This edition will take us outside the usual commentary on Australia and New Zealand. In October I was honored to be invited as a guest speaker at the 30th FAPPI Conference in Malaysia, along with invited speakers from RISI and Pöyry Group. FAPPI is the Federation of ASEAN Pulp & Paper Industries and the conference is predominately about sharing inter-country information. ASEAN has expanded somewhat from the five original founding countries, and of the 10 current members, those with a meaningful paper industry participated. These were Indonesia, Malaysia, Philippines, Thailand, and Vietnam.
Japan, Korea, and Taiwan also participate in this conference, so there was very much a pan-Asian view of the world presented at the conference.
The missing elephant in the room was China, which nevertheless was omnipresent in much of the discussion and commentary. India, perhaps a baby elephant by comparison with China, was largely absent from commentary, which reinforced the focus on China in everyone’s thinking. It is perhaps because of the dominance of China in the region that the original goals of FAPPI to reinforce and build regional cooperation seemed to be more relevant than ever.
The other issue that was of general significance, especially to Indonesia, was the perception that nongovernmental organizations (NGOs), particularly Greenpeace, were unfairly and deliberately misrepresenting the sources of wood pulped in the region. It seems that Greenpeace’s insistence on certification from the Forest Stewardship Council (FSC) means that all plantations established after 1994 are ineligible for certification. The Indonesian view is that the Greenpeace agenda is a deliberate attempt to kill off the two key growth sectors in Indonesia of pulp and paper and palm oil to protect established business and trade interests.
Many Asian countries can still boast a very healthy growth rate, but there is little doubt that all have been affected significantly by the global financial crisis and recovery has been hesitant. In some regards, the growth of the Chinese pulp and paper industry has been at the expense of these other Asian countries.
A brief overview of the situation in the participant countries helps to put the situation into perspective.
The Indonesian economy is growing at 6.5%, but this is only just ahead of inflation at 5.6%. Production has been static over the past year at around 13 million metric tons of paper and board and 8 million tons of pulp. The significance of the Greenpeace policy on plantations takes on real meaning with the announcement that a 1 million hectare plantation development will commence this year, with an expectation of five new pulp mills after 2015, effectively doubling pulp production in Indonesia.
Malaysia is also experiencing a suppressed rate of growth, declining to 4% in the second quarter of 2011, again only slightly ahead of underlying inflation (3.3%). Export industries continue to be challenged by weak conditions in other Asian countries and diminished competitiveness because of the strengthening of their domestic currency against the U.S. dollar. A total of 370,000 metric tons of new capacity in the past year have added to the challenging conditions in Malaysia.
In the Philippines, the story is similar. GDP growth is forecast at 5.5% in 2011 and inflation 4.3%. GDP growth in 2010 had recovered significantly from the global financial crisis but appears to be retreating. Although 2010 saw a strong recovery in paper consumption, this has been significantly satisfied by imports and higher use of installed capacity. There seemed to be little appetite for significant new investment.
Thailand was reeling from the devastating floods at the time of the conference and most of the Thai delegation was unable to attend the conference. The condition of the Thai pulp and paper industry seemed similar to that of the other Asian countries. GDP growth has been erratic, recovering from negative growth in 2009 to nearly 8% in 2010, but forecast to decline to less than 4% in 2011, matching the forecast inflation rate. Although the paper and paperboard consumption rate grew strongly at 12%, only 5% of the growth was satisfied domestically and capacity utilization is still on the low side. These statistics seem to reflect a rebalancing of demand from recent downturns and the forward picture is for growth more consistent with, but slightly ahead of GDP growth.
The situation in Vietnam was described as serious. GDP growth in Vietnam for the first half of 2011 was about 5.6%, but inflation was a troubling 19%. This is reflected in a credit interest rate of about 20%, which is seriously affecting investment prospects for the pulp and paper industry. The paradox is that paper consumption is growing strongly (up 13%) and production is up a significant 16%. Nevertheless, the industry is still very much a developing sector. Most pulp mills are very small and paper mills are generally much smaller than in neighboring countries; however, growth has been significant and capacity now exceeds 2 million metric tons. The unit size of paper machines is also increasing, but in general the upstream and downstream industry is reflective of a developing economy – albeit one very much on the move.
Taiwan’s economy is showing trends similar to those of its non-China neighbors. GDP is increasing significantly, but the rate of growth in 2011 will retreat quite significantly from 2010. The good news is that inflation is very much under control. Paper and paperboard production has been flat or declining, but consumption grew strongly in 2010 after significant annual declines since 2006.
Not surprisingly, Japan’s report was dominated by the consequences of the earthquake and tsunami in March, 2011. This had a large impact on industrial production, which has yet to totally recover. Real GDP growth had recovered from two years of negative growth to 2.3% in 2010. The effects of the natural disaster can be gauged by the forward estimate of 0.5% for 2011.
Paper and paperboard demand had been essentially flat for the last decade but declined dramatically by about 13% in 2009. Subsequent recovery in 2010 was minimal. Despite the earthquake, the first half of 2011 has shown a further modest increase, although demand is still well below the former levels. Of course, much of the increased demand has been a consequence of the reconstruction effort. Most operations affected by the earthquake were able to resume operations quite quickly, but the large Nippon Paper mill at Ishinomaki (capacity almost 1 million metric tons) was hard hit and has been progressively resuming operations since September.
The experience in Korea is similar to that of the other countries reporting to this conference. Korea has an economy reflective of developed countries. It recorded GDP growth rates in the period before the global financial crisis of about 5% annually, plunging to a negative 4% in 2009 and then overshot to plus 8% in 2010. The forecast for 2011 is a more modest 3.4%.
The capacity of the Korean paper and paperboard industry has not increased over the past 4 years, but demand has recovered somewhat in 2010 in line with the recovery of the economy. Consequently, both imports and exports have declined to maintain capacity utilization at a high level.
The industry in Korea does face the challenge of meeting significant targets for greenhouse emission reduction over the next few years, which has the potential to stifle capacity growth for the foreseeable future.
Cooperation between Asian countries was in clear evidence with a program to compile recovered paper and energy use data for all of the Asian countries participating in the FAPPI conference. This cooperative program has been in place since 2008. Much of the work has been directed at harmonizing data and information. In the future, this information should help Asia optimize energy and recovered paper usage.
At around 64 million metric tons, the combined paper and paperboard production for the countries participating in this conference was significant, making it collectively the third largest manufacturing region after China and the United States. The growth potential for Vietnam and Indonesia, in particular, is significant, and it could be expected that collectively this bloc will be the second largest producer of paper after China within a few years.
Of course Asia still does not operate like a European Union, and the cooperative spirit evident at this conference will not necessarily translate into a unified market. Asian countries do not operate to a free trade agenda, and as China forges ahead, other Asian countries might become even more intransigent to protect their own industries. In such a scenario it seems likely that China and possibly India ultimately will be the real winners.