| Paper sector or paper tiger |
No longer is the performance of the last two years worth the paper
it is written on for the paper and paperboard industry which may well find 2001-02
characterised by flat, if not declining, trends in profitability.
Much of this has to do with the sluggish international price trends which will influence
the domestic prices levels. The rupee's depreciation may offer some solace. But domestic
producers may have to brace themselves for a tougher period, though not as bad as in the
mid-1990s. Then, after a rush to all-time highs, prices crashed by almost 50 per cent.
This time, the fall may be more moderate, and to that extent, it is good for the industry.
The pulp market that was ruling firm for about two years has now started to signs of
weakness. In the recent months, the price of north bleached softwood kraft (NBSK) pulp has
declined to $583 per tonne and producers have had difficulty in passing on a planned price
hike. A $50 per tonne hike has been put on the backburner. In addition to this factor, the
current prices are at a discount to the list price of the producers. The prices represent
a decline close to $123 per tonne from the peak levels touched in 1999-2000. In effect,
this means an effective decline of 18 per cent from the peak levels. The prices of
hardwood pulp has shown a similar underlying trend The weakness in the pulp appears to
signal the end of what was a two-year period of good prices for the pulp, paper and
paperboard industry.
The recent decline in pulp prices has been attributed to a slowdown in demand and build-up
of inventories by the end-users. The slowdown in the US, Europe and the Japanese economies
may well mean that demand levels may have to be pegged at lower levels. The pulp producers
too have been saddled with inventory which means their ability to push through price hikes
may be limited. The view expressed by the Bank of Montreal's (Canada is a major player in
the pulp industry) latest monthly report is also notable. The bank has stated that `with
pulp consumers holding up purchases in expectation of lower prices, producer inventories
have continued to rise in January well beyond the critical level, shifting pricing power
to consumers. We believe this is part of a decline over the coming months. Recent efforts
to curtail output have been unsuccessful in re-balancing the market''.
The pulp prices are significant for the paper and paperboard industry. They are a leading
indicator of what may be in store and, therefore, are of significance to the paper
industry. THOUGH the paper industry has had a spell of good revenue and earnings growth,
it is largely a price-driven trend. Volumes continue to be on the lower side. In the three
years preceding the recent bullish phase in price, volume growth dipped below five per
cent. Though it may not be obvious, demand levels in the paper industry clearly do have
linkages to the level of economic growth. In the writing and printing paper segment, the
growth rates may continue to be 5-7 per cent on a long-term basis. In the industrial paper
segment, growth rates are likely to be better and at 10-12 per cent in the long term.
The downtrend in the international prices may have a similar effect in the domestic
market. But this may be with a time lag. It may also be of a lower magnitude since on the
way up too, prices did not move up as much. But domestic producers who had put through
seven rounds of price hikes in the 1999-2000 period may now have to contend with flat
prices and a decline at a later date. The cut in import tariffs to 30 per cent and the
possibility of lower demand levels at the global level may leave the Indian market open to
more imports than in the past two years.
This could also weigh on domestic price trends. Companies such as Ballarpur Industries,
Tamil Nadu Newsprint, ITC Bhadrachalam Paperboards and West Coast Paper which have
reported healthy profitability and good earnings growth in the last two years, may have to
face the prospect of sluggish growth rates.
Aru Srivastava
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