
Duplex (including coated and uncoated)
80
85
90
96
102
109
3,370
3,589
3,821
4,068
4,331
4,615
6.5
1,833
1,964
2,102
2,249
2,406
2,574
7.0
963
1,037
1,115
1,201
1,294
1,395
7.7
Grey and white boards
274
284
294
304
315
326
3.5
MG poster
299
239
305
257
310
277
313
298
317
321
320
346
7.7
Specialty
1.3
Total of the above
5,790
6,154
6,539
6,949
7,379
7,840
6.3
Newsprint
1,347
1,491
1,623
1,792
1,902
2,000
8.2
Total
7,137
7,645
8,162
8,741
9,281
9,840
6.6
E: Estimate; F: Forecast
Source: CRIS INFAC
W&P
Promotion of education to drive demand for W&P
The demand for W&P paper, especially the creamwove and maplitho variety, depends largely on the extent of
literacy and spread of education in the country, as these varieties are largely used in the manufacture of textbooks
and notebooks.
India: Population and literacy rate
Figure 1
(million)
(per cent)
1,400
100
90
1,200
80
1,000
70
60
800
50
600
40
30
400
20
200
10
0
1981
1991
Total population
2001
2010E
Urban population
2020E
Literacy rate
E: Estimate
Source: Department of Economics and Statistics
In its endeavour to spread education and increase literacy throughout the country, the government has
implemented various programmes like the Sarva Shikshan Abhiyan and the Mid-Day Meal Scheme. Under these
schemes, various initiatives have been undertaken, such as an increase in the number of schools, incentives in
cash or kind for enrolment in these schools and the provision of meals for students attending schools. The Union
Budget 2005-06 has earmarked Rs 1,016.6 million as the total expenditure for these two schemes.
The government has also introduced a surcharge of 2 per cent on direct and indirect taxes in order to fund
education schemes. All these initiatives will result in a spread of education and literacy, which will aid growth in
the W&P segment.
Shift in demand towards better quality paper

An improvement in the standard of living of Indians, especially in urban areas, has resulted in a gradual shift
towards better quality paper. This is expected to increase the demand for high-end varieties of W&P paper like
coated paper and high quality maplitho.
Writing and printing paper: Demand
Figure 2
100.0
90.0
80.0
(per cent)
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2004-05 E
Creamwove
2005-06 F
2006-07 F
2007-08 F
Maplitho (including unbranded copier)
2008-09 F
Branded copier
2009-10 F
Coated paper
Source: CRIS INFAC
Printing & publishing outsourcing

Printing & publishing outsourcing (PPO) is the new buzzword in the printing business. Earlier, international
books and magazines were printed outside India and then sold here. This meant higher costs for publishers as well
as consumers. However, in keeping with the current trend of outsourcing, foreign publishers have started
outsourcing printing & publishing jobs to India; books and magazines are now printed in India and sold in India
and in other neighbouring countries. Thus, PPO will provide an added impetus to the W&P segment.
Printing of childrens books to drive growth

One of the major drivers of growth in the W&P segment is the printing of childrens books. These books are
printed for domestic consumption and for exports. The exports of these books are expected to increase over the
medium term with growth in demand. Increased literacy and urbanisation is also expected to increase the demand
for such products in India.
Technological advancement to further demand for paper

Technological advancements have changed the way people live. Monthly statements of accounts, telephone bills,
credit card bills, etc are all mailed to customers. Most companies prepare annual reports, which are mailed out to
investors. As a result, the demand for paper has increased.
With computers taking over most office tasks, the demand for copier paper has risen; at present, it is one of the
fastest-growing segments in the paper industry. Even growth in media from radio to Internet has not
diminished the demand for paper. On the contrary technological improvements have increased the consumption of
paper over the years.
Co-existence of paper and media
Figure 3
High speed Internet
M illio n t o nne s
Expansion of Int ernet

CD-ROM s
Laser Print ers
Sat ellite
TV
M ainf rame
Computers
Colour
TV
M ini
Comp
PCs
Cable
TV
Printing and writing
Radio
Cinema TV
Newsprint
Source: Jakko Poyry
Industrial paper
Industrial segment to grow in line with industrial activity in the country
Industrial paper is mainly used for primary and secondary packaging. Hence, growth in this segment depends on
growth in industrial production. With the industrial sector in India poised for healthy growth, the demand for
industrial paper is expected to grow at a CAGR of 6-7 per cent over the next 5 years. Although industrial
production is expected to dip in 2006-07, the demand for industrial paper is expected to remain buoyant.
Growth in industrial paper and industrial GDP
Figure 4
(per cent)
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
E
F
F
F
F
Industry GDP (per cent)
Industrial paper
Source: CCER and CRIS INFAC
Growth in exports to boost demand for packaging paper

Indias exports have been growing rapidly over the years and are expected to continue to do so. The growth in
exports is directly related to the growth in the demand for packaging paper, as exported items need attractive and
durable packaging. It is believed that increased exports will lead to a stronger emphasis on high-quality
packaging, which will result in greater demand for duplex boards, especially coated duplex boards.
Indias foreign trade
Figure 5
(US$ billion)
200
180
160
140
120
100
80
60
40
20
0
97-98
99-00
Export
01-02
03-04
Import
Source: CRIS INFAC
Growth in export-import
Figure 6
(percentage change)
60
40
20
0
-20
-40
97-98
99-00
01-02
Growth in export
03-04
Growth in import
Source: CRIS INFAC
Demand for duplex boards to rise with change in lifestyle

The fastest growing end-use segments for duplex boards are foodstuffs, consumer durables, garments,
pharmaceuticals, cigarettes and matchsticks.
With supermarkets, shopping malls and self-service outlets springing up across the country, CRIS INFAC expects
the demand for duplex boards to grow, as packaging will play an important role in attracting consumers. The
emergence of fast food, dried convenience food and ready-to-eat food has also created new markets for coated
boards and other packaging material.
Corrugating industry to grow with growth in manufacturing sector

With growth in the manufacturing sector, the demand for corrugating material, especially kraft paper, is expected
to increase. The growth in agro-based industries like horticulture, marine products and fresh and canned fruits
will result in higher demand for kraft paper for packaging. Consumer durables will also buoy the demand for kraft
paper.
Specialty paper
Demand for specialty paper to be fed through imports
Specialty paper is another fast-growing segment in the domestic paper industry. However, most of the demand for
specialty paper is met through imports as very few domestic manufacturers produce specialty paper. Also, the
quality of paper manufactured domestically is much lower than that of international paper.
Although the specialty paper segment is expected to grow at a CAGR of 7-8 per cent, nearly 50 per cent of this
demand will be met by imports.
Newsprint
Segment to grow in line with GDP
Growth in the demand for newsprint has historically moved in line with GDP growth, as its demand is dependent
to a large extent on population, increase in circulation of magazines, etc. With Indias GDP expected to grow by
6.75-7.00 per cent in the medium term, the demand for newsprint is expected to grow at a CAGR of 8.20 per cent
over the next 5 years. Increased literacy is expected to result in a rise in the circulation of newspapers and an
increase in the number of newspapers and magazines, which will, in turn, boost the demand for newsprint.
In spite of positive prospects, the domestic newsprint industry will continue to languish, as more than 50 per cent
of the total demand for newsprint is expected to be met by imports. Over the next 5 years, imports are expected to
grow at a CAGR of 7-8 per cent, touching 1.05 million tonnes by 2010.
Rising imports
Figure 7
(per cent)
(in tonnes)
900,000
70
800,000
60
700,000
50
600,000
40
500,000
30
400,000
20
300,000
10
200,000
100,000
0
1998-99
1999-00
Production
2000-01
Imports
2001-02
2002-03
2003-04
Import as a percentage of total demand
Source: INMA and DGFT
Demand methodology
Box 1
Sectoral end-use method

In forecasting paper demand we have adopted the sector end-use methodology. This method of forecasting
demand is considered reliable, especially in the case of the paper and paperboard industry. In the Indian
context, it is difficult to forecast demand using this method, as the number of end uses is large and demand
from a number of emerging end-uses cannot be estimated accurately. However, we have estimated demand
from application markets based on their share in total paper consumption in 2003-04 (such as notebooks and
text books, packaging, printing) and their growth potential in the next 5 years.
The size of these application markets in 2003-04, and their growth potential were estimated and validated with
industry sources. Wherever possible, forecasts of sectoral demand and the total demand for the
paper/application market till 2009-10 was validated using information available within CRIS INFAC.
Given the lack of published information on most application markets, estimates were used to arrive at market
sizes and growth rates, which were then confirmed from a number of industry sources.
To forecast the demand growth for the notebooks and textbooks segment, we used data on the population
growth between 5 years and 24 years (as per the census of India), increase in literacy levels, decline in dropout
rates in educational institutions and Central government spending on education.
For the office-printing segment, we considered the growth in the service sector, change in office technology
(from dot matrix printers to laser/inkjet printers) and Internet penetration.
Increased focus by corporates on advertisement and publicity were considered for forecasting demand for
coated paper.
For the packaging segment (kraft paper and duplex board), we analysed growth in the packaging industry and
substitution by other materials (especially polymers). The growth in the packaging industry was validated by
CRIS INFACs estimates for growth in the pharmaceutical and consumer durable segments. These estimates
and growth rates were verified by a number of industry sources.
Regression
The demand analysis involved the following stages:
Identification of demand drivers by main grade.
Estimation of relationships between paper demand and economic / demographic developments using
time-series data.
Use of the forecasted value for various economic and demographic values from CRISIL Centre for
Economic Research (CCER).
Estimation of forecasts for paper demand by main grade.
Based on the regression carried out, it was found that there was a good fit between paper demand and each of
the other macro variables.
10
Supply
Paper: Player-wise production forecast
Table 2
2004-05 E 2005-06 F 2006-07 F 2007-08 F 2008-09 F 2009-10F
CAGR
(per cent)
Ballarpur Industries Ltd
460
470
475
613
738
750
10.3
ITC Ltd
355
360
364
365
371
455
5.1
Hindustan Paper Corp Ltd
325
330
330
400
400
400
4.2
Tamil Nadu Newsprint and Papers Ltd
185
195
200
220
225
225
4.0
78
80
80
85
95
95
4.0
West Coast Paper Mills Ltd
174
195
195
198
220
220
4.8
Andhra Pradesh Paper Mills Ltd
152
153
165
170
175
185
4.0
JK Paper
172
172
180
180
185
195
2.5
Century Textiles and Industries Ltd
125
120
122
124
124
125
0.0
Seshasayee Paper and Boards Ltd
116
116
117
116
115
116
0.0
Mysore Paper Mills Ltd
104
104
105
104
104
104
0.0
Sirpur Paper Mills Ltd
80
82
94
96
98
102
5.0
Shreyans Industries Ltd
53
54
55
55
58
60
2.5
10
10
10
14.9
71
71
72
73
74
75
1.1
Orient Paper and Industries Ltd
Global Boards Ltd

Star Paper Mills Ltd
Balkrishna Industries Ltd
50
52
52
52
53
53
1.2
Pudumjee Pulp and Paper Mills Ltd
34
35
35
35
36
36
1.1
Nath Pulp and Paper Mills Ltd
32
32
34
34
34
35
1.8
Pudumjee Agro Industries Ltd
15
15
16
16
17
17
2.5
102
110
110
120
120
150
8.0
4.9
Rama Newsprint
Total of above
2,688
2,751
2,809
3,066
3,252
3,408
Others
3,182
3,495
3,833
3,999
4,254
4,557
7.4
Total
5,870
6,246
6,642
7,065
7,506
7,965
6.3
1
Compounded annual growth rate for the 2004-05 to 2009-10 period
Source: CRIS INFAC
Large paper companies scaling up

Paper: Producer-wise capacity additions
Table 3
('000 tpa)
Capacity additions
2004-05 E 2005-06 F 2006-07 F 2007-08 F 2008-09 F 2009-10 F
Ballarpur Industries Ltd
485
150
150
ITC Ltd
374
101
Hindustan Paper Corp Ltd
335
100
Tamil Nadu Newsprint and Papers Ltd
230
15
West Coast Paper Mills Ltd
164
36
Andhra Pradesh Paper Mills Ltd
154
46
J K Paper
150
50
Sirpur Paper Mills Ltd
84
54
Star Paper Mills Ltd
71
1
The figures for Hindustan Paper Corp include the capacity of subsidiary companies Hindustan Newsprint
& Nagaland Pulp & Paper Co
Source: CRIS INFAC
11
The domestic paper industry is highly fragmented with most players having small and medium capacities. Large
players account for around 40 per cent of the market share. Most large players are currently implementing ECF
norms and have also embarked on capacity additions.
Over the next 5 years, capacity additions to the tune of 1.2 million tonnes are likely in the domestic paper
industry. Most of the capacity will be added by way of expansions and de-bottlenecking of existing plants. BILT
will be nearly doubling its capacity in the W&P segment.
Stricter implementation of ECF norms could result in a decline in capacity

The implementation of ECF norms entails a huge investment on the part of players, with average costs estimated
at Rs 11,000-12,000 per tonne of paper production. The deadline for meeting these norms is 2007-08. For smaller
players, the government has allowed an extension to 2009-10. However, small and medium-sized players are
constrained by a lack adequate resources and financial flexibility. They are not in a position to incur the expenses
required for switching to ECF-compliant technology. If the government implements these norms strictly many
small players may have to shut down their operations, resulting in lower capacities post 2010.
(For the purpose of this annual review, we have not considered the fall in capacity in 2010.)
Will the industry really face a shakeout post 2010?
Box 2
In line with the Montreal Protocol, the paper industry is required to eliminate the use of chlorine in
bleaching by 2010. The government has strongly urged players to switch to ECF technology. Units that do
not comply with this requirement could be forced to close down. However, the fact remains that most
Indian players have very small capacities, especially in the industrial segment, where more than 90 per
cent of the manufacturers of kraft paper have capacities that are less than even 50 tonnes per day.
Smaller players account for nearly 60 per cent of the total paper production. If the government enforces
the strict implementation of ECF norms, most of these players would be forced to shut down. Mergers and
consolidations are highly unlikely, given the fact that most small units are uneconomical and have old and
obsolete machinery. Larger players will not invest in such units.
Will most small players actually close down, resulting in a decline of 40-50 per cent of the total capacity?
With domestic demand growing at a healthy rate, will larger players ramp up capacities or will imports
cater to a majority of the demand as in the newsprint industry? Or will the government take a more lenient
stand towards smaller players? At present, these questions remain topics for debate. Nothing conclusive
can be stated unless there is greater clarity on the governments stand in this regard.
Operating rates to remain high irrespective of capacity additions

Operating rates in the paper industry are expected to remain high over the next 5 years on account of stable
demand. Although most of the capacities currently being added by players are expected to be operational post
2007-08, the level of consumption in the country will ensure high operating rates, especially for large players,
most of whom will operate at over 90 per cent.
12
Operating rates
Figure 8
9,000
100.0
8,000
('000 tonnes)
6,000
90.0
5,000
4,000
85.0
3,000
2,000
(per cent)
95.0
7,000
80.0
1,000
0
75.0
2002-03 2003-04 E 2004-05 F 2005-06 F 2006-07 F 2007-08 F 2008-09F 2009-10F
Demand
Effective capacity
Operating rate
Source: CRIS INFAC
13
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2.0
Costs and prices

Costs
Raw materials
Domestic manufacturers use three types of raw materials in the manufacture of paper forest products (wood
and bamboo), agri residues (bagasse, straw, cotton, etc) and wastepaper (recycled paper). In 2003-04, 25 mills
were wood based (5.5 per cent), 134 were agri-based (28.5 per cent) and 313 were wastepaper-based (66 per
cent). Imported pulp accounted for 5-7 per cent and imported wastepaper accounted for 15-18 per cent of total
paper production.
Paper: Raw material demand forecast
('000 tonnes)
Table 1
Input-output
norm (times)
2004-05 E
2009-10 F
Production Demand
Share
for fibre
(per cent)
Production
Demand
Share
for fibre
(per cent)
Wood and bamboo
2.6
1,659
4,313
30.0
2,390
6,213
30.0
Agri residue (including bagasse)
4.2
1,770
7,432
32.0
2,469
10,370
31.0
Domestic wastepaper
1.3
938
1,219
17.0
1,249
1,624
15.7
Imported wastepaper
1.2
832
998
15.0
1,300
1,560
16.3
Imported pulp
0.9
332
299
6.0
558
502
7.0
Source: CRIS INFAC
Scarcity of raw materials the biggest deterrent to growth

The availability of raw materials continues to be a major challenge for the domestic paper industry.
Environmental concerns and increased awareness of the need to conserve forests have lowered the availability of
wood for the production of paper.
The Forest Survey of India (FSI) conducted a demand/supply exercise for fuel wood, timber and fodder from the
forests of India (Rai and Chakrabarti, 1996). The findings of the the field studies are tabulated below:
Demand and supply of wood
(million cubic metres)
Table 2
1996 2001 2006 F
Requirement
Wood requirement (for housing, furniture, agricultural implements, industrial uses, etc)
64
73
82
Output from natural forest
12
12
12
Output from plantations raised under production and social forestry schemes and other wood lots
41
47
53
11
14
17
Availability
Deficit
F: Forecast
Source: FSI
15
Supplies from natural forests and old plantations are not expected to increase from the current level of about 12
million cubic metres. The current level could, however, decline owing to increasing restrictions on felling in
forests. Demand-led growth in the paper industry is expected to further strain the availability of wood-based raw
materials for the production of paper.
Supply of wood regulated by authorities

Wood is the scarcest of all the three raw materials used in the manufacture of paper. Although wood-based
producers form a small percentage of the industry, most large mills use wood as their feedstock, primarily due to
the higher quality of output generated from it. Companies have to source their wood requirement from state
governments and the open market, primarily from farmers. This has resulted in fluctuations in prices as various
users (plywood segment) bid for the scarce resource. Often, paper producers have to import wood pulp at higher
costs.
Although many large paper manufacturers have started farm forestry operations by providing seeds, saplings and
other resources to farmers, they are not assured of supply, as the farmers are not bound to sell their output to these
companies. The government does not allow captive plantations in the country to protect the interests of farmers.
Any change in this regulation is unlikely in the near future, though in the long term, this could be the only
alternative to control the deforestation that is currently taking place.
Plantation development is getting more sophisticated

While the industry as a whole faces raw material shortage across geographies, genetic improvements have been
undertaken to enhance fibre quality. As a result, land productivity has increased and fibre cost is expected to start
decreasing. It is hoped that genetically modified fibre will gradually replace natural forests as the desired fibre
source. At present, eucalyptus is one of the most preferred high quality fibres.
Prices of raw materials to continue on their upward trend

Restricted supply and growing demand for raw materials has resulted in an increase in their prices over the last
few years. Wood, which is the scarcest of raw materials, has witnessed multiple price increases in a short span of
time. Wastepaper costs too are increasing due to higher demand.
16
Raw material costs
Figure 1
50
49
percentage of sales
48
47
46
45
44
43
42
41
40
1999-2000
2000-01
2001-02
2002-03
2003-04
Source: CRIS INFAC
In addition, wastepaper prices follow international trends, and in the global market the significant demand from
China has pushed up wastepaper prices. International wastepaper prices have been volatile since they are
determined by demand as well as collection rates. The prices of bagasse have also been on the rise in 2004-05
owing to short supply on account of lower sugar production.
Cost comparison
Figure 2
($/tonne)
300
275
250
225
200
175
150
125
100
75
50
25
0
India
Indonesia
Pulp
Brazil
Distribution
Source: Jakko Poyry
Among the countries using hardwood as their raw material, India has the highest pulp manufacturing costs, since
the cost of wood and of conversion in India is higher than in most other countries. The average prices of wood
have been increasing at a CAGR of 6-7 per cent. We expect hardwood prices to rise by 4-5 per cent in the next 12 years, as pulp prices are expected to remain stable.
17
Hardwood prices
Figure 3
(Rs/tonne)
2,400
2,250
2,100
1,950
1,800
1,650
1,500
1999-00
2000-01
2001-02
2002-03
2003-04
Hardwood
Source: CRIS INFAC
India also has higher power and water costs as compared to other countries.
Pulp prices expected to remain stable

Pulp prices
Figure 4
($/tonne)
700
650
600
550
500
450
400
350
300
250
200
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
US softwood
US hardwood pulp
Indonesia hardwood pulp
CTMP-newsprint pulp
Source: CRIS INFAC
Pulp prices have been moving up since last year. Prices peaked in June 2004 at around $670 per tonne but have
since declined to around $525 in May 2005. However, prices are expected to remain stable due to adequate
supply. Additional capacities of nearly 2 million tonnes are expected to come up in Brazil (by August 2005) and
Chile (by January 2006), which will keep prices stable over the medium term. With most of the newer paper
capacities being wastepaper-based, the demand for pulp is expected to remain stable, resulting in steady prices.
Pulp prices will remain at $550-600 over the next 2-3 years.
18
Wastepaper
Wastepaper is the most largely consumed raw material in India. Imported wastepaper accounts for 45-47 per cent
of the total wastepaper consumption. The quality of domestic wastepaper is lower than that of imported
wastepaper mainly due to improper collection facilities. Hence, the demand and consumption of imported
wastepaper has increased over the years.
Over the next 5 years, the consumption of imported wastepaper is expected to increase and nearly 50 per cent of
the wastepaper requirement is likely to be imported. Global wastepaper consumption is also on the rise with over
50 per cent of planned capacities likely to be based on wastepaper. Most capacities in China are also wastepaperbased, resulting in a huge demand for the same. With increased consumption wastepaper availability is expected
to remain constrained.
Wastepaper: Landed cost
Figure 5
Domestic wastepaper prices
Figure 6
(Rs/tonne)
(Rs/tonne)
10,000
10,000
9,500
9,500
9,000
9,000
8,500
8,000
8,500
7,500
8,000
7,000
7,500
6,500
6,000
7,000
5,500
6,500
6,000
Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05
ONP Grade 8
OCC
Source: CRIS INFAC
5,000
4,500
ONP
OCC
Notebook
White record
Source: CRIS INFAC
Although the prices of both imported and domestic wastepaper have been increasing over the years on account of
growth in demand, they have remained relatively stable over the last few months across most varieties.
Chinese demand to drive wastepaper prices

Global wastepaper consumption is expected to grow by around 19 million tonnes over the next 2 years.
According to consultants Esko Uutela, the global recovered paper consumption is expected to increase from
around 168 million tonnes in 2003 to nearly 220 million tonnes by 2010. Wastepaper capacities are expected to
increase in Europe and the Asia Pacific while in North America, capacity is expected to decline.
China, with its huge wastepaper-based capacities will account for one-third of this growth. Demand from China
will result in buoyant wastepaper prices although prices are not expected to regain their historical highs since
Chinese purchases are regulated by the Chinese government, thus ensuring the best purchase price for producers.
19
Agri residues
Bagasse costs to remain high over the medium term
With a decline in the availability of wood, most producers now manufacture paper using agri-residues. Smaller
players generally have agri-based capacities, as these products are cheaper. Bagasse, wheat and rice straw are
classified as agri residues. Although the availability of agri residues is not a problem, factors such as seasonality,
lower yield and higher transportation costs act as limitations to their use. Although the availability of bagasse is
expected to improve due to the expected increase in sugar production, , there will be an increase in its demand
from sugar mills, for the generation of power.
Bagasse prices will decline marginally due to improved
availability; yet, they will remain high over the medium term.
Captive power consumption

Paper manufacturing is power intensive and power costs have a substantial bearing on the cost structure of paper
companies. For an integrated paper producer, captive power is an integral part of a paper manufacturing facility.
Captive power is 1.5-3.0 times cheaper than grid power and could result in substantial savings depending on the
level of operation.
Most integrated players have captive power generation facilities and the share of captive power used in the
production of paper is expected to increase steadily. This is expected to lower the cost of production. However,
rising coal prices and the availability of coal are key areas of concern.
Prices
Progressive cuts in custom duties and an appreciating rupee have kept domestic paper prices in check. However,
with the rupee starting to depreciate since the beginning of the year, domestic prices have also started firming up
in line with international trends.
Prices are expected to rise in the short term as operating rates have improved and proposed expansions will not
keep pace with the growth in demand in the short-to-medium term.
Paper prices to reflect rise in input costs

With modest recovery in demand growth and a gradual reduction in excess capacity (for smaller players), the
prices of various varieties of paper are expected to reflect the rise in input costs in the medium term. With prices
of raw materials (wastepaper, wood and bagasse) expected to rise, most producers are expected to pass on this
increase to customers.
Large manufacturers will be able to increase prices

Large manufacturers account for around 40 per cent of the market share in the domestic industry. They have a
fixed clientele and hence, have assured sales. The superior quality of their paper and the value-added products
they offer enable them to command higher price realisations for their products.
20
Capacity utilisation
Figure 7
(per cent)
150
140
130
120
110
100
90
Star Paper
JK
ITC
Emami
Mysore
West coast
Century
Seshasayee
APPM
Pudumjee
BILT
HPC
Sirpur
Balkrishna
Shreyans
70
TNPL
80
Source: CRIS INFAC
In addition, most large manufactures are operating at over 100 per cent of their installed capacity. This will also
contribute to the improvement in price realizations, especially in the high value-added paper segments. There has
been no greenfield capacity in the paper industry in the last 8 years. The last major projects were TNPLs 90,000
tpa bagasse-based mill in 1994 and Sinar Mass 115,000 tpa coated paper plant in 1996. Stringent environmental
norms have deterred fresh greenfield investments in the sector. All these factors put together will offer large
players greater flexibility in passing on increases in input costs. However, smaller players operate in a highly
competitive environment and hence will not be able to increase prices. These players also have smaller capacities
due to which they cannot exert control on the market. Larger players who are more organised can control market
conditions through their associations.
Prices notch marginal increase in almost all segments in 2004-05

For the paper industry, 2004-05 was a good year with respect to prices. The prices of most varieties were higher
than in 2003-04, since producers chose to pass on the increase in input costs. Most of the price increases came
from larger manufacturers.
Trends in domestic prices
Rs/tonne
2000-01 2001-02
Table 3
Y-o-Y 2002-03
change
Y-o-Y 2003-04
change
Y-o-Y 2004-05
change
Y-o-Y
Q1 05
Q1 06
change
Y-o-Y
change
Creamwove
31,200
31,025
-0.56
32,863
5.92
32,832
-0.09
33,934
3.36
32,379
37,167
14.79
Maplitho
34,067
34,207
0.41
35,403
3.50
35,890
1.38
37,173
3.57
35,807
38,417
7.29
Art board
45,391
45,523
0.29
47,357
4.03
46,965
-0.83
47,715
1.60
47,715
48,715
2.10
Duplex board
27,725
27,725
0.00
29,350
5.86
31,225
6.39
31,460
0.75
31,225
30,667
-1.79
Chromo
35,090
35,090
0.00
35,215
0.36
36,590
3.90
36,965
1.02
36,590
37,090
1.37
Kraft wood
23,200
23,200
0.00
24,867
7.18
25,225
1.44
25,625
1.59
25,500
26,417
3.59
Kraft (waste-based)
15,192 12,313
Y-o-Y: Year-on-year; Q1: First quarter
Source: CRIS INFAC
-18.95
14,333
16.41
16,758
16.92
16,975
1.29
17,600
16,700
-5.11
CRIS INFAC PAPER ANNUAL REVIEW: JUNE 2005, 38 PAGES
21
W&P paper prices to move up at a faster pace

In the first 3 months of 2005-06, the prices of maplitho and creamwove varieties were revised upwards. While
creamwove prices moved up by Rs 1,500 per tonne in June 2005 over March 2005 levels, maplitho prices
increased by Rs 750 per tonne.
Writing and printing paper prices
Figure 8
(Rs/tonne)
39,000
38,000
37,000
36,000
35,000
34,000
33,000
32,000
31,000
30,000
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Creamwove
Jul-04
Oct-04
Jan-05
Apr-05
Maplitho
Source: CRIS INFAC
Industrial paper prices exhibit varying trends

Prices in the industrial paper segment recorded varying trends in the first 3 months of 2005-06, with kraft paper
prices showing a marked increase and duplex board prices registering a drop.
Kraft paper (waste-based) prices
Figure 9
(Rs/tonne)
20,500
20,000
19,500
19,000
18,500
18,000
17,500
17,000
16,500
16,000
15,500
15,000
14,500
14,000
13,500
13,000
Source: CRIS INFAC
22
Kraft paper (wood-based) prices
Figure 10
(Rs/tonne)
30,000
29,500
29,000
28,500
28,000
27,500
27,000
26,500
26,000
25,500
25,000
24,500
24,000
Source: CRIS INFAC
Duplex board prices
Figure 11
(Rs/tonne)
32,000
31,750
31,500
31,250
31,000
30,750
30,500
30,250
30,000
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Source: CRIS INFAC
Although nearly 1.5 million tonnes of additional capacity is expected to come up over the next 5 years, operating
rates are slated to improve on account of the expected growth in demand. This improvement in operating rates
will yield stable prices, as producers will try and sell at higher prices.
Industry operating rate
Figure 12
100.0
9,000
8,000
95.0
6,000
90.0
5,000
4,000
85.0
(per cent)
('000 tonnes)
7,000
3,000
2,000
80.0
1,000
0
75.0
2002-03 2003-04 E 2004-05 F 2005-06 F 2006-07 F 2007-08 F 2008-09F 2009-10F
Demand
Effective capacity
Operating rate
Source: CRIS INFAC
Duty cuts on coated paper negative for players

In the Union Budget 2005-06, the peak rate of customs duty was reduced from 20 per cent to 15 per cent. Coated
paper witnesses the largest imports among various paper segments, at 20-25 per cent of total demand.
23
Coated paper: Landed costs vs domestic prices
Figure 13
(Rs/tonne)
80,000
77,000
74,000
71,000
68,000
65,000
62,000
59,000
56,000
53,000
50,000
47,000
44,000
2000-01
2001-02
2002-03
2003-04
Landed costs
2004-05
2005-06
Domestic prices
Source: CRIS INFAC
The decline in customs duty over the last few years has resulted in a drop in landed costs. However, domestic
prices have been on the increase. The price differential between domestic and international prices fell from
around 41 per cent in 2000-01 to around 35 per cent in 2004-05.
In 2005-06, this gap has narrowed down to nearly 12 per cent with domestic producers maintaining their prices in
spite of the duty cut. This was possible mainly because importers operating at low margins chose to retain the
benefits of lower customs duties instead of passing it on to end users. However, with a further reduction in duties
likely, coated paper prices are likely to drop, as domestic producers will have to maintain a differential between
international and domestic prices.
Sensitivity to imports
Domestic price
Rs/tonne
Coated paper
Source: CRIS INFAC
48,715.0
Table 4
International
price (US$)
881.3
Landed costs
15 per cent duty
52,576.1
10 per cent duty

50,250.5
5 per cent duty

47,924.9
0 per cent duty

45,599.4
The coated paper segment is sensitive to changes in import duty as any change in the duty has a direct impact on
prices. If the custom duty comes down from the current level of 15 per cent, domestic paper producers will be
forced to respond with a price cut as landed costs will decline. Thus, while domestic coated paper manufacturers
are protected at current duty levels, further duty cuts could have a negative impact on them.
Newsprint
Moderate increase in domestic price expected
Domestic newsprint prices are pegged to prevailing international prices, as more than half the domestic
consumption of newsprint is met through imports. Domestic prices are estimated to have increased by around 6
per cent in 2004-05. A $20 increase in international prices enabled domestic manufacturers to increase domestic
prices by Rs 1,000 per tonne in April 2005. International prices are expected to increase further by $15-20 in
2005-06.
24
3.0
Credit profile
Industry credit profile to remain stable

With operating rates below 90 per cent, paper producers have found their pricing flexibility constrained.
However, a steady growth in demand and limited capacity additions will help paper companies to pass on a part
of the increase in input cost. In the face of firm input costs (wood pulp and power costs), most domestic players
have increased prices to lower the impact of the same on their cost structures and margins. With higher prices and
better realisations, CRIS INFAC expects paper companies to maintain a stable credit profile in the short-tomedium term.
Margin pressures will, however, continue, as players will resort to a high level of borrowing to meet the 2009-10
deadline for ECF-compliance.
Large players to dominate the sector

CRIS INFAC believes that large integrated companies will be better equipped to face competition and to sustain
future downturns in this cyclical industry. Large players have a stronger foothold in the paper industry as
compared to smaller players, since they enjoy economies of scale due to their larger size, integrated nature of
operations and brand value. This has ensured a healthy financial profile for larger players on the strength of better
margins, lower costs and larger market share.
Operating margin
Figure 1
Net profit margin
Figure 2
(per cent)
(per cent)
30
12
25
10
8
20
15
10
2
0
-2
0
Industry Industry APPML
(incl
(excl
large
large
players) players)
BILT
JK
Paper
SPBL
2002-03
TNPL
West
Coast
Industry Industry APPML

(excl
(incl
large
large
players) players)
2003-04
Source: CRIS INFAC
BILT
JK
Paper
2002-03
SPBL
TNPL
West
Coast
2003-04
Source: CRIS INFAC
In the future too, smaller companies will find it difficult to survive given their inefficient operations resulting
from the lack of economies of scale. Moreover, the price advantage that smaller producers enjoyed on account of
an excise duty differential has now narrowed down.
25
Interest coverage
0.40
0.35
7
6
2002-03
2003-04
2002-03
Source: CRIS INFAC
West Coast
TNPL
Seshasayee
West Coast
TNPL
Seshasayee
0
JK
0.00
BILT
0.05
APPM
0.10
Industry(excl
large player)
0.15
JK
0.20
BILT
0.25
Figure 4
APPM
0.30
Industry(excl
large player)
(times)
10
0.45
Industry(incl
large
players)
Figure 3
0.50
Industry(incl
large
players)
(times)
NCA/Total debt
2003-04
Source: CRIS INFAC
Smaller companies will also find it difficult to undertake the large capex required to meet ECF-compliance norms.
Steady margins in the medium term

While large and small companies enjoyed similar margins in 1999-2000, the scenario has changed since then.
Lower pricing flexibility (owing to the manufacture of low-end paper) and cost pressures have brought down the
margins of small and medium-sized players at the operating and net levels.
Trends in OPM for paper companies
Figure 5
Trends in NPM for paper companies
Figure 6
(per cent)
(per cent)
18
10
16
14
12
10
-2
8
99-00
00-01
01-02
Large cos
02-03
03-04
04-05
99-00
00-01
02-03
03-04
04-05
-5
Small cos
Source: CRIS INFAC
01-02
Large cos
Small cos
Source: CRIS INFAC
With companies undertaking cost-reduction measures, margins are unlikely to be under pressure in the short-tomedium term. In the medium term, the price of paper will, to a large extent, reflect the rise in input costs.
Large paper companies will be in a more comfortable position than smaller companies, as they will be able to
command higher prices on the basis of their brand strength and value-added range of products. Smaller players
face tough competition due to the fragmented nature of the paper industry and will not be able to pass on the
increase in input costs, thus resulting in lower returns.
26
Improvement in returns will be gradual

The paper industry has been enjoying a high return on capital employed (RoCE), mainly on account of its stable
margins. Its asset turnover has also risen owing to low capital expenditure.
However, any improvement in the profitability of paper companies will be gradual, as companies will be required
to fund plant modernisation and install environment-friendly equipment for chlorine-free pulping facilities.
Credit ratios to remain stable

Paper companies have improved their credit profile over the last 3 years by using cash accruals to modernise
assets and reduce debt. Companies have judiciously mixed debt with equity and corrected their capital structure in
the last 5 years. The debt-equity ratio, which was 2:1 in 1999-2000 (since companies largely debt-funded
expansions in the mid-90s), has fallen to 1.5:1.0 in 2003-04.
The net cash accrual to total debt has also improved in the last 5 years; from 5 per cent in 1999-2000 it increased
to 20 per cent in 2003-04.
In the short-to-medium term, we do not expect the credit profile of paper companies to alter significantly from
current levels. Our expectations stem from the fact that unlike earlier years no large capacities are being set up
during the current upturn in the industry cycle. Most companies are continuing with their cost-cutting measures.
Credit profile
Figure 7
4.50
0.25
4.00
(times)
3.00
0.15
2.50
2.00
0.10
1.50
1.00
(times)
0.20
3.50
0.05
0.50
0.00
0.00
Mar-02
Mar-03
Interest-coverage ratio
Mar-04
Mar-05(E)
Debt-equity ratio
Mar-06(P)
NCA/Total debt
Source: CRIS INFAC
Interest costs to rise

Interest costs for players incurring capital expenditure on the expansion of capacities is expected to increase
owing to higher borrowings. However, most of the additions will take place through the cost-effective brownfield
route rather than the more expensive greenfield route. This is expected to lower the cost pressure on companies
that are opting for expansions.
27
At present, smaller players do not have any plans that would involve significant capex. The strict implementation
of stringent pollution-control norms might compel these players to incur expenditure on modernising their plants
if they hope to avoid closure. In such a situation, they will have to borrow funds at higher interest costs since they
have limited resources at their disposal. This will strain their finances.
28
4.0
Key success factors
The paper industry in India is highly fragmented; particularly the industrial paper segment, which has a greater
number of small players as compared to the W&P paper segment. These players produce goods using different
raw materials, sell their finished products to different customers and make varied margins and profits. In such a
scenario, comparison on some key parameters will help identify potential gainers.
With demand growing at a stable rate, what separates one player from another is the potential to garner more
business (in the high-margin value-added products), build on strengths and reduce weaknesses.
To facilitate inter-player evaluation, CRIS INFAC has identified the following key success factors. We believe
that performance on these factors determines the fortunes of players in the paper industry.
Size matters
The paper industry in India is characterised by small and medium-sized players with production capacities that are
lesser than even the minimum economic size of around 50,000 tonnes per annum. These capacities are further
split up into a number of machines of smaller capacities. Larger players enjoy economies of scale, which helps
spread capital costs and reduce the unit cost of sales.
Player-wise capacity (2003-04)
Figure 1
(tonnes)
380,000
330,000
280,000
230,000
180,000
130,000
BILT
HPC
ITC
TNPL
Orient
West coast
JK
APPM
Century
Rama Newsprint
Mysore
Seshasayee
Sirpur
Rainbow
Shreyans
Global Board
Emami
Balkrishna
Pudumjee
30,000
Star paper
80,000
Source: CRIS INFAC
29
Player-wise operating margins (2003-04)
Figure 2
(per cent)
24
21
18
15
12
9
6
TNPL
BILT
JK Paper
Star Paper
Seshasayee
Rama
West Coast
Pudumjee
APPM
Sirpur
Orient
Mysore Paper
Source: CRIS INFAC
In terms of size, BILT has the largest capacity of about 400,000 tonnes per annum followed by Hindustan Paper
Corporation and TNPL. Their large scale of operations has given these companies a distinct advantage in terms of
growth. For example, BILT and TNPL, both of which have large capacities in the industry, also enjoy very high
margins
Product segment decides vulnerability to cyclicality

In the paper industry, vulnerability to cyclicality depends, to a large extent, on the product segment catered to. A
diverse product and customer range will moderate the effects of cyclicality.
In the case of niche segments like specialty paper or coated paper, where the size of the market is limited and
there are only few players, international price movements and custom duty levels dictate the fortunes of local
producers.
The ability to alter product mix according to market trends is another crucial factor determining success in this
cyclical industry.
Extent of integration determines break-even point

The extent of integration determines the fixed cost intensity of a producers business. A unit, which is fully
integrated, from the pulping stage to the converting stage will be more fixed cost intensive, resulting in higher
break-even volumes and greater vulnerability during a downturn.
Greater integration would also mean that players would not be able to exploit a drop in pulp prices. In contrast, a
manufacturer with a lesser degree of integration will be in a better position to withstand downtrends because of
relatively lower fixed costs. Hence, his profitability would also remain average during such times.
30
Favourable raw material mix helps control costs

In the paper industry, raw materials account for the largest component of the total operating cost. On an average,
raw material cost is 40-45 per cent of net sales. The cost of raw materials depends to a large extent on the type of
raw material used.
Paper producers use wood, bamboo, wastepaper, agri residues and bagasse in varying percentages and in various
combinations to manufacture paper. Each of these raw materials has its own supply-cost dynamics, which
determine its price. Proximity to the source of raw material, agreements with sources, bargaining power of
producers, etc play an important role in determining the cost of the raw material. As raw material cost is the
largest cost component, producers who are able to minimise this cost benefit significantly.
Player-wise raw material break up
Figure 3
(per cent)
Bamboo
Figure 4
(Rs/tonne)
30,000
25,000
20,000
Hardwood
Agri Residue
Waste Paper
Source: CRIS INFAC
SPBL Qty
West coast Qty
PPPML Qty
Sirpur Qty
Star Qty
JK Qty
BILT Qty
TNPL Qty
15,000
APPML Qty
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Raw material cost
Bagasse
10,000
5,000
Pulp
Star
TNPL Sirpur
West APPML SPBL

JK
Coast
Paper
BILT PPML
Source: CRIS INFAC
Star Paper procures wood (their major raw material) at low prices making their total raw material cost the lowest
in the industry. Wood is also the main raw material used by BILT (78 per cent). The company manages to procure
wood at low prices; however, they also use imported pulp (around 22 per cent) for manufacturing coated paper,
and the cost of the same (which accounts for nearly 75 per cent of the total cost), increases their raw material cost
substantially. The same is true for Pudumjee Pulp and Paper Mills, which has the highest raw material cost in the
industry mainly due to its high requirement of imported pulp for manufacturing specialty paper.
Cost of operations is an important indicator of a companys success

In the manufacture of paper, raw material and energy costs together account for over 50 per cent of total costs.
Raw material costs are influenced by a number of factors, as discussed above. Energy costs are dependent on the
type of raw materials used, the type of paper manufactured and the machines used for manufacturing paper. High
raw material and energy costs will translate into a high cost of production.
31
Player-wise operating costs (2003-04)
Figure 5
90
West Coast
80
Operational cost/net sales
70
Star
60
APPML
Sirpur
SPBL
BILT
JK
PPPML
TNPL
50
40
30
20
10
0
0
500
1,000
1,500
2,000
2,500
Power consumption/tonne
Source: CRIS INFAC
Most paper-manufacturing companies have captive power plants, which cater to a part of their power
requirements. The remaining is purchased through the grid. In terms of power consumption per tonne, Pudumjee
has the highest consumption mainly because the manufacture of speciality paper requires higher power.
Andhra Paper has the highest operational cost as a percentage of net sales, even though it has the lowest power
costs mainly due to higher raw material costs.
Product mix drives margins

Different varieties of paper yield varying margins in the paper industry, mainly because of the difference in the
cost of production and in the selling price. Higher varieties of paper like coated paper, coated duplex boards, art
paper, etc generate higher margins, while lower varieties like creamwove, maplitho and kraft paper bring in lower
margins. Thus, a companys product mix also determines, to a large extent, its profits and margins.
32
Player-wise margins (2003-04)
Figure 6
25
(per cent)
20
15
10
0
APPML
BILT
JK Paper PPPML
SPBL
Sirpur
Operating margins
Star
TNPL
West
Coast
Net margins
Source: CRIS INFAC
TNPL has the highest margins at the operating and the net level primarily because of lower raw material costs,
due to the use of bagasse. BILT also has high margins as it operates in high-value segments and is in a position to
command higher prices due to its brand strength.
Credit profile denotes core strength and ability to grow

The credit profile of a company is reflective of its competence in the business and its ability to grow. Higher
stability denotes better efficiency.
Most large paper companies have a stable credit profile due to their healthy financial position. Seshasayee has a
higher RoCE because its plants are relatively older. TNPL has a higher interest coverage ratio with lower debt
levels.
Player-wise net cash accruals/total
Player-wise RoCE (2003-04)
debt (2003-04)
Figure 8
Figure 7
24.0
Sirpur
21.0
APPM
18.0
Star
15.0
(per cent)
TNPL
Seshasayee
Pudumjee
12.0
9.0
6.0
BILT
Source: CRIS INFAC
0.3
0.4
0.4
JK
Seshasayee
0.3
Sirpur
0.2
times
Star
0.2
West Coast
0.1
APPM
0.1
BILT
0.0
TNPL
0.0
JK
Pudumjee
3.0
West Coast
Source: CRIS INFAC
33
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5.0
US and European paper markets are now saturated; as a result, the global paper industry has a new leader Asia.
And among the Asian countries, China is the fastest growing market for paper and paperboards.
Chinas demand for paper increased from negligible levels around 20 years ago to nearly 53 million tonnes in
2004. The demand for paper and paperboard has grown at a CAGR of 10 per cent from 1995 to 2004, while
production has grown by around 9 per cent in the same period. According to Jakko Poyry, a leading consultant
firm in the paper industry, demand for paper and paperboard in China is expected to grow at around 4.5 per cent
over the next 10 years.
Yet, Chinas demand for paper and paperboard is a fraction of the consumption in major global markets. Its per
capita consumption is about 40kg/person as compared to around 200kg /person in more developed economies.
Chinas total production of paper and paperboard was around 43 million tonnes in 2003 as against 37.8 million
tonnes in 2002. In 2004, production is estimated to have grown to around 53 million tonnes. Chinas total
consumption in 2003 was around 48 million tonnes.
Paper and paperboard consumption
('000 tonnes)
Table 1
Production
2002
Consumption
2003
2002
2003
Newsprint
1,850
2,070
2,040
2,410
Uncoated W&P
9,200
9,600
9,370
9,730
Coated W&P
1,800
2,400
2,760
2,980
Tissue paper
3,100
3,470
2,970
3,280
Packaging
4,000
4,800
4,290
5,040
Boxboard
4,600
5,500
5,360
6,450
Linerboardd
6,000
6,800
7,250
7,960
Corrugating paper
6,000
6,700
7,300
8,020
Specialty paper
700
800
1,080
1,090
Others
550
860
900
1,100
37,800
43,000
43,320
48,060
Total
Source: China Paper Association
Chinas pulp and paper industry is centered in the four key regions of Shandong (accounts for nearly 18 per cent
of the total production), Guangdong (Pearl River Delta), Jiangsu and Zhejiang. Together, these four provinces
account for over 54 per cent of the total paper production in China.
35
Production (2002-03)
Figure 1
(per cent)
Shandong
20
Others
45
Jiangsu
8
Zhejiang
14
Guangdong
13
Chinas paper industry is divided into the New China Industry and the Old China Industry. The mills built
before 1996 are classified as old. Most of these mills are small and use non-wood fibre and domestic wastepaper.
The New China industry comprises mills built post 1996 and having larger capacities. They largely use imported
fibre (wood pulp and wastepaper). In all, China boasts around 3,500 paper and paperboard manufacturers.
Supply to outpace demand in the medium term

China is one of the fastest growing economies in the world. It is also the second largest consumer of paper and
paperboards in the world. Strong economic growth, the 2008 Olympic Games and the 2010 World Expo, both of
which are to be held in China, are all expected to boost Chinas paper demand. To meet the increasing demand for
paper and paperboard, local and international producers have been aggressively developing new projects in
China; around 20 million tonnes of new capacity were added in the country between 2001 and 2005. Other
projects are still in the pipeline and are expected to come on stream in the next few years.
Although Chinas demand for paper has been growing phenomenally, the growth in supply is expected to outpace
that in demand in the long term, resulting in overcapacity.
36
Global capacity growth

100
Figure 2
Asia
Rest of World
80
China
Japan
60
Europe
40
20
North America
1970s
1980s
1990s
2001-2006
Source: Jakko Poyry
Shortage of fibre to be felt more sharply

China is neither a major importer nor exporter of processed paper products but most of its fibre requirement is met
through imports. China uses 20 per cent wood fibre, 40 per cent recycled paper and 40 per cent agri residues to
produce paper.
Raw materials
Figure 3
25,000
'000 tonnes
20,000
15,000
10,000
5,000
0
1990
2000
Wood pulp
2001
Non-wood pulp
2002
2003
Wastepaper
The biggest drawback that China faces is the shortage of fibre. Although China has initiated plantation activity, it
still imports nearly 70 per cent of its wood pulp and nearly 50 per cent of its wastepaper requirement.
37
Wastepaper consumption
Figure 4
Wood pulp consumption

('000 tonnes)
('000 tonnes)
25,000
10,000.00
20,000
8,000.00
15,000
6,000.00
10,000
4,000.00
5,000
2,000.00
0
1990
Figure 5
2000
2001
Domestic
2002
2003
0.00
1990
Imported
2000
2001
Domestic
2002
2003
Imported
Chinas huge demand for pulp and wastepaper affects the global paper industry with respect to supply and prices.
However, given its high dependence on imported raw materials, China suffers from a lack of assured supply. In
the medium term, with demand expected to remain strong and with additional capacities coming up, demand for
pulp and wastepaper is expected to increase and the shortage of fibre will be felt more sharply. Chinas total
recovered paper consumption is expected to rise from around 24 million tonnes in 2004 to 28 million tonnes in
2006.
Will China turn into a threat for global paper manufacturers?

Although the consumption and demand for paper in China is growing, existing capacities as well as expected
additions are very large. Currently, Chinas exports are minimal as its paper production largely caters to domestic
demand. However, with the kind of capacities likely in China in a few years, it would be in a position to
manufacture paper in excess to its domestic requirement, necessitating exports.
If China started exporting paper, some paper producers could be affected. Asian countries could be the ideal
choice for paper exports, given their proximity to China. India, with its growing demand for paper could be one of
the choice destinations for Chinese exports, furthering competition in an already fragmented industry. Although,
China imports a large part of its raw material requirement, its total cost of manufacturing paper is low. This would
offer China an advantage over other countries, especially in the export market, as it would be in a position to
export at a cheaper rate.
However, what remains to be seen is if this situation does indeed arise. Given the current domestic consumption
in China, exports from the country do not present a threat to Indian or international manufacturers in the short-tomedium term.
38

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Opinion

Costs and prices

The demand-supply scenario

The demand-supply scenario

Costs and prices

Raw material costs

Wastepaper: Landed cost

Domestic wastepaper prices

Writing and printing paper prices

Kraft paper (waste-based) prices

Kraft paper (wood-based) prices

Duplex board prices

Industry operating rate

Coated paper: Landed costs vs domestic prices

Net profit margin

Trends in OPM for paper companies

Trends in NPM for paper companies

Key success factors

Player-wise capacity (2003-04)

Player-wise operating margins (2003-04)

Player-wise raw material break up

Raw material cost

Player-wise operating costs (2003-04)

Player-wise margins (2003-04)

Player-wise net cash accruals/total debt (2003-04)

Player-wise RoCE (2003-04)

China to determine global paper industry dynamics

Wood pulp consumption

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

The demand-supply scenario

Costs and prices

China to determine global paper industry dynamics

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

Demand-supply gap to shrink

Moderate improvement in prices with growth in volumes

Input costs to rise

Financial and credit profile to remain stable

Threat of imports negligible in the medium term

China: Strong growth in domestic consumption to limit its export potential

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

The demand-supply scenario

Paper industry to witness firm demand

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

Paper: Variety-wise demand forecast

2004-05 E 2005-06 F 2006-07 F 2007-08 F 2008-09 F 2009-10 F CAGR (per cent)

Writing and printing paper

Maplitho (including unbranded copier)

Coated chrome paper

Grey and white boards

Total of the above

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

Shift in demand towards better quality paper

Maplitho (including unbranded copier)

Printing & publishing outsourcing

Printing of childrens books to drive growth

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

for such products in India.

Technological advancement to further demand for paper

High speed Internet

Expansion of Int ernet

Printing and writing

Source: Jakko Poyry

CRIS INFAC PAPER ANNUAL REVIEW: JULY 2005, 219 PAGES

Growth in industrial paper and industrial GDP