Despite an increased emphasis on digitisation, the humble paper has not lost its sheen. With domestic demand for paper outpacing production in India, the only option left with traders is to depend on imports to bridge the demand-supply gap. Will Indian manufacturers be able to step up to meet the rising demand or will imported paper continue to be the preferred choice? The Dollar Business delves into the details.
Interview by Aamir H. Kaki | December 2017 Issue | The Dollar Business
Till a few years ago, if you were mid conversation and needed to jot down a phone number, you would look around for a piece of paper or your handy leather-bound organiser. Today, your smartphone is your notebook, recorder and, of course, the quickest way to get in touch with a friend. From legal documents to greeting cards; from newspapers to letters, paper in a many ways has always been an essential item of life, across sectors, countries and age groups. But, in today’s digital world where you can get everything from a bank statement to a greeting card on your phone, one would assume that the demand for paper was on a decline. The reality is quite the opposite. The demand for paper is increasing as paper finds use in a variety of different applications. Today, beyond printing and writing, paper finds use in packaging, and several industrial and construction processes. India’s rising consumption of paper has outpaced India’s domestic capacity and made the imports of paper an attractive option.
What has been fuelling this domestic growth in demand? Education and development, it seems. What is more is that the type of paper that is used for these purposes is mostly not produced in India, and that is the reason that of all our paper and paperboard imports the type of paper that is imported under HS Code 481019 is by far the highest.
Rohit Pandit, Secretary-General, Indian Paper Manufacturers Association (IPMA), says, “Greater emphasis on education and literacy by the government, coupled with the growth of organised retail and demand for better quality paper, are the major drivers for paper and paperboards. Demand for better quality packaging of FMCG products marketed through organised retail, rising healthcare spends, over-the-counter medicines and increasing preference for ready-to-eat food are the key demand drivers for paperboard and packaging paper.”
Presently, paper consumption in the country is around 16 million tonne per annum (TPA), which is expected to rise to 23.5 million TPA by FY2025. “An additional 1 million TPA of integrated pulp, paper and paperboard capacity is required to be created in India to meet the growing demand,” adds Pandit.
Cost is key
Despite the need for an additional 1 million TPA capacity, the scarcity of raw materials is preventing production from matching the demand. The raw material here being wood fibre. India is a wood fibre-deficient country and wood price is 50% of the total cost of production of paper. The domestic availability of wood is 9 million TPA compared to demand that is presently at around 11 million TPA. According to Pandit, the cost of wood has also been significantly going up over the last few years. The mill-delivered cost of domestic wood in India is higher by almost $30-40 per tonne compared to other Asian countries. This is the primary reason for the cost of paper production in India being higher by $100 per tonne.
In addition, the restrictions on supply of wood by the Indian government due to environment concerns has also been impacting the production of paper in India. Tushar Gupta, Proprietor, Om Shiv Packaging, says, “The restrictions by the government are both on paper as well as plastic. But, there is a need to promote the paper industry that has made thousands of crores of investment and provides employment to lakhs of people.”
Imports to the rescue
The lack of capacity has naturally opened up the market for importers. In fact, over the past six years, imports have increased at a compound annual growth rate (CAGR) of 15.8% in value terms to Rs.8,237 crore, and 17.6% in volume terms to 1.42 million tonne in FY2017, according to IPMA.
India imported around $317.84 million worth of paper and paperboards under HS Code 481019 during FY2017. Four years ago, imports were worth just $172.72 million. During the April-August period of the current fiscal, the country has already imported $194.87 million worth of paper and paperboard under the same HS Code, signalling that the growth in imports remain unabated.
According to importers, it is not only a matter of availability but also of quality. Gupta says that the paper produced in India is mostly of low burst factor (BF), and the cost of producing high BF is quite high. BF refers to the strength of the paper. However, the paper produced in other countries is of high BF and is cheaper compared to similar products produced in India. The quality and pricing of the imported paper has made importing a viable choice.
What’s more? According to Pandit, “Imports of paper and paperboard in the current financial year has touched an all-time high of 4.7 lakh tonne in the first quarter against 3.2 lakh tonne in the corresponding quarter in the previous year.”
Since the shortage in raw materials and their rising costs have been the main reasons behind India’s inability to increase production, imports have had to fill in the demand supply gap. But the reason for the increase in imports is not limited to unavailability of the domestic product. The duty structure for imports and global market dynamics also have had a role to play. Let us first look at the countries that are the sources of India’s paper and paperboard products under HS Code 481019. The main countries exporting paper and paperboards to India are China, South Korea, US and Indonesia.
Out of these, China is the largest exporter of paper and paperboards to India. It exported around $127 million worth of paper and paperboards under HS Code 481019 in FY2017. Imports from South Korea have also been increasing at a steady clip. Imports from the ASEAN region have also been on a rise, and Indian manufacturers blame the ASEAN-India FTA for the same, as it has meant that duty on these products are nil, making importing more profitable than producing. The same is the case with South Korea as the South Korea-India CEPA dictates that the import duty on this product will be 0% from January 2018.
Imports of paper and paperboard, excluding newsprint, into India from ASEAN in the last six years have grown at a CAGR of 42.5% in value terms and 43.3% in volume terms. Interestingly, imports from South Korea alone have grown at a CAGR of 60.3% in value terms and 58% in volume terms.
Citing another reason for such a steep growth in imports from the ASEAN region, Pandit says that the conventional markets for China and Indonesia have been US and EU. In both these markets, anti-dumping and anti-subsidy tariffs have been imposed on paper and paperboard imports in order to protect their domestic industries. “Further, the economic slowdown in developed economies and export-dependent economies like ASEAN has led to excess capacity of paper and paperboard in these countries. Taking advantage of the low import duty rates in India, these countries find India as an attractive outlet for diverting their excess inventory,” says Pandit.
Cheaper imports are forcing domestic companies to bring down their rates, thus hurting their margins and profitability. The industry has also sought for government intervention and is demanding a level-playing field by urging the government to increase import duties.
An Importers’ Game
According to IPMA, the paper industry is poised to grow at a rate of 6-7% per annum, in the foreseeable future. And while domestic capacity building is happening, it is unlikely to keep pace with the rise in demand for the product.
For exporters, India is thus proving to be a worthwhile market. Poonam Gupta, CEO, PG Paper Company Ltd., a UK-based exporter, says, “India has a huge population and its per capita usage of paper is still lower compared to most developed countries, and that provide enormous opportunities for growth. The fact that plastic is being increasingly replaced by paper as a more environment-friendly alternative by corporates is also propelling the demand for paper in India.”
Gupta, of PG Paper, feels that domestic Indian paper industry also has enormous potential and opportunities for growth. “The industry has witnessed a steady growth over the last few years. And, I expect that the industry will be on positive growth trajectory in the coming years, leading to increase in domestic production as well as imports,” she says.
While the packaging paper and paperboard segment is expected to grow at 9-10%, the writing and printing paper segment is expected to grow at 4-5%.
Of course, when it comes to profitability, importers offer mixed opinions. But then, most importers The Dollar Business spoke to say that the margin is usually fixed and is around 2% or in some cases lower, depending on the market price and the dollar conversion rate. The market, these importers say, adjust according to the international prices making higher profits difficult.
Importers are quite positive about the growth in demand of paper and paperboard in India despite the narrow profit margins. An increase in literacy, changes in lifestyle and a populace that is increasingly environment conscious, coupled with growth in sectors like organised retail, FMCG, packaging and construction means the demand for paper is here to stay. Question is, will importers be able to write their own future on paper?
TDB: Import of paper and paperboard has been rising steadily over the last few years. According to you, what are the reasons for this rise?
Rohit Pandit (RP): India is a wood fibre-deficient country. Availability of wood domestically at 9 million tonne per annum (TPA) is way lower than the demand, which is currently about 11 million TPA and is projected to rise to 15 million TPA by FY2025. Mill-delivered cost of domestic wood is higher by almost $30-40 per tonne as compared to other Asian countries. Due to this, cost of paper production in India is higher by $100 per tonne. The problem has been exacerbated by the government’s policy of extending preferential tariff treatment to import of paper and paperboard under the different free trade agreements. Under the India-ASEAN FTA, import duties on almost all tariff lines of paper and paperboard have been progressively reduced and the basic customs duty came down to 0% with effect from January 1, 2014. Under the India-Korea CEPA, the basic customs duty will be 0% with effect from January 1, 2018, and imports from South Korea will rise.
TDB: Do you envisage imports of paper and paperboard growing further?
RP: Currently, per capita paper consumption in India is around 13 kg and is projected to increase to at least 17 kg by FY2025. Under the baseline scenario, domestic consumption is projected to rise to 23.5 million TPA by FY2025. If we cannot increase our production, imports will naturally grow. According to Indian Paper Manufacturers Association (IPMA), the paper industry is poised to grow at around 6-7% per annum in the future. The packaging paper and paperboard segment is expected to grow at 9-10%, while writing and printing paper segment is expected to grow at 4-5%.
TDB: How is GST expected to impact the paper and paperboard industry?
RP: GST is expected to have an overall positive impact on India’s paper industry, though there are bound to be some short-term transitional and implementation issues. In the medium-term, the cost competitiveness should improve with unification of the fragmented domestic market and reduction in costs associated with inventories and logistics, especially with the removal of entry barriers.
Ideally, the paper industry would have liked a uniform GST rate on all grades to avoid classification problems. Most grades are covered under 12%, while there are some in the 18% category and newsprint is in the 5% category. By and large, the industry is satisfied with the GST rates on the output side, though the rates on raw material and inputs could have been lower so as to avoid the blockage of working capital.
TDB: What challenges do you face while exporting to India?
Poonam Gupta (PG): When you talk about exports, all markets have their own individual challenges. India is no different and has its own unique set of challenges. However, we certainly have the advantage of being present in the industry for 14 years. We also have an in-depth understanding of Indian legislation. Recently, the implementation of Goods and Services Tax (GST) in India had presented some challenges and had affected our industry, but the industry is now embracing this new tax regime and business is stable.
TDB: Recently, you announced plans to set up a paper manufacturing facility in India. What has been the motivation behind this move?
PG: Around 85% of our exports go to the Indian subcontinent. India is a growing market and I see paper as an environment-friendly alternative to plastic packaging, which is currently widely used in India. So, it makes sense to set up manufacturing facilities in India and take advantage of the growing packaging sector. It will also make our supply chain more effective. I see a lot of opportunities for growth in India in the coming days.
TDB: The Indian government initiated an anti-dumping probe on paper imports from Indonesia, Thailand and Singapore. How will this impact your paper exports to India?
PG: The anti-dumping probe might actually have a positive impact on our business as most of the paper that we supply to India does not originate from these countries. However, we also strongly believe that the paper industry places a higher demand on natural resources like water and wood logs. So, for a country like India, it makes sense to put these resources to human use rather than utilise them for producing paper. Thus, for India, sourcing paper from other countries makes more sense.
TDB: The paper industry is expected to grow at a rapid clip in the coming years.How are you preparing yourself to meet the increasing demand?
PG: The paper industry is still growing despite a decline in publishing paper grades. This is due to an increase in technology and environmental awareness. As a result, we have shifted our focus towards packaging grades and diversifying our product portfolio. The packaging and labelling industry is growing rapidly, and we are aggressively tapping into this segment. We see the progression towards packaging materials to be a continuing trend and will focus on developing our team and product portfolio to meet this demand.