New China

Pulp & Paper Canada
September 30, 2008
By Pulp & Paper Canada

China is the second largest economy in the world, after the United States. And, as the old TV commercial pointed out, if you are No. 2, you try harder. By all accounts China has done well. The country's economy grew at a hyper rate of 11.4% in 2007, on top of a sustained average annual growth of 9.5% between 2001 and 2005. China's GDP is now $7 trillion US, representing more than 10% of the world's global GDP of just over $65 trillion US (the United States has a $14 trillion economy).

And, yet, for all its admirable progress toward a market economy, China is still officially a communist state, producing five year plans, holding no free elections, not allowing freedom of assembly or freedom of speech, and monitoring the daily movements of its citizens and foreigners.

It's true China, under President Hu Jintao's leadership in the last eight years, has moved away from its economic strategy of the late 1980s and early 90s, when it practiced a more rigorous form of central state planning. Yet, it suffers a host of problems common to an economy that has expanded too quickly, notably from an agrarian society to an urban industrialized one.

A rising middle-class is likely happy about the changes, reaping the benefits of a Western-style consumer economy, as are its 100 or so billionaires, many of whom are under 50 and are making fortunes in the burgeoning stock market. This is New China.

"In New China, you will find some of the largest, most sophisticated paper machines in the world," said Clive Suckling, global leader, forest, paper and packaging for PricewaterhouseCoopers in London, England.

The two Chinas

Despite the changes, New China rubs against Old China. The Asian nation has some daunting challenges to overcome, not the least of which are environmental problems, illegal logging, fibre supply and a growing gap between rich and poor.

"You have an odd mix in China," said David Cohen, professor at University of British Columbia's department of wood science in the faculty of forestry in Vancouver.

Cohen carried out a lot of work in China in the 1990s. "Take, for example, a plywood plant, where you have people putting together 10 sheets a day in their backyard, competing against sophisticated industrial plants."

But these small operations will eventually close, unable to compete against behemoths like Asia Pulp and Paper (APP), Shandong Chenming Paper and Nine Dragons Paper.

Here are the numbers for the largest mills in New China:

Shandong Chenming Paper Mill produces high-quality art base paper 40-160 g/m and high-quality LWC 55-80 g/m. It reported revenues of $2 billion US and a net income of $128 million US in 2007.

Nine Dragons Paper Company is run by Yan Cheung, a self-made billionaire entrepreneur, who is among the richest women in China. ND Paper's Nine Dragons 2.4-million-square-metre complex in Dongguan, Guangdong Province is the most concentrated containerboard production site in the world, producing 7.75 million tons in 2008. It reported revenues of $1.3 billion US in 2007 and a net income of $264 million US, generating an impressive 13% return on capital employed.

Shandong Huatai Paper Company Ltd. is China's leading newsprint producer, with an annual production capacity of 1.2 million tons, about half the national total. The mills, located in Shandong province, contain Voith paper machines. Huatai PM 11, one of the most modern newsprint lines in the world and largest in China, was commissioned at the end of 2005. PM 12 came online in October 2006. The company reported revenues of $796 million US and a net income of $66 million US in 2007.

One of the things that strikes forestry analysts is the lack of consolidation in China. "You don't see Asian Pulp and Paper and Shandong Chenming Paper Mill getting together to discuss consolidation," said PwC's Suckling. "But there is a type of consolidation going on in China, as tiny efficient mills are being closed because they are such high polluters and produce low-quality paper." According to industry website researchinchina.com,nearly 1,700 mills were shut in 2007.

China's official unemployment rate of 4% would be far higher if not for government intervention to prop up the economy.

"There is a need to create about 20 million jobs annually to minimize public unrest," Cohen said. "Not everyone has benefited from the opening of the economy in China, and public unrest has increased to 74,000 cases of mass protest, up from 10,000 a decade earlier."

Not all 1.3 billion Chinese share in the miracle of China's growth and prosperity. Estimates say between 56 million and 120 million people live in poverty, earning less than $1 a day, and having no easy access to drinking water. China's GDP is $5,300, much lower than Finland at $35,300, Canada at $38,400, and the U. S. at $45,800.

Bear in mind that numbers emanating from Chinese state agencies are generally unreliable. "It's a difficult place to do research, because first, people tell you what they think they are supposed to tell you," Cohen said. "And if that doesn't work, they will tell you what they think you would want to hear."

China's state agencies report that it produced 77.9 million tons of paper and paperboard in 2007, valued at about $53 billion US, and $2.5 billion US worth of pulp -most of it for domestic consumption. It imported 4 million tons of paper and paperboard, valued at $540 million US, and exported 4.76 million tons of paper and paperboard, worth $586 million US, according to state agencies.

Plantations and fibre

Finding enough fibre is a continuous concern for Chinese papermakers. To meet its domestic production needs, China has imported 8 million tons of pulp, the majority coming from the U. S. and Canada. It has also imported 23 million tons of waste paper or recovered fibre, chiefly from the U. S., England and Japan. "U. S. waste paper is favoured, chiefly because of the volume and the good quality," Suckling said.

It can't yet rely on its forest plantations, which consist of between 20 million and 53 million hectares of trees and plants - the precise number hard to determine. Most are young trees and bamboo plants located in southwest China, currently too immature to use as fibre. The hope is that species such as bamboo and eucalyptus will eventually supply China's domestic needs, according to Suckling.

"Chinese officials, for years, have been boldly predicting that one day it would be self-sufficient in fibre, which is nonsense, because the land is unavailable for that," he said.

And to make matters worse, last winter's snowstorms damaged a total of 17.3 million hectares of forests, about one-tenth of China's forest cover. The State Forestry Administration, a government agency, estimates the damage to snow-laden trees totaled about $2.5 billion US -most of it affecting the bamboo crop.

Yet, China's work in the labs may produce a solution. A part of the forest plantations has been set aside for genetically modified species. "They have planted more than 1,000 hectares of genetically modified trees," Cohen said. "These are trees that can grow in very acidic soil."

It is also looking to sub-Saharan Africa, says the Daily Mail, a British publication. "Reminiscent of the West's imperial push in the 18th and 19th centuries -but on a much more dramatic, determined scale - China's rulers believe Africa can become a 'satellite' state, solving its own problems of over-population and shortage of natural resources at a stroke." It goes on to say: "Pristine forests are being destroyed, with China taking up to 70% of all timber from Africa. (See sidebar, Wal-Mart getting tough on illegal lumber)

Building new mills

Over the past decade investment banks have put in some $40 billion in pulp mills, as demand for paper has soared. Some industry analysts foresee over $50 billion in new investment by 2015, much of it in Brazil, China an d Indonesia.

Yet in China, most of the investment will come internally. China, perhaps surprisingly, has not had much foreign investment. "There's been UPM, Stora Enso and International Paper," Suckling said. "The Chinese government said that many of these industrial sectors, like forestry, were strategic sectors where local companies were conferred advantages that foreign companies could not gain."

Some notable mill projects include:

Asia Pulp and Paper: one of the world's largest paper companies, with an estimated $10 billion US in assets. It plans to invest $1.8 billion to build a 1.6-million ton paper mill in the southern island province of Hainan, which is expected to go online in 2009. APP owns 17 pulp and paper companies in China and more than 20 forestry centres, with an annual production capacity of over 5 million tons. It has been investigated for dubious forestry practices, including illegal logging.

Orient Paper Inc.: one of China's largest paper manufacturers, plans to build a new paper mill in Baoding, Hebei, in the second half of 2008, with an annual production of 1.2 million tons. The 2-million-square- metre facility will produce mainly corrugated paper, offset paper and writing paper. Zhenyong Liu, CEO of Orient Paper, said: "It is going to be a very large facility that will enable us to compete with the biggest paper businesses in China, as well as the rest of the world."

Environmental concerns

One of the most evident problems China faces is the dense smog found in such large industrialized centres as Beijing and Shanghai. "That's one of the reasons that I don't travel to China anymore," Cohen said. "My eyes can't take it."

China has not met any of its environmental targets, he pointed out.

"They make a lot of plans, but it's very much lip service," Cohen said.

Unless China finds a way to clean up its coal plants and the thousands of factories that burn coal, pollution will soar both at home and abroad. And it already has: the sulphur dioxide produced in coal combustion poses an immediate threat to the health of China's citizens, contributing to about 400,000 premature deaths a year. It also causes acid rain that poisons lakes, rivers, forests and crops.

China will have to find a Chinese solution to its internal problems, a recent article in The Economist stated. "Those concerns are certainly prompting the government to reflect on what sort of economic path it wants to pursue. So far, its efforts to temper economic growth, encourage energy efficiency and wean the country off heavy industry have had little effect. But continued failure would eventually make China a less prosperous and more unstable place," the article said.

If China has done well, as many say it has, it has done so by dint of hard work, by investing in modern machinery from the west, by reaping resources from Africa, east Asia and elsewhere, and by generally ignoring the world's complaints about China's lack of human rights, environmental progress and western ideas of right and wrong. That formula has worked, at least for now.

PPC

Perry J. Greenbaum, a Montreal-based freelance writer, has been covering the forestry sector since 1996. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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Contacts:

David Cohen, professor University Of British Columbia Department of Wood Science, Faculty of Forestry, Fourth Floor, Forest Sciences Centre #2900 - 2424 Main Mall, Vancouver, B.C., V6T 1Z4

Tel: (604) 822-6716

Fax: (604) 822-9104

This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Clive Suckling, global leader, forest, paper & packaging, PricewaterhouseCoopers London, England

Tel: 44 (20) 7213 4887

References:

1. CIA World Factbook: China, www.cia.gov/library/publications/the-world-factbook/geos/ch.html (2008).

2. Malone, A., How China's taking over Africa, and why the West should be VERY worried, Daily Mail, Julyv 17, 2008. (www.mailonsunday.co.uk/news/worldnews/article-1036105/How-Chinas-taking-Africa-West-VERY-worried.html)

3. Rainforests vanishing as timber demand surges, Economic Times (India), April 27, 2008. (http://economictimes.indiatimes.com/articleshow/msid-2987110,prtpage-1.cms)

4. Sala-I-Martin, X., Blanke, J., et al, The Global Competitiveness Report 2007-2008, http://www.gcr.weforum.org/, Geneva: World Economic Forum (2008).

5. Wal-Mart pledges to phase out illegal lumber, www.businessgreen.com, July 15, 2008.

6. China Loses one-tenth of forest to snow havoc, Chinadaily.com., Feb. 9, 2008. www.chinadaily.com.

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Wal-Mart getting tough on illegal lumber

The world's largest retailer, Wal-Mart, says it plans to phase out use of illegal timber in its products and increase the proportion of sustainably certified wood products that it sources. The announcement came as the retail giant confirmed it has joined the World Wildlife Fund (WWF)'s Global Forest and Trade Network, an initiative designed to help protect threatened forests.

The illegal timber trade, fuelled by poverty and corruption, is rife in much of Asia, where 78% of forests are state-owned and often managed by the armed forces, and not the people who live in or near them, experts point out.

The move is the latest in a series of programs from Wal-Mart designed to help reduce the environmental effect of its supply chain. The company last year launched a program requiring many of its largest suppliers to report on their environmental performance. Earlier this year, Wal-Mart announced it was extending the program to include many of its Chinese suppliers.

"One of our goals at Wal-Mart is to sell products that sustain and protect our resources," said Matt Kistler, Wal-Mart's senior vice president of sustainability. "By joining the GFTN, we can further this goal by providing our customers with a reliable supply of wood products that come from responsibly managed forests."

WWF said Wal-Mart sources wood from some of the most biologically diverse regions, including the Amazon, Russian far east, northern China, Indonesia and the Mekong region of Southeast Asia, and, as such, the move represents a major breakthrough.

Under the terms of its membership, Wal-Mart has agreed to undertake a complete assessment of where its wood furniture is sourced and whether the timber is legally felled from well-managed forests. Once the assessment -scheduled to take a year -is completed, the company has committed to eliminating the purchase of wood from illegal and unknown sources within five years.

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