Picking up the pieces of Asias paper industry – Part 2

Picking up the pieces of Asias paper industry – Part 2

In Whang’s opinion, exports will continue to be the most likely way for Korea to win the oversupply battle. But the question remains whether the export markets will be strong enough for Korea to continue offloading its excess products. China is traditionally one of Korea’s key export markets and for a grade like duplex board, for example, the answer would appear to be yes. But a question mark hangs over China’s ability to import large woodfree volumes, given the new capacity coming on stream in China itself

In January, Asia Pulp and Paper (APP) started full commercial production on its two new woodfree PMs at the Dagang mill, China. According to the company, the machines are now running to at least 80% of their capacity levels. The Dagang launches came hot on the heels of the startup of APRIL’s new 350,000 ton/yr uncoated woodfree machine in the second quarter of last year.

In total, an extra 1.25 million tons/yr of woodfree capacity has started up in China during the last 12 months. That’s a lot of paper by anybody’s standards. With China’s economic growth not exactly forecast to surge in the immediate future, some industry observers are asking whether the Asian giant can soak up all this new capacity.

The consensus seems to be that there could well be a few short term worries, with weak pricing in the next three to six months. A look at APP’s China pricing actually shows a $70/ton rise between the third and fourth quarters of 1999, but it is not clear how much of the improvement was for base paper. Some sources suspect that the bulk of the rise can be attributed to APP’s converted products in China. Analysts seem confident that it is just a matter of time until the Chinese market adjusts, growth rates pick up and the country closes down more of its older and smaller mills. In the words of Waite at Salomon Smith Barney, “It’s a temporary absorbency problem.” Some of the new capacity might have to be exported initially, but the Chinese market should soon be able to absorb the volumes. “The Chinese market is ripe for a woodfree market,” Waite adds, referring to a shift in China’s demand from inferior to higher quality products. Whether there will be room for high quality Korean imports as well remains to be seen though.

Even if Chinese consumption is rising, it should be remembered that the floodgates are also opening for a surge of new linerboard and newsprint capacity. Once again, industry pundits are weighing up whether the market can take such large volumes of new capacity. Companies investing in additional linerboard capacity hope to capitalize on a growing regional trend away from kraftliner and toward testliner. This substitution was spurred on by a rising gap between kraftliner and testliner prices in Asia. The traditional gap is reported to be about $50-60/ton. But by the end of last year, sources said it had widened to $80-100/ton.

Newsprint is the other grade that is set to take China by storm. Last year saw Napping Paper bring a new 180,000 ton/yr PM on stream. This year will witness startups at Black Dragon’s Qiqihar mill and Guangzhou Paper’s Guangdong mill. Most market players are confident that the extra capacity will feed China’s growth and not replace imports into the country. After all, the market is blossoming and import restrictions are still in place on US, Canadian and Korean output.

China imposed painfully high import duties of up to 78% following an anti-dumping investigation in 1998. The tariffs will stay in place for five years from 10 July 1998. Despite these measures, one Hong-Kong based analyst referred to China’s newsprint capacity as “a definite risk”. He questioned who was going to buy the volumes, given the Chinese government’s media crackdown, the restrictions on circulation and in some cases the closure of certain newspapers. A look at Asia’s newsprint market from a broader perspective certainly paints a more cheerful picture. The market broke through a significant psychological barrier in January with the region’s first price increase since the end of 1997. Suppliers announced a $50/ton increase for 1 January and in some cases this is exactly what they achieved.

The amount of the increase varied according to supplier, customer and market. But most suppliers said prices rose $40-50/ton, with just one source quoting a lower range of $30-45/ton. The increases brought average transaction prices to $475-530/ton, c&f. This covers the 45 g/m^sup 2^ to 48.8 g/m^sup 2^ weights in most Asian markets, with the exception of Korea and China where prices are reported to be even stronger. Producers are certainly starting to smile, even if they are not cracking open the champagne just yet. Demand might have been given a slight artificial boost as buyers built up stocks ahead of the January price increase, but the market seems convinced that most of the extra demand is from a rise in real consumption. For example, Singapore’s main daily newspaper, The Straits Times, published a 330-page bumper issue on 15 January – the biggest edition in the newspaper’s history. And Indonesia is getting a helping hand from the new newspapers, tabloids and magazines that are now allowed to flourish in the “reformation” era.

Few industry observers would argue that the newsprint price increase marked a turning point for the market. But suppliers are also quick to point out that much of the increase was absorbed by rising production costs. The driving force behind the price rise was the newsprint suppliers’ urgent need for better returns. But pleas of poor profitability alone did not push up prices. The announcements were also supported by a strong US economy, a fourth quarter price rise in North America and, perhaps most importantly, signs of economic recovery in Asia.

The seeds have certainly been sown for a burgeoning Asian market. But it is not yet clear whether the seedlings will be allowed to reach full height or if they will be cut down prematurely. Demand is starting to pick up, prices are recovering for many grades and the overall message from industry observers is one of cautious optimism.

In recent years as local boxmakers sought more ways to cut costs in the wake of the region’s financial crisis, testliner became an increasingly attractive option. Boxmakers were also forced to turn away from the higher priced kraftliner as they faced difficulties passing on the increases to end-users. Oversupply in the box market also means that the end-user could shop around for cheap boxes, putting extra pressure on boxmakers to lower their prices. As a result, testliner capacity has been springing up all over Asia. Looking ahead, though, most of the new projects are destined for China. Industry observers seem relatively confident that China will cope with the new capacity, either absorbing it into the domestic market or exporting it to other Asian markets.

salomon smith barney asia pulp and paper china pricing industry observers excess products pulp and paper duplex board dagang absorbency picking up the pieces hot on the heels oversupply export markets chinese market immediate future question mark matter of time pms economic growth second quarter

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