Paper & Paper Products

Background

The paper industry plays an important social role and consumption of paper is considered as an indicator of economic growth of the country.

An improvement in the standard of living of Indians, especially in urban areas has resulted in a gradual shift towards better quality papers. This is expected to increase the demand for high-end varieties of paper. Further, with rising exports and keeping in view the current trend of outsourcing, foreign publishers have started outsourcing printing and publishing jobs to India. This would significantly increase the demand for different varieties of paper. 

Size

·         There are about 666 industrial units engaged in manufacture of pulp, paper and paper-board, out of which, nearly 568 are in operation. The Indian paper industry is highly fragmented. The cost of setting up of industrial paper plants is generally low and technology cheap because of waste paper based processes, resulting in a large number of smaller capacities. The top five producers account for 15% of the total paper capacity in the country.

·         The Indian paper industry consists of small, medium and large paper mills having capacity ranging from 5 to 800 metric tonnes (MT) per day (tpd). The total installed capacity of the paper mills is 85 lakh MT out of which 11 MT is idle due to closure of nearly 98 paper manufacturing units. The Indian Paper industry has a turnover of more than Rs. 17,000 crore. It contributes to the exchequer Rs.2,500 crore annually by way of excise duty, customs duty, CVD, etc. It employs nearly three lakh persons directly and another ten lakh persons indirectly.

·         The country is almost self-sufficient in manufacture of most varieties of paper and paper-board. The country imports only certain speciality paper such as coated and cheque paper, etc. which are imported from Singapore, USA, UK, Japan, Germany and Malaysia. Writing / Printing grade paper, art paper, coated paper, etc. are exported to neighbouring countries like Sri Lanka, Bangladesh, Nepal and Middle-East countries

Structural Characteristics

·         The Paper Industry uses wood, agri residue and waste-paper as raw material. All the three segments are contributing equally to the production of paper and paper-board. The use of non-wood raw material and waste paper has increased over the years and at present, about 70 per cent of the total production is based on non-wood based raw material.

·         Demand for some of the important user industries such as agriculture, consumer durables and exports tends to be cyclical which exposes the industrial paper segment to cyclicality. Internationally, this cyclical behaviour is simultaneously influenced by periodic supply shocks. These shocks result from the simultaneous building of significant production capacities leading to spells of over capacity in the markets and affects the industry margins and the patterns in investment activity. During upturns, prices move upward at a faster rate than costs of inputs, while during the downtrend, prices fall at a faster rate as compared to cost of inputs, which has a direct impact on profitability. 

·         The performance of the industry has been constrained due to high cost of production caused by high cost of raw materials, high cost of energy and environmental issues. In order to enable the industry to sustain the production, the Government has taken several policy measures such as rationalization of duty structure, funding of R&D activities, de- licensing of the paper industry, permitting 100 per cent FDI through automatic route, etc. 

Policy 

·         The paper industry, which includes pulp, paper and paper-board and newsprint is delicensed.

·         Foreign Direct Investment (FDI) upto 100 per cent is allowed on automatic route on all activities except those requiring industrial licence from locational angle i.e. the project should not be located within 25 kms from the periphery of city having population more than 1 million. 

·         Government has provided small non-conventional raw material (NCRM) users with an incentive by reducing the excise duty on paper manufactured by them to 8% for the first 3,500 tons and 12% for any further production. In light with the trend in other industries, the customs tariff on paper and paperboard has been declining in past few years. 

·         Peak customs duty has been continuously reduced from 20% to 15% (Union Budget 2005-06) and further to 12.5% (Union Budget 2006-07) & now at 10% (Union Budget 2007-08). 

·         Excise duty reduced from 16% to 12% (Union Budget 2006-07). 

·         The newsprint players suffer from a lopsided import duty structure leading to lack of pricing flexibility. They attract a mere 5% import duty on newsprint paper which is the same as for raw materials like wastepaper & wood pulp (i.e., 5%) and discourages the players from manufacturing newsprint. 

Outlook

·         Demand for the industry is expected to grow at 6.0-6.5% over the next couple of years due to healthy economic growth, promotion of education by the government & rising literacy rates. With buoyant demand scenario and very high operating rates, imports are growing at double digit rates. 

·        The steady growth in paper consumption has been accompanied by a shift to higher quality papers generated by increasing office automation, an expansion in high-speed offset printing and the substitution of traditional packing materials such as jute and wood by paper (especially in the agricultural and export sectors). Industrial users are showing an increasing preference for lower weight and brighter papers. Thus the demand for upstream market paper products, like, tissue paper, tea bags, filter paper, light weight online coated paper, medical grade coated paper, etc. is picking up.

·         With no major fresh capacity additions paper production has slowed down because of capacity constraints faced by the industry as it is operating at over 90% utilisation levels.

·         As exports require high quality packaging, exports will push up duplex board demand. However, despite high demand growth, there may be continuing overcapacity in the low-end wastepaper-based capacities on account of the low capital intensity of the business. Moreover, prices in the industrial packaging segment are likely to rise only moderately on account of high level of fragmentation in the industry.

·         The Government has undertaken various initiatives to increase literacy such as Mid Day meal scheme and Sarva Shikha Abhiyan with substantial budgetary provisions. Apart from this, another major demand driver for the W&P segment is the printing of children’s books, exports of which is expected to increase over the medium term apart from domestic demand. Rapid urbanisation will also support the growth of this segment.

·         The demand for Newsprint paper is expected to consistently grow with fast increasing literacy rates as also newsprint consumption per literate person. 

Industrial Paper 

·         The industrial paper primarily consists of Kraft paper, Duplex boards, Grey boards, White boards & M G posters. The Kraft paper is largely used for manufacturing of corrugated boxes and carry bags, demand for which depends upon the industrial growth, the main demand drivers being horticulture, textiles, food, edible oils, consumer durables and FMCG industries. The demand for Duplex boards is dependent upon the industrial growth rates in pharmaceuticals, cigarettes, hosiery products, matchboxes and agarbatti industries. Grey boards, White boards, and M G posters are mainly used in the packaging industry, printing & publishing industry, and the advertising industry respectively.

·         Demand for industrial paper depends upon industrial activity and accounts for around 45% of the total paper production. During the years (1999-2000 to 2004-05) Industrial paper demand increased at a CAGR of 6.0%, and reached 3.37 million tonnes in 2004-05. It is projected to grow at a CAGR of 7-8% in the next couple of years reaching 4.62 million tonnes per annum by 2010.

·         Rising price of film packaging has also led to a shift towards paper-based packaging. However, despite high demand growth, the overcapacity in the industry is expected to continue, especially in the low-end wastepaper-based capacities, on account of the low capital intensity of the business. This also makes the industrial paper segment highly fragmented. The segment is price competitive as the end-user segments of industrial paper resist any hike in prices, which makes it difficult for manufacturers to raise prices.

·         Growth in emerging sectors like packaged foods & dried convenience foods, garments, horticulture and pharmaceuticals sectors are key drivers for this segment. Moreover, rapid export growth outlook has also pushed up demand for industrial paper due to the requirement of high quality packaging.

 Writing & Printing Paper (W & P Paper)

·         The segment accounts for approximately 40% of the total paper production in the country. Of the writing & printing paper, the cream wove segment accounts for 54%, maplitho (including unbranded copier) 26%, branded copier 6%, and coated paper about 13%. During the years (1999-2000 to 2004-05) W & P paper demand increased at a CAGR of 5.4%, and reached 2.18 million tonnes in 2004-05. It is projected to grow at a CAGR of 5.7% in the next couple of years reaching 2.88 million tonnes per annum by 2010.

·         Capacity is expected to increase at a CAGR of 3.0% from 2004-05 to 2009-10. The domestic demand supply gap has narrowed down considerably as demand has been robust and supply has stabilised. Capacity expansions have been few, as the paper industry requires huge investment for the implementation of pollution control norms. Though some of the large players are expanding their capacity, these will be operational post 2006-07.

·         Demand for the W & P paper is picking up due to the campaign for literacy drive and spread of education in the country. Government schemes like Mid Day meal scheme & Sarva Shikha Abhiyan with substantial budgetary provisions, and exports of children’s books will provide necessary fillip to the demand of this segment.

Newsprint

·         The Newsprint industry was de-licensed under the Industries (Development & Regulation) Act, 1951 since July, 1997. The paper mills producing newsprint conforming to BIS standards and supplying to newspaper publishers are considered for inclusion in Schedule of Newsprint Control Order, 2004 enabling them to avail exemption of excise duty.

·         There are at present 77 mills including two Central Public Sector units and two State Public Sector units which are manufacturing newsprint paper with a total installed capacity of 15.9 lakh tonnes. The domestic production of newsprint is 9.1 lakh tons for the year 2005-06 and 6.1 lakh tonnes in the year (April-October) 2006-07. 

·         This segment accounts for around 15% of the total paper production. Of the newsprint paper, large newspapers account for 45-50%, while medium & small newspapers, along with magazines and government publications account for about 35-40%. During the years (1999-2000 to 2004-05) newsprint demand increased at a CAGR of 8.6%, and reached 1.34 million tonnes in 2004-05. It is projected to grow at a CAGR of 8.2% over the next few years reaching 2 million tonnes per annum by 2010.

·         Demand for newsprint paper is being driven by increasing literacy rate in India. Newsprint consumption per literate person has increased from 0.16 kg (1990-91) to 0.63 kg (2000-01) and further increased to 1.22 kgs in the recent past.

·         The demand for the newsprint in the country is met partly from indigenous and partly from imports.

·         The Indian newsprint industry is weak due to its high manufacturing costs on account of high wood/fibre prices, small machine size, and higher power costs. Rising imports have affected domestic players leading to low capacity utilisation, huge losses & deferred modernisation/expansion plans due to paucity of resources.

 Newsprint Industry Statistics

(Unit in Lakh Tonnes)

References: Annual Report Ministry of Commerce & Industry, CRISIL & ICRA Reports