The global paper industry has changed significantly over the years. Between 2012 to 2018, the global paper production has risen at a CAGR of 1.25%. In 2018, Asia Pacific had the highest share in the global paper production (48.92%). Europe and North America also had quite impactful presence with the shares of 24.24% & 19.83% respectively. In the era of booming digitization, the use of papers across multiple sectors have become lower, especially in the developed economies. However, the lesser use of plastic and other synthetic products for the packaging purpose has increased the importance of paper across all the industries over the years. In recent times, the demand of paper is seen to be highly controlled by Wrapping and Packaging Industry (55% share in the global paper consumption).
What is the status of Paper Industry in India?
India is the 7th largest and 2nd most populated country in the world. Being an emerging nation, the growth trajectrory of India has been remarkable in the last few years. In the last 20 years, the nominal GDP of India has grown at a CAGR of 9.7%.
- Between 2012 to 2018, the paper production and consumption have increased at CAGR of 11.57% and 11.28% respectively in India. Though the achieved growth rate of India is higher than many other countries, still the status of it in the global paper Industry is still not that satisfying.
- Globally, the share of Indian paper production and consumption were 4.17% and 4.58% respectively in 2018. China had the highest shares for both the cases of the production (28.68%) and consumption (27.86%). Otherwise US had the shares of 17.92% & 16.99% in the global paper production and consumption respectively.
- In the Asian paper market, the share of Indian production and consumption were 8.53% and 9.12% respectively in 2018. Here also, China had the major shares with 58.62% in production and 55.49% in consumption.
Raw Materials for Paper Production in India –
Paper is made from a raw material called pulp. Pulp is made from Wood. The good quality of papers is produced from Wood Pulp.
Types of Pulps (The mandatory raw materials for Paper Production)
- Wood Pulp (e.g. Mechanical Wood Pulp, Semi Chemical Wood Pulp, Chemical Wood Pulp, Dissolving Wood Pulp etc.), Unbleached Sulphite Pulp, Bleached Sulphite Pulp, Unbleached Sulphate Pulp, Bleached Sulphate Pulp & Other Fibre Pulp
Apart from these, another important thing used majorly for the paper production is:
- Recovered or Recycled Papers
In India, the production of wood pulp is higher than the other types of pulps. Between 2012 to 2018, the production of wood pulp has increased in India at a CAGR of 9.49%. Production of Bleached Sulphate Pulp and other fibre pulps has also grown at CAGR of 15.75% and 11.31% respectively in that period. Otherwise, the importance of recycled or recovered papers also seems to be grown over the years. Between 2012 to 2018, the production of this type of papers has expanded at a CAGR of 9.2%. In 2018, the share of recovered paper in the overall production of all pulps and recovered papers was 28.67%.
Segmentation of the paper industry in India
- Versatile types of paper products are manufactured in India. Production of the Paper & Paper Board has increased at a CAGR of 10.18% between 2012 to 2018. This segment of “Paper & Paperboard” represents the composite production of newsprint, printing and writing paper etc. In 2018, the share of it was 61.63% in the national paper production.
- Production of Household & Sanitary Paper, Wrapping & Packaging Paper and Other types of papers has increased at CAGR of 31.94%, 13.82% and 13.76% respectively between 2012 to 2018.
Trade Scenario of paper products in India
- The import and export value of various types of paper products have increased at CAGR of 11.49% and 14.46% respectively in India between 2001 to 2018.
- The share of newsprint in the overall imported paper products of India was highest in 2018 with a value of US$ 909.38 Million.
- In 2018, the top 5 exporters for exporting multiple ranges of paper products to India were China, South Korea, Russia, United States and Canada.
The growth of trade for paper products has been quite impressive in both the cases of import and export. Over the years, the export has also risen but the level of import is still greater than it. Imports of foreign products generally assures about a better product quality but it increases the input and production cost simultaneously. For the further growth in the export sector in the coming years, hike in the domestic production and betterment of product quality are the mandatory requirements.
Drivers & Challenges of the Indian Paper Industry
- India is the fastest growing paper market in the world: Between 2012 to 2018, the paper production in India has increased at a CAGR of 11.57% whereas this growth rate in all the leading nations for paper production has become quite lower. Between 2012 to 2018, the paper production has risen in Russia, China, Finland, Indonesia, Japan, Brazil at CAGR of 2.73%, 1.82%, 0.96%, 0.7%, 0.64%, 0.6% respectively and in US it has declined at 0.28%. The fastest growth pattern of India not only assures a great service to the domestic paper industry but also at the global level.
- Increase in Literacy Rate and Increasing Enrolment in Education: Along with the rise in literacy rate, school enrolment process and the numbers of institutions for higher education have increased enormously in India. The literacy rate which used to be 63% in 2001 is expected to be 78% by 2020. Number of colleges in India have gone up from 37,000 to 42,000 in last five years. It could lead to higher demand of paper in India because all the study materials like books and different types of exercise copies are produced from papers.
- Rising Circulation and Number of Newspaper & Magazines: The newspaper circulation which used to be 39.1 Million copies in 2006 rose to 62.8 Million in 2016. When India is witnessing such type of growth, then many of the major media markets are facing downturn (e.g. UK, US, Germany, France etc.). The print media ad revenues grew 6% in 2018 to Rs 22,121.8 crore. The Print media and the newspaper are the preferred option among the mass to gather national and international news. It has been possible because majority of the Indian population is still not accustomed to the emerging digital infrastructure in the country (e.g. digital newspaper) and they find it more comfortable to read the newspapers and various printed documents on daily basis.
- Development of e-commerce: The e-commerce industry has grown at a CAGR of 45.36% between 2014 to 2018. Previously papers were used for the packaging purpose in FMCG, healthcare etc. sectors. However, with the growth of online shopping the demand of papers has expanded immensely for the wrapping and packaging purpose in India. Also, ban or reduction plastic bags in several places has influenced the use of paper more for the wrapping and packaging in India in the last few years.
- Raw Material: In early years, paper production was majorly dependent on wood fibre. However, with the increasing awareness in favour of environmental sustainability, the use of recycled papers also became popular. Being a wood fibre deficient country, India’s share in the global pulp and recycled paper production was 2.36% in 2018. The wood fibre helps to produce strong and better quality of paper. Hence, it diverts India to depend heavily on foreign countries.
- Imports: India imports heavily from the globally recognized paper industries (e.g. China). Between 2001 to 2018, the import value of pulp and other fibrous cellulosic materials has increased at a CAGR of 14.03% in India. Import of the raw materials like Recovered “waste and scrap” paper, Chemical wood pulp (Processed by soda or sulphate), Chemical wood pulp (dissolving grades) and Wood pulp (obtained by a combination of mechanical and chemical pulping processes) has grown at CAGR of 14.24%, 13.31%,13.99% and 26.34% respectively between 2001 to 2018. Though cheaper global cost of these products leads to higher imports but extreme level of import increases the overall the manufacturing process expensive. In 2018, the import value of such raw materials was US$ 2570 Million.
- Rising energy prices: Being an energy intensive industry, the individual paper mill may require 52 GigaJoule of energy for 1 ton of paper production. However, it may vary across the types of chemicals or machines used and based on the quality and type of paper produced. The power generation process of India has been under pressure since a long time. Between FY2010 to FY2019, the power deficit has increased in India at a CAGR of 24%. Furthermore, rising oil prices also increases the transportation costs for paper, which are high due to it being a bulky and relatively low-value product.
- Rising prices of paper: The high import value of raw materials and greater energy consumption raise the price of final products. The Indian paper producers do not have any other choice to avoid this because for producing good quality of paper either they need to collect the raw materials domestically or they need to depend on foreign countries. If they want to get the raw materials within India, then they need to cut trees which provokes environmental degradation or they need sufficient amount of land where they can plant those trees. Getting such huge area of land, and maintenance of such large numbers of trees are time consuming and hectic too. This is why they prefer to choose the cheaper imports. Hence, it increases the overall production cost and the producers are left with no other choice but to increase the price of papers.
- Digital revolution: The digital revolution in India and other countries is poised to bring a radical change in all the industries and paper is definitely the one of them. The emergence of digitisation directly indicates about the lesser or no use of papers over time. The digital infrastructure ensures about a system where all the information, documentation and many of the paper related activities are supposed to be completely abolished in the near future. Hence, if the paper producers do not find any suitable alternative to expand the further growth of their industries then facing a huge loss or a long-term downturn is inevitable.
- Use of Outdated Technology: Most of the technologies used in the paper industry are either outdated or obsolete. Energy consumption by the machines of most the paper mills are very high compared to foreign countries. Even majority of the paper mills are said to be incapable from meeting a brightness target of 89 percent for the final products. Absence of updated technology not only reduces the production capacity of the paper mills but increases the power consumption, affects the environment and raise the manufacturing cost accordingly.
- The highly fragmented industry: The Indian paper industry is highly fragmented with a large number of small and medium sized paper mills. Among the existence of more than 1000 mills, 750 are said to be operational. There are almost 28 established players in the Indian paper sector, among which the top 3 paper companies only consist of 9% of the industry. The small units account for 60% of the industry size.
This kind of fragmentation is highest in India compared to the other established paper industries at the global level. The comparison of this fragmentation with the other countries are as follows:
Large scale of fragmentation means the existence of multiple small firms in an industry. Small firm generally have lower capacity. Here the capacity includes the factors like their unstable financial condition, lesser production capability, use of outdated technology etc. Hence, small scale activities of these firms do not add any special value to the overall growth of the industry. Most of the time, it becomes difficult for them survive in the highly competitive sector. Large players are found to invest in the production of copier paper, coated packaging paper & board, while the smaller companies manufacture low value-added segments such as creamwove, kraft paper etc. Hence, higher level of fragmentation generally increases the chaos and production inefficiency leading to slow growth.
Under such circumstances, does the consolidation of Paper mills would be helpful for overcoming the challenges faced by Indian Paper industry here?
Indian paper industry is currently flourishing. The growth figures of both consumption and production have improved in the last few years compared to the established paper industries of other countries. However, the existing challenges of the Indian paper industry will hamper its long-term development. In order to sustain the competition from the established developed paper markets like US, China, Japan, Indonesia, Finland, Japan, Germany etc., the industry should evolve. Given a highly fragmented market, consolidation seems to be a possible solution for bringing stability in this Industry which will in turn sustain a long-term growth.
Consolidation means many of the small firms will merge and create a comparatively strong conglomerate. This step will increase the production capacity, versatility in the manufactured papers, build up a stronger workforce, absorb a greater share in the market and moreover gain the financial stability.
The reasons behind the requirement of consolidation are as follows:
- Capital Intensive Structure – For paper production, the producers need to invest for the things like land acquisition, establishment and maintenance of paper mills, wood plantations, import value for better quality of raw materials, technology upgradation, environmental compliance etc. All these things make the manufacturing of paper a highly expensive capital-intensive task. Thus, small players might find it tough if they wish to be competitive in the market.
- Economies of Scale – The average capacity of the Indian Paper mills is around 21,000 TPA (Tonnes Per Annum) whereas US is 9 times greater than India for the same. The overall production of the country also reduces due to its fragmentation. Smaller the size, lower is the production. The requirement of water, power and different chemicals become lesser if the mills grow larger. E.g. the water consumption level of Orissa’s JKPL unit used to be 86 cubic metres in FY11 which reduced to 42 cubic metres in 2017 when the size of the mill became larger. Hence, the presence of multiple small firms generates greater amount of waste resulting in the production inefficiency and quality degradation over the time.
- Environmental Protection – The paper industry is considered to be the largest producers of water pollutants and waste products. Hence, it is mandatory for the manufacturers to install emission monitoring system. However, it is expensive for the small firms to be environmentally compliant.
- Emergence of GST – A 12-18% of GST is fixed to be imposed for most of the paper categories. Hence, the relaxation previously provided to the small companies for avoiding the tax will be pressurized.
Here, the mills need to work more strategically for bringing excellence in manufacturing, controlling the internal and external market, balancing the demand-supply scenarios of the consumers, being concerned about the environmental measures and digitalising their business. For executing this, consolidation of the mills will be a good choice.
With this association, the conglomerate company will be able to manage all types of expenses which are necessary and helpful for strengthening their manufacturing process and revenue structure. Otherwise, with the unbearable cost structure many of the existing small firms will be closed or become stressed and might be liquidated in the coming years.
The outcome of a consolidation
Some of the favourable outcomes of the consolidation are as follows:
- With the rising capacity, the merged paper mills will be able to adopt advanced manufacturing technologies. Use of the updated machineries will help to increase production efficiency and competitiveness.
- With an urge to produce better quality of products, the companies will also be able to have Quality Control Systems (QCS) and Distribution Control Systems (DCS) for producing fine quality of products.
- Regular and required upgradation of coating mechanism, calendaring, material handling system will help the industry to reach to the international standards.
- Besides, financially strong companies will be capable to invest in the latest pollution prevention equipment and technologies.
- With the growing size, the companies can experiment to widen their raw materials base. The paper industry has always preferred the use of wood pulp for better quality of paper production. However, the greater use of wood pulp ultimately leads to environmental degradation. Currently, the industry is running out of woods and this is the high time they need to switch to some other raw materials. In recent times, the production and use of non-wood pulp have also increased in India.
- Otherwise, these firms can also encourage the process of agro forestry. Agro forestry is the process of agriculture with trees. Rather than plantation of trees in scattered way it helps to produce huge amount of versatile pulps in a single plot of land. Though it generally has long gestation period. Still with the continuous effort, it could be an amazing source of raw materials and Indian paper industry can also substitute the huge amount of pulp import gradually.