Malu Paper Mills Ltd Management Discussions.

GLOBAL PAPER INDUSTRY SCENARIO

In the global paper & paperboard market, growing consumer awareness for sustainable packaging, rising demand from various end users and increasing environmental concerns are some of the factors favouring the market growth. The growing disposable incomes of people especially in the developing countries is one of the major opportunities. Globally over 400 million tonnes of paper and paper products are consumed. In the global paper industry China has become the largest producer of paper followed by USA and Japan, these big three produce 50% of worlds paper production. Indias share in world production of paper is about 3.7%, with estimated production of over 17 million TPA. The global recycled paper market has seen consolidation in holdings also in recent years. In USA the top 4 paper manufacturing companies control 75% capacity, in Indonesia top 2 control 60% capacity and in China top 3 control 21% capacity.

The global paper and pulp industry has contracted slightly over the past few years, this was due to the shift to digital media and paperless communication across most developed economies. But the demand in emerging markets has partially offset the decline in developed markets due to increased demand for paper used in packaging materials. Developing economies like India and China will drive the market for the paper packaging segment, with applications across industries like healthcare, personal care, homecare, retail and others. The focus has now shifted towards ecofriendly and sustainability, paper packaging is expected to gain traction with many countries pushing for paper packaging products over plastic packaging, which poses a significant threat to the environment.

In the past year the Chinese paper industry has been impacted by the environmental issues, as the Chinese government banned import of several varieties of waste paper, mostly unsorted grades. China has about 65 Million Tonnes of recycled paper capacity and imports around 26 million tonnes of waste paper. Due to implementation of strict parameters for import of waste paper about 20% capacity of Chinese producers was impacted. The stringent enforcement of environmental norms forced many paper mills to shut down, old mills are phased out and certain specific areas are proposed to be shut down by 2019 end. This has resulted in China becoming importer from a major exporter of paper, paper board and Newsprint. The recycled paper market has become precarious and uncertain. There has been steep decline in the share of imported waste paper in China from around 30% to 20% in last one year. As a result of this international waste paper prices especially for unsorted grades have seen steep fall. Due to shortage of waste paper there has been sharp increase in the Chinas import of recycled pulp leading to firming up prices of the pulp in international market.

INDIAN PAPER INDUSTRY

The total installed capacity in India is about 17million tonnes. The per capita consumption of paper is around 13 kg against the global average of 57 kg. Every 1 kg increase in per capita consumption results into increase in annual demand over 1 million tons. At present, the industry is largely fragmented with over 750 paper mills and there are only a few large paper mills having capacity above 50,000 TPA. In India the paper capacity remains fragmented, top 10 manufacturers account for about 30% capacity. There are only 2% paper mills which are large Integrated mills, whereas 11% mills are midsized and 87% mills are small having capacity of less than 50,000

TPA. The Indian paper industry is likely to grow at 6-6.5%% v/s the global demand growth rate of 1%.

WRITING & PRINTING PAPER

The Printing and writing paper segment is having 30% market share in India, it is likely to grow at 5-6%. This growth is fuelled by growing literacy rates, increase in education expenditure. The demand is expected to grow on account of an anticipated pickup from the education sector with growing enrolment as well as increasing number of schools and colleges. The increased digitisation is also leading to higher consumption of copier paper.

NEWSPRINT PAPER

The Newsprint sector accounting for 15% share is likely to grow at 1%. India continues to defy the negative growth in newsprint worldwide due to its thriving democracy, its growing young population and increasing literacy levels. The Indian print media continues to command a major share of the advertisement revenues and still remains effective in delivering the content. However, more than 50% of the newsprint demand is met through import. The domestic prices of newsprint are largely determined by the landed cost of the imported newsprint. The central government has imposed @ 10 % import duty on newsprint to create level playing field for the domestic manufactures. This has provided much needed level playing field to the Indian newsprint manufacturers against imported ones. Improving literacy rates, rising circulation and an increasing number of newspapers and magazine is expected to support growth in newsprint demand, which is expected to reach 2.7 million tonnes in 2019. However, competition from growing imports from developed countries is a major challenge to the industry.

PACKAGING BOARD & KRAFT PAPER

The packaging Board/ Kraft paper having about 52% market share is the fastest growing segment and is likely to grow at 8-10%. The rise in the per capita income, urbanisation and transformation in lifestyle habits is leading to larger offtake of packaged products, growth in e-commerce, demand for ready to eat food and organised retail is leading the growth in this segment. For the Indian paper industry, strong domestic economic growth has been accompanied by equally robust demand for paper. There has been growing awareness about environmental hazards of single use plastics and its growing volumes. Many countries around the world have set the target for phasing out various single use plastics in respective countries, India has also agreed to phase out the single use plastics and many states have already imposed a ban on use of such material. This is going to be a major demand booster for the packaging industry in near future, however, the companies will have to develop the products of low grammage high strength paper for this segment.

TISSUE PAPER

The changing lifestyle of individuals in the urban as well as rural India are expected to provide exponential growth of hygiene paper products in India. The tissue paper segment is likely to grow at more than 15%.

FUTURE OUTLOOK

Over the next five years, the domestic industry is projected to grow at 6-7% CAGR to reach 20 million tonnes by 2022. Packaging paper & board segment demand is expected to grow at a faster pace as compared to Printing & Writing and the Newsprint segments.

The reasons for growth of paper industry in country are continuous demand for education and literacy, increasing organised retail, growth in e-commerce, FMCG, pharma/ healthcare sector, demand of quality packaging, ban on plastic (especially polythene bags) and incremental demand of eco-friendly paper bags, continuously increasing demand of ready-to-eat food and printed stationary.

The demand drivers and growth triggers have come from a combination of factors such as rising income levels, growing per capita expenditure, rapid urbanization and a larger proportion of earning population which is expected to lead consumption and there is enormous potential for the paper industry in the country.

Higher recycling demand will further push the use of paper as a packaging material, with consumers and businesses looking for solutions that help in cost reduction as well as keeping the environment safe while keeping government regulations intact.

STRENGTH AND OPPORTUNITIES

• Central location, Post Implementation of the GST, owing to its central location, Nagpur is gradually developing into a transportation and logistics hub, this will enable the company to optimise on the transportation cost of raw material and finished goods.

• Government emphasis on avoid plastic packaging and to promote Bio degradable packaging to provide impetus to the packaging industry.

• Robust growth in e-commerce FMCG, Consumer goods to drive paper board demand.

• Close proximity to Western Coal Fields (WCL) for procurement of coal and availability of biomass from the nearby rice producing regions.

• Three Inland Container Depots (ICD) near by enabling smooth and cost effective infrastructure for import and export of goods.

• Established customer base and dealers network.

• Governments thrust on Education, Literacy and Environment coupled with increasing disposable income and overall economic growth of the nation.

• Levy of Import Duty on imported newsprint as compared to duty free import earlier.

• Levy of IGST on imported newsprint as compared to duty free import in pre- GST regime

WEAKNESS AND THREATS

• Cyclical nature of the paper industry.

• Numerous Regional Trade scheme (RTs)/Free Trade Agreement (FTAs) without adequate safeguard to the domestic industries.

• Increasing competition from electronic media and digitalization (for newsprint).

• Capital-intensive industry.

• Fragment nature of industry having small and unorganized industry players.

• Competition from imports and

• Technology obsolescence.