Budget impact on paper industry
The budget proposals had a largely neutral impact on the paper industry particularly the wood based one. The increase in excise outgo by one per cent (from four to five per cent) will have some impact on the industry. However the Finance Minister needs appreciation for withdrawing the stimulus measures in terms of fiscal incentives accorded to the industry in a judicious manner. That has come as a big positive. Another positive for the paper industry is the continued thrust on education through Sarva Shiksha Abhiyan.
What was also reassuring was the fact that there was no decrease in the import duties on paper. Over the last couple of years, India has been the key target export market for China and Indonesia and the dumping of cheap imports has been hurting the interests of domestic industry.
In another welcome move, the custom duty on waste paper import has been halved from 5 % to 2.5%. This will definitely help the waste paper based mills in the country. However the industry had wanted a total withdrawal of import duty on waste paper and wood pulp as India is a fibre deficient country. Currently 0.6 million tonnes of wood pulp and 3.0 million tonnes of waste paper are imported by the domestic industry.
The greatest challenge facing the industry is the rising cost of raw materials – be it wood or waste paper. Raw material component alone in paper production constitutes around 40% of the cost. The cost of raw materials to Indian players is most uncompetitive in comparison to paper produces in Brazil, Indonesia, China, Thailand, Canada and Scandinavia as these countries have put industrial plantation policies to access wood in a cost effective manner. Similarly India does not have a robust system of waste paper collection, sorting and grading.
Till a pro-active policy alike other major paper producing countries is initiated by the Govt to encourage industrial plantation as well as waste paper collection, wood pulp and waste paper imports are inevitable. IPMA therefore wanted a total withdrawal of import duty on wood pulp and waste paper. Unfortunately the import duty on import of wood pulp has been kept intact and on waste paper also it has been only partially withdrawn.
No announcement on implementation of Technology Upgradation Fund (TUF) in the budget that the industry was keenly expecting however came as a dampener. It is critical for the industry to upgrade technology across the board for it to be globally competitive.
Paper industry abuzz with new energy
The last few years have seen Indian companies even in traditional sectors looking beyond domestic confines. The resilience that India has shown in the wake of the economic recession has rubbed off on corporate sector. With renewed enthusiasm and confidence, Indian Inc is looking at the world as a global village in true sense of the term. Paper industry is no exception. Over the past few months, the corporate sector is abuzz with news on expansions, acquisitions and fund-riasing by companies in paper industry. The M&A activity is catching up in paper industry as well.
Ballarpur Industries’ recent move to list its overseas unit on foreign bourses provided an incisive insight on the ambitiousness of Indian paper companies. India is the fastest growing paper market in the world with growth in the range of 8-10 %. Little wonder then, Indian paper industry has elicited the interest of international majors. The premium over the current market prices that International Paper has offered for a majority stake in Andhra Pradesh Paper Mills in one bold stroke has helped raise the valuation of the paper industry in India. Given the fact that paper industry has been performing well in India, it richly deserves this valuation.
Most companies in the paper industry have been unfortunately undervalued and have been trading in the band of five-six times of their FY 11 earnings. However the International paper – APPM deal will help reduce the valuation gap between Indian paper firms’ stocks and their international counterparts. Low valuations have also been coming in the way of full blossoming of the paper industry in India. Improvement in domestic valuation will help companies raise more funds for expansion and technology upgradation.
The Indian growth story is intact. The Indian paper companies have been fuelling the growth story. Higher valuation will only help in accelerating the process.
Another significant aspect of the International Paper-APPM deal is that it will help bring international practices and latest technologies to the country to the benefit of entire paper industry in India.
Bamboo as a grass and its impact on the paper industry
The Ministry of Environment & Forests (MoEF) has recently taken bamboo off the timber list allowing tribals living in the notified forest areas to plant and cut bamboo without any permission from the foresters. Bamboo will now be considered as ‘Grass’ and as a minor forest produce (MFN). The notification tantamount to a change from organized, regulated system of bamboo production and sale to a deregulated system in which the control has gone out of the hands of the State Forest Development Corporations (SFDCs) or Forest Department.
Interestingly, the move to take out bamboo out of the category of timber has been hailed by some of the NGOs as significant attempt to mitigate the raw material constraints that the industry is facing.
There is no denying the fact that over the years bamboo as a raw material has come to account for a very low percentage of total raw material used by the paper industry. The entire paper industry uses less than one million tonnes of bamboo per annum; 70% or more is being used by the units of Public Sector Hindustan Paper Corporation Limited.
Undoubtedly bamboo offers good long fibre for paper making; however, silica poses severe problem to the chemistry of paper making and adds to the manufacturing cost. The argument proffered in favour of bamboo is that it’s replenishable, so is wood. It is also an accepted fact that wood is far more sustainable for, the black liquor as a bio mass byproduct is used as an alternate fuel by the power intensive paper industry. Accordingly, the increasing preference of the industry is towards pulpable varieties of wood and so is the industry initiative towards agro forestry in which pulpable varieties of wood are grown on degraded lands of marginal farmers.
At the same time the MoEF’s recent notification for change in nomenclature has left many questions unanswered. There is a general apprehension that it may lead to a situation in which none of the stakeholders – tribal communities, government and industry -stand to benefit.
The points that need to be pondered are many. First of all, who will regulate the prices? So far the government was protecting the rights of tribal communities by offering at least the minimum wages. With no regulation from the Govt, are tribals in a position to face the vagaries of free market economy. Under the present system the large volumes of bamboo are harvested and collected in a 2-3 stage collection process under the supervision and administration of Forest Deptt. before disposal to various users. Will the tribal communities be able to organize themselves and generate/ collect enough quantities at key locations as the demand from the users like basket makers, construction industry and paper mills is large. Also how will the user industries make payments to such a large number of tribals. In all likelihood the tribal communities might take the help of middlemen who will tend to exploit both the tribals and buyers of bamboo. In effect, the control might pass in the hands of middlemen from the government.
Another issue that needs serious consideration is whether tribals will follow the silvicultural rules in letter and spirit. Under silvicultural rules, only dry bamboos need to be cut. These rules have been laid down by India’s foresters by years of learning to sustainably manage large, natural bamboo forest areas. However since the industry buys bamboo by weight and green bamboo weighs more, the communities might be tempted to cut green bamboo and leave dry bamboo at site causing a fire threat to the entire forest area. Moreover the tribals would tend to harvest the bamboo available at foot hills or at easier forest locations and may not harvest the entire, “silviculturally available”, bamboo during a season. The lower bamboo productivity is neither in the interest of tribals nor the govt.
User Industry is all for protection of rights of tribal communities and equipping them with resources. However it will do a lot of good to the stakeholders – tribals, Govt and the Industry if the above-discussed issues are well considered.
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IPMA Newsletter May 2011
