INDIA

GENERAL ECONOMIC SITUATION OF INDIA - 2001

The National Democratic Alliance (NDA), under the leadership of Mr Atal Bihari Vajpayee, continues to lead the nation on the path of reforms for the third consecutive year.

The country faced a devastating earthquake in Gujarat on the morning of 26 January 2001. However, the whole nation, the international community and Indians abroad stood by the State of Gujarat and worked continuously in order to return to normalcy within much less time than had been anticipated.

The latter part of the year saw a devastating attack on the World Trade Centre in New York on 11 September 2001 and on Indian Parliament on 13 December 2001. The focus of the last quarter was clearly on eradicating terrorist activities in Afghanistan and installing an interim government. This has totally unified the global approach towards the fight against terrorism.

The attack on the Srinagar Assembly on 2 October 2001 and the Indian Parliament stunned the nation as it was considered to be an attack on a democratic principle. It received world condemnation. This sparked escalation of border tensions and raised prospects of a military confrontation. Diplomatic efforts to defuse the situation continue. In this endeavour all nations like the United States, the United Kingdom, Germany, France, Russia and Japan and progressive nations in the near-east like Iran and the United Arab Emirates are playing a positive role.

Economic scenario

The above-mentioned events contributed to the slowdown of the world economy, which had gone into recession even before the September attack. India could not escape the trends in recession as a fall-out.

Global economies followed a weak trend, with major countries expected to report disappointing GDP growth. The growth in global output has declined from 4.7 percent in 2000 to 2.4 percent in 2001. It reflects both the slowing economic trend and the impact of terrorism, which have resulted in greater impediments and costs to international trade.

India's GDP which was anticipated to grow at a rate of 5.6 percent has been lowered to 4.8 percent.

Due to control on oil prices at US$19/bbl, energy costs remained under control. Inflation rate dropped to 2.3 percent, an all time low.

Indian equity markets have recovered almost 16 percent during the last quarter and 24 percent from the low in September 2001.

The value of the Indian rupee against the US dollar has depreciated. The foreign exchange rate of Rs46.54 has gone up to around Rs48.71 during the period and as of February 2002.

On the positive side, the country's foreign exchange reserves (excluding gold and SDRs) are at a high of US$47 285 million as of 15 February 2002.

PERFORMANCE OF THE PAPER INDUSTRY

Present status and profitability

The pulp and paper industry presents an incoherent picture today, with mills of various sizes struggling to survive side-by-side, unlike in the Western region where for large single-machine capacity of around 100 000 tonnes per annum has become a norm. Compared to those figures, the average mill capacity in India is around 10 000 tonnes per annum. The total size of the Indian paper industry in volume terms is approximately 5.7 million tonnes per annum.

The growth rate of the industry is 5-6 percent per annum. Exports from India account for a mere 3 percent of industry volume.

While the per capita consumption has increased it is still at around 5 kg. This figure is very low when compared with the global average of 46 kg. The per capita consumption of China, Iran, Egypt and Thailand are at 26 kg, 16 kg, 13 kg and 5.5 kg, respectively.

               Note: Unorganized sectors below 10 000 t per annum were underestimated previously.

The top six players in the industry include the following:

On the product side there are four major categories:

Production, demand and supply scenario

The scenario of demand and supply position for the Indian paper industry given below is based on the following assumptions:

1. Demand for paper and board variety will move on the basis of a positive GDP growth rate. However, the rate of growth for different varieties of paper will be as follows:

• Writing and printing - 7 percent per annum

• Industrial paper - 8 percent per annum

• Specialty paper - 10 percent per annum

• Newsprint - 10 percent per annum

2. At the moment there are no big production capacities in the pipeline and as such there will be a marginal increase in the existing production capacity through modernization and higher capacity utilization. This is estimated at:

• Writing and printing - 5 percent per annum

• Industrial paper - 6 percent per annum

• Specialty paper - 7 percent per annum

• Newsprint - 2 percent per annum

Likely scenario of demand and supply position

Compounded annual growth rate for the 2000-01 to 2004-05 period (thousand t)
	2000-01	2001-02	2002-03	2003-04	2004-05
Capacity (thousand t per annum)	6 583	6 697	6 797	6 947	7 097
Capacity utilization %	73	76	79	81	84
Production	4 806	5 121	5 355	5 662	5 952
Imports	180	180	240	295	395
Exports	140	140	95	95	95
Demand	4 846	5 161	5 500	5 862	6 252

Paper: Variety wise export forecast (thousand t)
	2000-01	2001-02	2002-03	2003-04	2004-05
Writing and printing paper	105	105	80	80	80
Creamwove	30	30	20	20	20
Maplitho (including unbranded copier)	25	25	10	10	10
Coated chrome paper	15	15	15	15	15
Art paper	20	20	20	20	20
Art boards	15	15	15	15	15
Industrial paper	35	35	15	15	15
Kraft	5	5	-	-	-
Duplex (including coated and uncoated)	30	30	15	15	15
Specialty	0	0	0	0	0
Total	140	140	95	95	95

In addition to the above there is at least a capacity of over 1 million tonnes per annum in the unorganized sector having less discipline about tax and power bill payments, which comes into the market when the demand is strong.

Newsprint

Out of the total demand of 1 million tonnes, about 50 percent is imported while the balance is produced in the country. Newsprint is produced in five major mills. Three of these use wood and bamboo as raw material, one uses bagasse and one uses recycled fibre.

The health of the newspaper industry therefore largely depends on the availability and price of imported newsprint. Newsprint comes from North America, Europe, Russia and China. During 2001, large-scale imports at a very low price pulled down domestic prices over 40 percent and gave a serious setback to the newsprint manufacturing sector. The duty on newsprint continues to be only 5 percent and industries' efforts to enhance the same has not yielded any results.

Due to this, two public sector mills viz.: Nepa (60 000 tonnes per annum) and HNL (75 000 tonnes per annum) have closed down and the other mills are decreasing production of newsprint while investigating value added items like white writing printing.

Newsprint: Demand-supply forecast (thousand t)
	2000-01	2001-02	2002-03	2003-04	2004-05
Installed capacity	939	954	964	964	964
Capacity utilization*	49.5	50.0	50.7	52.0	53.3
Production	465	477	489	501	514
Imports	369	387	407	427	449
Demand	815	852	890	930	972

* All the mills require modernization and upgrading programmes to enhance capacity utilization.

Prices

	Unit	February 2001	January 2002	February 2002	Change (percent)
					Month	Year
International prices
Import prices
From Canada From Russia	US$ per t	710 725	410 400	400 390	-2.4 -2.5	-43.7 -46.2
Landed costs
From Canada From Russia	Rs per t	34 864 35 600	21 313 20 298	20 312 19 804	-4.7 -2.4	-41.7 -44.4
Domestic price
49 GSM (large mill)		30 700	22 000	22 000	0.0	-28.3
		2000-01		2001-02		Change
		(April-December)		(April-December)		(percent)
Domestic demand-supply
Production	t	422 291		436 887		3.5

Note: The percentage change figures have been calculated using the low prices.

There has been an overall decline in the selling prices as indicated above with more than 40 percent decline in newsprint prices.

Environmental protection

Raw Material

Availability of raw material (wood) is today a major issue for the paper industry. Raw materials not only cost more in India than in the rest of Asia, but availability is scarce. Moreover, with the environmental lobby becoming increasingly vocal and the government not yet having decided whether to permit industrial plantation, availability of raw material will continue to haunt Indian paper manufacturers. In anticipation of such a scenario, some of the major players over the last decade have taken some pioneering steps in social and farm forestry which will not only ensure constant availability of raw material but will create new employment opportunities in rural and tribal areas. However, in this area the country still has a long way to go in increasing yield per hectare.

The total geographical area of India is 3 287 million km² of which dense forests account for 11.17 percent and open forests for 7.95 percent.

The productivity of Indian forests is very low due to inefficient forest management, with an average value of only 0.5 cu m³ per hectare compared to an average of 2.5 m³ per hectare in Europe and the United States.

Power

Power is the important constraint in the paper industry. Most of the power was bought out from the State Electricity Boards and minimal was being produced by the mills. With pressure on the power sector, the supply position has become not only unreliable but also at an ever-increasing cost. To combat this situation all units are enhancing their captive power generation capacity from a level of 25 percent to over 90 percent. Few units have reached 100 percent. This is a very important step in higher capacity utilization with lesser energy cost. This is encouraged by financing institutions by creating lower cost, long-term finance available to these units.

Pollution Abatement

Most of the progressive mills have reduced water consumption levels by 30 percent and adopted segregation of streams to offer selective treatments for coloured and non-coloured effluents with a control over BOD and COD levels.

Some experimental work is being done on treating solid waste by way of bio-technology to convert the waste to bio-fertilizers. Results are encouraging in this direction.

Considerable improvement is being obtained in air emissions.

Profitability

In 2001, there was an 8 to 10 percent decline in paper prices, and a more than 40 percent decline in newsprint prices.

Consequently, profit margins registered a downward trend. Large wood-based mills earned operating margins between 10-20 percent while wastepaper-based mills saw a margin of 10-15 percent. Only a few mills achieved operating margins (PBILDT) over 25 percent.

Outlook

Paper industry

Globalization has become the most important message in the development of the industrial sector in India which means that industry will have to become competitive both in cost and quality.

During 2001 BILT acquired two large units: Sinar Mas (coated papers - 80 000 t per annum) and Servall (specialty coated board unit - 75 000 t per annum) taking a total group capacity close to 0.45 million tonnes per annum.

Similarly, JK Corp., which had two units, one at Orissa State (90 000 tonnes per annum) and another Central Pulp Mills (CPM) in Gujarat (60 000 tonnes per annum) both for the production of quality Maplitho and copier papers, has merged Orissa with CPM and the new combined unit is being named JK Papers Ltd.

Companies like BILT, JK Industries and ITC Bhadrachalam have focused their attention on the expansion of the paper industry. Their aim is to expand existing units as well as acquire or merge potentially profitable units. These companies will also be looking for strategic alliances overseas in view of controlling quality raw material at affordable cost on long-term arrangements, or for the introduction of modern high-yielding forestry techniques.

A number of units in the small and medium sector are being closed due to their incapacity to compete. Quite a number of units based on agro-residues are facing closure because of pollution and some of them are converting their mills to recycled fibre and manufacturing cheaper grades of paper varieties and catering niche markets.

During the next few years, industry will be seeing some upheaval in restructuring, acquisition and mergers. The paper industry is highly capital-intensive with a lower turnover to capital ratio. Realizing this, and in line with global trends, financial institutions are considering longer gestation and repayment programmes (even up to 12-13 years) with a lower interest rate. The debt equity ratio desired is 1.5:1.

Since no grassroots capacity is planned, optimization of production efficiency and profit will be the route taken by the industry. The future for efficient mills looks to be good.