Thailand’s paper industry: Predictions difficult, potential there

If you want to take the pulse of Thailand’s pulp and paper industry, the Thai economy is the wrist to grab for a beat. “There is some lag, but Thailand’s GDP is really like an index for how the paper industry is doing,” says Price and Pierce (Thailand) project manager Nillachai Damrongkijudom.

Unfortunately, the Thai economy has seen little growth this year, with falling demand spurred by the slowing US economy having an impact by the end of 2000. For Q1 2001, a 0.1 per cent decline in GDP was measured by the National Economic and Social Development Board (NESDB), while Q2 saw quarter-on-quarter growth of 0.9 per cent, contributing to year-on-year growth of 1.9 per cent. The NESDB recently downgraded its forecast for 2001 from two to three per cent, to 1.5 to two per cent, while the Bank of Thailand forecast is for 1.6 to 1.8 per cent.

The world is now focused on the global aftermath of the September 11 terrorist attacks in the US, which could see anything from war to at least recession occurring. In case of either, the inevitable rising oil prices, declining exports and falling tourist arrivals would have a direct and dire impact on Thailand. Bangkok Bank has already revised its growth forecast downwards following the attacks – the only institution to do so at time of going to press – to 0.7 to 1.5 per cent.

The impending global gloom comes just after Thailand’s pulp and paper industries seem to have clawed their way out of the Asian crisis. From 1990 to 1997, the Thailand Pulp and Paper Industries Association (TPPIA) estimates that the industries saw annual capacity expansion of six to 10 per cent and operations close to maximum capacity. With the devaluation of the baht in mid-1997, pulp and paper companies saw their debt repayments escalate, while domestic consumption for paper fell – from 38kg to 31kg per head from 1997 to 1999 – and world prices stumbled.

Now, at least in isolation, it seems the worst is over. Domestic pulp and paper consumption for 2000 was estimated by the TPPIA to have grown five per cent from 1999 to 2.8 million tons – close to the 1996 consumption level of 2.9 million tons. Capacity expanded by six per cent to 4.6 million tons, comprised of pulp mill capacity of 956,000 tons (with a utilisation rate of 80 per cent), and paper and board mill capacity of 3.7 million tons (with a utilisation rate of 63 per cent).

Rising domestic demand contributed to a fall in exports for 2000 of almost 20 per cent. Thailand’s main export markets are China, Hong Kong, Malaysia, Singapore, USA, Philippines, Taiwan and Australia.

Over the same period, paper imports – from Indonesia, Japan, US, Sweden, Taiwan, Finland, Korea, Russia, New Zealand and Singapore – rose by 21.4 per cent to 420,179 tons, due to a domestic shortfall in newsprint and high quality printing/writing paper.

Looking ahead, the TPPIA expects pulp consumption to increase from 868,000 tons in 2000 to 1.2 million tonnes in 2004, while paper consumption is expected to reach 2.4 million tons by 2004.

In regards to pulp, prices for the first half of 2001 prices “were quite poor” according to a former analyst, falling from US$500 per ton in January to US$400 per ton in June, due to excess capacity and dumping by Indonesia. “Most companies expect a turnaround in prices next year, so they’re delaying any capacity expansion,” he says.

Phoenix Pulp and Paper’s chief financial officer Mr Banthia As concurs with this opinion, saying that the Thai companies that had been planning for expansion are reconsidering in light of falling prices. “Self-sufficient companies [ie those that have overcome crisis period debt problems] had expansions planned, but they’re watching for something concrete to emerge before they go ahead,” he says. “Thai companies will have no problems surviving, but their capacity is limited because if their old debts are continuing, then commitment to new funds is difficult.”

Jakarta-based UBS Warburg analyst Mr Ray Anthony agrees that one key for Thailand’s pulp and paper industry expansion is affordable financing to allow a reasonable return on investment. “But I’m not entirely convinced the Thai banks are in a position to lend that kind of money immediately.”

Regionally Mr Anthony says that Thailand’s pulp industry fares relatively better than its paper industry, as it uses predominantly single-species wood fibre. “Indonesians and the Chinese use a varied mix of either tropical hardwood fibre or bagasse. Advance Agro [Thailand’s largest pulp producer] and Phoenix [the second largest] have been able to cultivate eucalyptus wood for the majority of their wood fibre needs, and thus they produce a better quality pulp.”

On the paper side, Mr Anthony isn’t as sanguine. “Thailand is at a disadvantage regionally mainly due to the size of its machinery. With many regional companies building 350K-plus ton per annum paper machines, the unit cost per ton of paper favours the large producers. In any event, much of Thailand’s paper production is sold domestically and thus their focus has not yet been towards the export markets – yet.”

But it is to this front that Thai more producers are now turning their attention.

“Over the next two years I think companies will review their spending on technology,” says Price and Pierce’s Mr Nillachai. “The big players will aim to export more – they’ve started to change their strategy to focus on exports over the past two years while recovering from the crisis, and while world paper prices were up [throughout 1999 and 2000].”

Mr Somboon Chuchawal, president of the TPPIA, and [Sahana, please check caption sent with photos] of Siam Pulp and Paper Public Limited Company (PCL), says that to export more, companies need to improve the quality of their products. “That’s a must,” he says. “Secondly, they need to develop good distribution channels. And thirdly, they need to be big enough.”

The importance of size leads Mr Somboon to speculate that the industry will undergo a consolidation period in the future. “There are opportunities for good companies within Asia overall to grow larger – but problem companies need to restructure. The way to survive is to consolidate, so they can take advantage of size, scale and scope.”

For Thailand, consolidation already appears to be starting, as earlier this year Siam Pulp and Paper PCL considered taking a stake in Phoenix Pulp and Paper PCL to bolster their own supply – but a final outcome hasn’t yet occurred.

Mr Pattanapong Cholvanich, secretary general of the TPPIA, and [please check caption] of Siam Pulp and Paper PCL, says Thailand’s export opportunities are enhanced because the country has its own forests and thus pulp. Then there’s relative regional quality. “China has a lot of paper mills, but quality- wise they’re not up to world standard – Thailand’s quality is better. They have many old machines still in operation that they’ll need to shut down.”

Specifically, he identifies growing demand for brown paper from China and for printing and writing paper from Europe and China. The US – where the focus has been on virgin pulp and paper facilities rather than recycled pulp – could also be a growth area, as could the Middle East.

The essential challenges, then, are to keep costs down but quality up. “We are pretty sure that with our costs in Thailand, we can compete with other countries,” says Mr Pattanapong. “But a number of Thai producers do need to improve in terms of cost and quality. New investment needs to focus on quality improvement – not just capacity expansion.”

UBS Warburg‘s Mr Anthony believes Thailand has an opportunity to become a major presence in the region. “Much of the investment in Indonesia has ebbed due to various increased risks. Malaysia has problems with sustainable wood resources. China has yet to commit to building up a modern pulp and paper industry – outside of investment from Asia Pulp Paper,” he says. “The growth area for capacity could certainly be focused in Thailand for the next few years, while other regional players wait for their domestic economies and issues to improve.”

Other factors could affect Thailand’s pulp and paper industry growth. In line with the Asean Free Trade Agreement, import tariffs for paper products are to be reduced to between zero and five per cent, depending on the grade, by 2003. Although this initially raised concern among the TPPIA, they are now less vocal about the potential impact.

A more persistent – and highly important – bugbear are the environmental concerns that continue to be raised domestically, and are at least partly affecting decisions to expand pulp- producing capacity. Advanced Agro PCL had recently been considering adding 700,000 tons per year capacity to support demand from China –which would close to double Thailand’s overall production – while Phoenix Pulp and Paper was considering adding 150-300,000 ton per year solely for export. Both companies have suspended plans in light of environmental considerations, plus falling prices and difficulties in procuring funding.

At a more general level, Dr Thanwa Jitsanguan, head of Kasetsart University’s department of agricultural and resource economics, argues that the polluter pays principle be followed more closely. “Varied incentives, such as emission charges or pollution management fees, should be strictly enforced, both to conserve the public environment, and to encourage the sustainable production of this industry.”

In response to the particular debates over the negative impact eucalyptus plantations are having in Thailand, Dr Thanwa believes research should be done to help consensus be reached. “Research and development is one of key factors needed to be invested in the paper industry, especially in increasing tree plantation for pulp industries,” he says. “Data and information should be collected to make clear the environmental impact from eucalyptus trees.”

Besides environmental management and control, Dr Thanwa believes other factors are important to the pulp and paper industry’s future, such as stimulating domestic market demand for paper products, and growing more pulp domestically to replace imports. “More importantly, policy makers should understand clearly that paper is an important foundation for many value-added products,” he says. “Paper is obviously a necessary ingredient to increase the value of many other products and services in the economy.”

The economy and paper each, therefore, affect the other.

With recent developments in the US at the forefront of people’s minds, Price and Pierce’s Mr Nillachai reflected the sentiments of most when he said the industry will just have to wait and see what the future holds. “The industry is coping with the economic recovery – they’ve climbed out of the bottom and are doing better. But really, it’s difficult to predict anything now.”

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