Picking up the pieces of Asias paper industry

Picking up the pieces of Asias paper industry

Producers across Asia are beginning to see signs of improvement in prices and demand, but they still have a long way to go before the celebrations can start

There’s no denying that Asia’s paper and board markets are in a state of flux. Inevitably, the region is experiencing a few growing pains as it makes the transition from crash back to – hopefully – strong growth. Several factors in recent months have indicated that Asia is well on its way to bouncing back. But there have also been some alarming market forces in evidence that the paper industry has had to contend with. For example, there has been overcapacity in the woodfree market, while Korean printing and writing paper producers have been forced to give hefty discounts and kraftliner importers have been getting elbowed out of the market in favor of local testliner producers. Fortunately though, clear signs of a market rebound are starting to emerge. The key questions now are how quickly the recovery will develop and can the turnaround be sustained.

GDP growth projections for 1999 to 2001 show strong numbers across the Asia Pacific region (Table 1). Most countries seem set to go from strength to strength, although China’s GDP is likely to remain relatively steady at around 7%. The positive economic news is leading the industry to expect rising consumption and higher production levels in most Asian countries.

As Charles Spencer, Asian paper analyst at Morgan Stanley Dean Witter, explains, “GDP growth in non-Japan Asia is expected to grow at 7-8% this year and next. Based on the historical relationship of paper consumption to GDP growth, we would not be surprised to see 10% paper consumption growth with an upside surprise for even greater growth if the region’s inventory rebuild continues. Evidence of this strong recovery is clearly being seen in Korea where newsprint consumption was up 20% last year and we estimate another 15% increase this year.”

Overall, economic growth and currencies look reasonably strong, consumer confidence is returning and paper markets appear to be on the rebound. “There are still some things to be ironed out,” says Spencer. “For example, Thailand’s banking system and the possibility of a slowdown in China.” But he remains upbeat, pointing to the strong numbers coming out of southeast Asia, the sweeping changes in Indonesia and the fact that China is not deflating as quickly as in the past.

The economic tide can of course turn very quickly and there are always risks to bear in mind. For example, investors continue to approach Indonesia with caution due to the country’s social and political upheavals. For 1999, Indonesia’s GDP growth is expected to come in at just 0.2%, way behind the other countries in the region. But the outlook for Indonesia is more positive going into 2000 and 2001, with GDP growth projected to reach 3% and 4%, respectively. China is also a risky card, with the possibility of a devaluation of the renminbi lurking in the background. On the whole though, it is positive economic news that dominates. Industry players are also taking heart from the upward market trends, which are already being felt in Asia’s pulp and paper circles. Demand is picking up across the board and in many cases pricing is following suit.

Pulp has led the pack in the upward price march in Asia, spurred on by a strong international market and global supply cutbacks. As the worldwide pulp market has become tighter, pulp prices in Asia have continued to creep ahead of other markets. By February 2000, northern bleached softwood kraft (NBSK) had soared to $640-650/ton net in northern Asia and $660-670/ton in China and Indonesia. In the hardwood market, eucalyptus reached $620-630/ton across most of Asia, with China once again commanding the highest levels at $640/ton net for regular business and slightly higher for spot tonnage. Pulp capacity expansions are also limited, a factor which should help keep the market balanced. At the start of this year, Indonesia’s Tanjungenim Lestari brought its 450,000 ton/yr hardwood pulp line on stream. But the market hardly batted an eyelid as the extremely thirsty papermakers swallowed up the extra pulp capacity. The only other major project on the horizon is a second pulp line at Asia Pacific Resources International’s (APRIL) Kerinci mill in Indonesia. The group is installing a 450,000 ton/yr hardwood pulp line, with startup penciled in for the end of 2001.

While pulp appears to be powering ahead with few obstacles in its way, paper and board markets are facing a tougher time. Prices are starting to move up, but at a slower pace. As Norman Waite, paper analyst at Salomon Smith Barney, points out, “Paper prices won’t fly yet. Economies are not yet running at full speed and paper suppliers know that their customer base cannot absorb an increase just yet. But it (the gradual price recovery] just slows the trajectory of the upturn, it doesn’t derail it.”

In Waite’s opinion, “The leading edge of the economic recovery is in the packaging grades.” Taiwan is going for its second price increase this year for industrial paper packaging grades and local testliner producers throughout Asia aimed to boost price levels during the first quarter.

A testliner increase would be supported by the recent sharp rise in raw material costs as wastepaper prices have moved up steadily over the past few months. Healthy demand and a strong export situation for end-user products, such as electronics and textiles, further strengthens the producers’ case for a price rise. But some sources erred on the side of caution, claiming that local suppliers might hold back price increases in an attempt to encourage more corrugators to switch from kraftliner to testliner. Others dismissed the fears, saying that the sharp rise in costs would leave testliner producers no option but to follow kraftliner’s example.

Kraftliner prices have already started to rise in Asia. Signs of a turnaround have been seen in the market for several months, but these only translated into higher prices at the start of this year. Most linerboard producers announced a $50/ton price rise for the beginning of 2000. The increase is being implemented in two stages, each of around $20-30/ton.

The first step has been fully achieved, but some producers are still working on the second round. Suppliers were confident that the remainder of the $50/ton increase would be successfully implemented in March. The rise was set to take the average price for 175 g kraftliner to $470-500/ton, c&f.

The picture is not as rosy for printing/writing grades though, where prices have struggled to move up. The sector is being pushed along by an urgent need to improve margins in the wake of relentlessly rising pulp prices. But at the same time, it is being pulled back by demand levels and a fear of overcapacity. The Korean printing/writing market has never been far out of the headlines in recent months. Producers continue to take up to five days downtime per month, with discounts going as high as 25%. The situation is improving though, as domestic demand stages a marked recovery. As one investment banker points out, “1998 was a disaster. It [the Korean market] needs time to recover.” On the one hand, domestic demand is improving, which enables producers to raise production levels. But on the other hand, as operating rates recover and new capacity hits the market, the old problem of an oversupplied market returns. Coated woodfree demand picked up between 1998 and 1999 and is forecast to continue rising into 2000. But it appears that supply will increase even faster.

These fears were echoed in a recent market report from Korea’s largest woodfree producer, Hansol Paper. The company warned that supplies of coated woodfree paper look set to continue soaring far and above demand levels. The trend is similar for Korea’s uncoated woodfree market, but the gap between supply and demand is much less severe.

According to Soo-Hyun Whang, paper analyst at Daewoo Securities, the key to Korea’s plight is exports. The country has always relied heavily on export markets, but all the more so since the country plunged into economic crisis. Even now that Korea’s domestic consumption is recovering, exports remain high at above precrisis levels, Whang explains.

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