Expansion vs sustainability challenges Asia

SHANGHAI, Aug. 9, 2010 (RISI) - Expansion (in almost all paper grades), is the word that can be heard most in talks among industry CEOs and executives during recent events that I attended organized by suppliers or industry associations in the pulp and paper industry. The Chinese market seems to have recovered from the earlier economic downturn and players are gearing up for new growth after a pause due to the world financial crisis.

New orders can be easily tracked at the RISI website news section, though quite a few paper producers still prefer to keep their new projects confidential. "We are afraid that other peers will follow suit so that the paper grade we are investing in would see oversupply very shortly," says one producer.

New expansion is also a widely discussed topic among attendees during the annual RISI Asian Pulp and Paper Outlook Conference held during June. The conference has attracted record high attendees this year due to an improving economy combined with uncertainty about market trends - such as soaring pulp prices, which is a main cost for paper producers who heavily depend on imports due to limited domestic resources.

"There are two reasons behind strongly bounced back pulp prices amidst a very weak global economy. Firstly, Chinese demand rebounded in 2009 to a remarkable degree. Secondly, capacity closures outside of China exceeded expectations, and restarts were slower than expected," says Kurt Schaefer, VP Fiber, RISI at the conference.

"2011 to 2012 could turn out to be a very favorable period for pulp producers. On the demand side, graphic paper is the key driver of market pulp demand while on the supply side, there are no new pulp mills outside of China during the period," concludes Schaefer.

The recent PPI Asia newsletter published on August 9th shows that heavy pressure from buyers has forced suppliers to cut market pulp prices across Asia, including in China. Chinese buyers have held off purchasing pulp for the last two months, citing stagnant pricing and falling demand in the domestic paper and board market.

Suppliers are ready

To respond to the industry's new growth spurt, suppliers are making new investment too in facilities, service centers and technology centers in different parts of China.

Metso's biggest recent investment in China - a technology center specializing in automation solutions - was inaugurated in Shanghai on May 28, indicating the company's commitment to supply the emerging market in China and the rest of Asia.

Voith Paper just opened up a new service center in Nansha district, Guangzhou. Together with Voith Paper's two existing service centers operating in Dongying, Shandong Province in North China and in Kunshan, Jiangsu Province in Eastern China, the Nansha site has been set up to complement and complete a well-covered service network in China.

ABB will be transferring manufacturing of its Quality Control System (QCS) and Web Inspection Systems, WIS HDI800, to a new factory in Kangqiao in Pudong, Shanghai, and it is part of the company's strategy to shift the business from the west to the east.

Nalco recently opened a new Asia Pacific center for industry marketing, supply chain, technology development and training in Shanghai, China. Other chemical suppliers like Kemira and Hercules opened technology centers in earlier years.

Challenges on sustainability

Nevertheless, there is no doubt that the industry faces challenges in sustainable development and talked about topics within the industry include short supply of raw material, environmental issues and world trade conflicts.

These topics were also discussed at the China Paper Industry Sustainable Development Forum, held by the China Paper Association and China Business Network (CBN) in Nanjing in late July. Officials, associations, companies and representatives from NGOs were exploring the sustainable growth for the paper industry in China along with the main financial media in the country.

Some officials believe that China should not just grow plantations within the country, where the resources are limited and not ideal. "Can we plant trees outside China, say in east south Asia, Africa or South America where the environment is much better than China for plantation growth?" says Li Junfeng, deputy director of Power Research Institute, National Development and Reform Commission.

Today, carbon emissions and ecological sustainability are already of high concern in China, but they are expected to grow in importance as stricter policies are being implemented. Big companies have already invested heavily to meet new standards. "Gold East has invested RMB 1.2 billion ($177 million) on environmental issues, and the company can get RMB 100 million ($14.8 million) benefit per year in return," says Sun Bingjian Senior Director of Gold East Paper.

The forum was held at a time when the draft for "Twelfth Five Year Plan" (China's economic plans for the year of 2011-2015) was just settled and the document should be released next year. "The plan is still confidential at the current stage, all I can mention from the plan is Structural Adjustment, Upgrading and Green Development," says Zhao Wei, General Secretary of China Paper Association at the forum.

China aimed to shut down 6.5 million tonnes of polluting and outdated capacity in the paper industry by 2010, and the industry believe that the country has already reached the goal. Meanwhile, the Ministry of Industry and Information Technology released detailed plans for further capacity shut down (4.32 million) tonnes by the fourth quarter this year，a big increase compared to the authorities' original goal.

Media attitude change

Paper companies also have realized that the green message needs to be sent widely to the public, not just within the industry with an aim for a sustainable growth. The results seem to be positive. The media who usually have biased views against the paper industry partly are starting to make positive comments of the industry.

"My early impression of the paper industry was that it is a representative industry of China's sweatshop economy. However, now, after visiting some modern mills, I realize that the industry is walking on a path towards sustainable growth. The media should have the responsibility to focus on the industry for today and also for the future," says Qin Shuo, Editor of CBN.

Annie Zhu can be reached at azhu@risi.com.