For paper manufacturers 2012 has been full of mixed blessings.
They were faced with high input prices and pressure on margins, given their inability to pass on costs in a slow market. On a positive note, though, the market has absorbed the expanded capacities and new supplies in printing and writing paper, demand is set to pick up towards the year-end and things are not as bad as in 2011. A look at the stock prices of leading paper mills is an indicator of the trend.
In mid-December 2011, stock prices of all paper mills were ruling close to the year’s lows. Now their share prices are closer to the year’s highs.
Challenging year
The mood, however, is sombre across the industry.
“Broadly, the year has been challenging,” says Pradeep Dhobale, Executive Director, ITC. The industry’s fortunes are closely linked to economic growth, and things have been slow, he said.
There has been a substantial increase in coal prices and shortage in supply, pulp-wood prices have increased considerably, along with other inputs, such as chemicals. With the market down, there is a “slight pressure on margins,” he said.
But in a 12-million-tonne-a-year market, even 6 per cent growth means an additional consumption of about 700,000 tonnes of paper. That is substantial by any standards and the expansions effected over the last three years has been “more or less absorbed,” Dhobale said.
A senior executive in a large south-based mill pointed out that between 2008 and 2010 the large paper mills had added over 16 lakh tonnes of printing and writing paper capacity.
This was a 30-40 per cent jump over the prevailing capacities then. This had contributed to the slump for manufacturers in 2011.
But the market has absorbed the capacities and the inventory build-up noticed in December 2011 is absent now.
Harshpati Singhania, Managing Director, JK Paper, said the long term is “good, for a variety of reasons.” The Government’s focus on the education sector and growth in the economy will drive consumption of all grades of paper.
“The demand drivers are all intact,” he said.
Long-term view
The financial results of most paper companies have been ‘troublesome.’ This has been primarily due to the unrelenting increase in cost of raw material and inputs, including coal and pulp wood. The costs could not adequately be recovered from the market.
“The demand is OK, but the issue is more about input cost squeeze,” Singhania said.
According to industry sources, mills have hiked printing and writing paper prices by about Rs 2,000 a tonne in December to Rs 54,000.