Indian Paper Industry showing shoots of revival !!!

Indian Paper Industry showing shoots of revival! Lets dig further!

September 15, 20185:51 am

Indian Paper industry which has been struggling for decades since the dominance of China’s ever-growing industrialization has started to show shoots of revival. And guess what who is responsible for that. The same country “China”.

What is the Chinese Impact?

Given the unlivability of Chinese Cities, there are a number of steps taken by the Chinese govt to curb the pollution. China banned the import of waste materials, waste paper being one of them. China will allow the import of only certain grades of waste paper & the increased environmental compliance have lead to closing down of significant capacities. 

Reason for such an drastic move: 

Pulp mills contribute to air, water and land pollution

Further reading

China who was the trash bin of the world’s garbage for long don’t want to continue as the one.

The ban was announced in July 2017 but was to be implemented from 1st Jan 2018, giving countries 6 months of lead time to look for other alternatives.

Indian Paper Industry showing shoots of revival !!!
Demand-Supply mismatch

China being the world’s largest manufacturer in the world with capacities which run in multiples of other top manufacturing company was expected to send ripples around the world with the ban. The impact was felt by paper manufacturers or be it those countries disposing off waste paper in China.

And obviously, this would change the dynamics of the paper industry:

1. With reduced production, the prices of Paper products are soaring

2. With the ban, China is has to switching to paper manufacturing through wood pulp, due to limited availability of waste paper.

What kind of companies in the Indian paper industry will benefit from the move?
  1. Companies that manufacture paper from waste paper will be the biggest beneficiary. They have the twin advantage of dropping Waste paper prices and increasing end product prices. 
  2. Companies that have captive forestry to procure wood pulp will get the benefit of the increasing paper product prices.
  3.  Companies that import wood pulp will be at an disadvantageous position.

Before I get into the details, lets get to know a few things about the paper  industry:

  1. Wood is made up of 3 components: Cellulose, Lignin & Hemicellulose. Cellulose is the required component.
  2. Wood can be obtained from 2 kinds of trees: Deciduous– Hard wood trees  (Birch, beech, poplar, eucalyptus) & Conifer trees (Fir, Pine & Spruce). Conifer trees have longer fibers & hence form stronger paper. Indian paper industry in particular uses hard wood obtained from Eucalyptus tree as the Indian soil & climate is more suited. It takes about 4 years to grow the plant to the appropriate stage.
  3. 100 Kg of Water is required to produce 1 kg of paper. Of the 100 kg, 90 kg is recycled: Dependent on the vagaries of nature. In case of below average monsoon, the factories in the region might have to shutdown the facility. Eg. Tamil nadu newsprint, Orient paper.
  4. High power consumption: Conveyer belt, Wastewater & fan motors, Drive motors, Multiple number of rollers etc
  5. Capital intensive business: Large and  multiple number of equipment are required.
  6. White Liquor: Used to convert wood into wood pulp. Consists of {Hot water+Sodium Hydroxide(NaOH)+ Sodium Sulfide(Na2S)}
  7. Black liquor: While breaking down the wood chips into its components, around half of them are dissolved with the acid solution forming a black color liquid. To improve the efficiency of plants, black liquor is burned in the Recovery boiler where the wood particles are burnt which is utilized to generate steam & electricity leaving back the chemicals which can be used again.
  8. Paper industry’s growth is correlated to the economic growth. India with its target to reach double digit GDP growth which be a booster to the Indian paper industry.
Paper Manufacturing process using Wood Pulp & Waste Paper
Indian Paper Industry showing shoots of revival !!!
Indian Paper Industry showing shoots of revival !!!

Raw material used for paper recycling:

  1. Office waste
  2. Old magazine papers
  3. Old newsprint
  4. Paperboard
  5. Corrugated fibreboard
  6. Bagasse, Wheat straw, etc {Used mainly in newsprint}
Indian Paper Industry showing shoots of revival !!!
Waste paper recycling
Indian Paper Industry showing shoots of revival !!!
Diagram showing Paper manufacturing process
  1. Recycled paper primarily finds use in Corrugated boxes and newsprint. Can’t be used to manufacture high quality paper.
  2. Paperboard or corrugated boxes won’t require Bleaching. Thus, saving costs on a few steps as well as less polluting.
  3. Hydrogen peroxide a key chemical used in paper industry is manufactured by National Peroxide & Gujarat Alkalies & Chemicals
After effects of Chinese ban on waste paper

Prices of Old Corrugated Containers(OCC) dropped from Euro 150/T  in July’17 to Euro 135/T in Dec’17.

Prices of Kraftliner Recycled paper increased from Euro 642/T in July’17 to Euro 694/T in Dec’17.

Because of low import of other grades of paper, there has been significant reduction in supply of waste paper for China. In order to compensate that they are taking in all the old newsprint waste(considered high grade waste), thus creating immense demand for Newsprint paper taking the price to ₹47,000 per tonne from ₹32,000 per tonne in early 2018.

But I don’t think the prices of newsprint is going to continue at such an high level for long because:

  1. The price absorption capability for the end industry i.e. newspapers are quite low due to the unability of them to pass on the increased cost to the end consumer(i.e. reader)
  2. Media & Newsprint industry has a very strong lobby fighting to get things back in their favor.
Evident impact on Indian Paper manufacturers
Indian Paper Industry showing shoots of revival !!!

As we can see in the table below, profit margin of companies belonging to the Indian paper industry have improved. I have chosen for analysis has increased and for some of them the increase is quite significant.

I will talk in details about these companies in the next blog.

By,

Shekhar Yadav

author-avatar

Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

14 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *