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Indian Paper Industry to Consolidate?

Post the acquisition of Andhra Pradesh Paper Mill by International Paper Ltd, given the smaller size of operations of Indian paper companies compared to international players and surge in demand for paper in India, Indian companies may look to consolidate.

Read why…

The Indian paper industry is estimated to be worth over Rs 25,000 crore. Based on the usage of paper, the industry is broadly classified into paper, paperboards and newsprint. Currently, about 50% of the total production is based on recycled or waste-paper, 25% based on agro-fibre and 25% based on wood, according to the Indian Agro & Recycled Paper Mills Association.

In India, the peak season for paper industry begins during Diwali and ends around mid-July, after the printing of school and college text books and notebook gets over.

Raw material prices rising

American Northern Bleached Softwood Kraft (NBSK) is used by the industry as a benchmark grade for pulp. Its prices rose by 9% to $977 per tonne in March 2011.

Prices of pulp were falling on a month-on-month basis till February 2011. However, following the earthquake in Japan, prices rose in March compared to the previous month.

Rapid increase in domestic demand

Until last financial year, there was an abundance of supply in the Indian market due to additional capacities by large paper companies like Ballarpur Industries, Tamil Nadu Newsprint & Paper (TNPL) and West Coast. This restricted the paper companies from passing on the rise in raw material prices to the end consumers.

While there are no official statistics available about paper consumption, production trends marginally reflect demand. During April-February 2010-11, production of paper & paper board rose by 4.9% over and above a high base of 8.5%. Growth in output of corrugated boxes/cartons has been rapid at 15.3%.

With domestic demand rising at robust pace, demand is likely to be catching up with supply. This seems so because the paper companies managed to raise prices three times during the financial year 2010-11 and it was absorbed by the consumers. This is probably an indicator that the paper industry is moving from excess supply (in which case consumers are not willing to absorb price hike) to an improving demand situation.


The US newsprint prices averaged 15.7% higher at $627 per tonne in March 2011. During the year 2010-11, international newsprint prices recovered after declining in the previous year, backed by healthy demand.

Demand for newsprint is dependent on the print media industry. The newsprint production in April 2010- January 2011 grew by 3.2%, after a 15.3% decline a year ago. The growth in the newsprint production has been modest because majority of the demand is being met by imports. Newsprint imports in the country are high due to lower quality of domestic newsprint and low waste paper availability which is the key raw material for making newsprint.

Paper companies raise prices

Domestic companies have raised prices three times during the financial year 2010-11. The increase was due to high cost of raw materials such as coal and furnace oil.

An article in the BS mentioned that on an average, mills consume 1.5 tonnes of coal to manufacture a tonne of paper. Coal India has hiked prices by 30% from March 1, 2011, which will increase cost by Rs 400-700 a tonne for various firms, depending on the mill location.

Industry sales to rise

Increase in spending by the Government on school education is likely to boost demand for writing paper from the academic segment.  Also, with a healthy recovery in the economy, demand for packaging paper and paper used by corporate offices are expected to improve. This will result in higher sales volumes.

Rising prices will enable company to garner higher realisations resulting in higher sales for the industry. A sharp rise in raw material costs (wood & pulp and coal) and freight costs may dent operating profits and exert downward pressure on profitability.

International Paper picks stake in Andhra Pradesh Paper

NYSE-listed International Paper has entered into agreements with L.N. Bangur, and related family members and affiliates to purchase the majority stake in Andhra Pradesh Paper Mills. It would pay $257 million for buying a 53.5% stake in Andhra Pradesh Paper Mills. The US-based company will also pay $62 million as a non-compete fee and aims to own a 75% stake in AP Paper by September.

APPM is one of the top five paper manufacturers in India (by sales of FY 2010), with two mills and a combined capacity of about 2.5 lakh tonnes of uncoated free sheet paper annually.

While the stock price of AP Paper on the BSE on March 29, 2011 was Rs 197, the world’s largest paper company is paying about Rs 542 per share, which is over two-and-a-half times the then ruling price, for a controlling stake in the company.

Return on Capital (RoC) for global players in around 4% to 5%, Asia around 6% to 7% while RoC for Indian companies is more than 12%, according to the data shared by the Indian paper companies with the media. However, reasons for APPM being chosen over its larger counterparts is yet to be known. Also, the company has its presence in the Chinese market, it could have also looked at other emerging Asian economies like Indonesia and Malaysia who have better access to raw materials.

Hence, post the acquisition of APPM, given the smaller size of operations of Indian paper companies compared to international players and surge in demand for paper in India, Indian companies may look to consolidate.

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