The Hindu Business Line : Paper manufacturing

To remain competitive, the paper industry must become transparent and adopt a sharing mindset. Apart from a company’s unique strategy in serving its customers, it should be able to initiate synergies with others in the sector, be it in sourcing, logistics or distribution.

Naresh Gupta

Paper is an essential commodity. Its per capita consumption is currently 7 kg, one of the lowest in the region. World paper demand growth is subdued and is between 2-3 per cent, against India’s 8 per cent. This high growth rate has been possible by a strong emphasis on literacy, increase in per-capita income, increasing use of photocopiers and printers, higher export growth and demand for high quality packaging. India’s total annual production and consumption of paper and paper board is around 8 million tonnes — barely 2 per cent of global production. It is projected that India’s paper demand would reach 17 million tonnes by year 2015.

The Indian paper industry started facing heat from the reforms initiated by the Government in the 1990s. Till then the protection provided by the Government was helping the sector record inflated profits and giving it a false feeling of competitive strength. And the industry did not seem interested in taking timely initiatives to face the challenges emerging from globalisation. The government is on record in bringing import tariff to the levels prevailing among Asean members, putting the industry in a real tight corner.

‘Productivity Trends in India’s Manufacturing Sectors in last two decades’ — a study done by Unel for the IMF Working Paper WP/03/22 concluded that the paper sub-sector had the second lowest productivity growth in the 13 major manufacturing sub-sectors analysed. Most of the paper mills in India were found not competitive against imports. Several factors have brought the industry to such a pass. These are discussed briefly below:

Raw Materials

The industry uses different fibres for paper-making, namely bamboo, hard-wood, bagasse, agri-residues (wheat/rice straw) and recycled paper. India is deficient in all these fibres. Bamboo is now almost extinct, excepting in the North-Eastern States mainly Mizoram and Assam.

Hard-wood is no more accessible from forests but can be grown in India in large quantities due to fine tropical climate, good rainfall, abundant unemployed youth and large expanses of degraded lands needing immediate restoration, as has been done successfully by Brazil, Chile, Argentina and Indonesia.

But the Government has not agreed to industry’s proposal to allow degraded forest lands for industrial plantations. Some initiatives were taken by paper mills to engage farmers in hard-wood plantations, but for potentially more valuable sectors, only a small share of wood harvest reaches the paper mills. The landed cost of hard-wood for a paper mill is not less than $90 per tonne, against $40-45 in other countries. Taking 2.5 tonnes of wood needed for a tonne of paper, India starts with a disadvantage of $120 per tonne. The story is no different with bagasse. Sugar mills find it more attractive to burn it as fuel for power generation. Similar is the case with agri-residues. Wheat and rice straws primarily used as animal feed-stock for the growing animal population are mostly in short supply. Prices are never stable and have, of late, shown unduly large variations.

Recycled paper is being increasingly used worldwide for paper-making. But, here too, India does not have an advantage, as a proper collecting system for waste paper is not in place. India collects just 22 per cent of total paper consumed in the country — one of the lowest recovery figures in South-East Asia.

Energy is around 18-20 per cent of total cost of manufacturing paper. Indian mills consume, on an average, 1,600 units per tonne of paper, while it is only 920 units in Europe. Here, due to excessive grid power cost, several large paper mills have set up their own power generating units.

Energy COSTS

The cost of own power generation is increasing due to consistent increase in coal prices. Wood bark unsuitable for paper-making and having no fibre can be used for power generation as an input in place of fossil fuels such as coal. Several wood-based paper companies are using it in Europe, Latin America and in South East Asia. Thus Indian mills are losing on two counts: high cost of power (either grid or own) and higher power consumption.

Paper manufacturing is a highly capital-intensive activity and also a long gestation one. The Indian paper sector has been always investor-shy as it has rarely rewarded its shareholders amply. Not only shareholders, even banks and financial institutions are also not favourably disposed towards the sector. Thus cost of capital is high for Indian corporates.

Poor roads and bridges and ports mean high transportation costs. And many of the paper mills source inputs from distant places and ship finished paper to all Indian cities, pushing up the logistics costs. In fact, huge internal transportation costs are also an entry barrier for imported products in the country.

Scale of production

The small scale of production and outdated technology have been the main features of Indian paper units, and are still so. On an average, to produce 100,000 tonnes in a year, an Indian mill manages five paper machines in one or more location, while abroad, paper-making machines of 500,000 tonnes per annum, or more, are the norm.

Economies of scale, after considering the impact of higher capital cost, are 3-5 per cent of total conversion cost. In addition, large modern machines produce internationally accepted paper, difficult with smaller machines. Thus India loses out on both counts — quality and cost.

Apart from the high cost of manufacturing paper in India, employing environment-friendly technology with outdated machines and pulp mills is also not easy. The Government is forcing paper mills to upgrade the effluent plants and follow the strict norms being notified from time to time. But the impact of such steps is still not visible. The investment needed for such activities generally yields much lower returns and impacts the bottom-line.

The industry must become transparent and adopt a sharing mindset. Apart from a company’s unique strategy of how differently it serves its customers, it should be able to initiate synergies with others in the sector, be it in sourcing, logistics or distribution.

Rival newspapers such as Times of India and Hindustan Times are co-producing a daily ‘Metro News’ in Delhi. Three top US paper companies are e-procuring chemicals needed jointly. New initiatives are emerging. The industry also needs to have a fresh look at vertical disintegration — associating its employees and associates in growing pulp-wood plantation; and at the value-chain — reducing its internal logistic cost by having national distribution networks.

Other problem areas such as economies of scale, pollution control and capital costs also demand innovative solutions. Regulatory agencies must also extend their assistance in helping the industry solve problems rather than offering temporary sops such as tariff cuts.

(The author, an alumnus of IIM(A), has had a long association with the Indian paper industry.)

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