Financial Reports & Markets
The Paper and Packaging Market in China: Risks and Rewards
December 1, 2005 By Pulp & Paper Canada
In 2004, annual sales of paper and paperboard in China exceeded US$20 billion a year. The potential for further growth is enormous; annual per capita consumption of paper products is less than a fifth…
In 2004, annual sales of paper and paperboard in China exceeded US$20 billion a year. The potential for further growth is enormous; annual per capita consumption of paper products is less than a fifth of the level in the U.S., Japan, and Europe, but a strong economy and more prosperous lifestyle are rapidly driving up demand. Industry sources predict that by the end of the decade China will need 70 million tonnes of paper and board a year — 32% more than it used in 2004. The packaging market is expanding equally fast and is forecast to exceed US$50 billion by 2008.
The Chinese government is keen to reduce the country’s dependence on imports and has embarked on a massive expansion program. China has been actively encouraging foreign investment in the sector, through liberalizing the rules governing approval of foreign-funded projects and the introduction of tax incentives. Some of the global giants in the paper and packaging industry have already taken advantage of these opportunities and earned the opportunity to access the world’s fastest-growing market.
However, China is not an easy country for foreigners to do business in. It is culturally, politically, and legally very different from the West. The competition from domestic paper and packaging producers is increasing. The government is subsidizing the modernization of some of the largest state-owned enterprises and, as local producers improve, they are moving up the value chain to make the high-quality goods that were once the preserve of foreign manufacturers.
In 2004, China used 54.4 million tonnes of paper and paperboard. It manufactured 49.5 million tonnes domestically and imported another 4.9 million tonnes. According to the National Bureau of Statistics, nearly 25.8 billion newspapers, 2.7 billion magazines, and 6.5 billion books were published in 2004. Consumption of tissue is expected to reach 3.5 million tonnes in 2005. The market for all forms of packaging materials has soared to US$37 billion. However, current annual per capita consumption of paper and board is low at just 42 kilograms, compared with an average of more than 200 kilograms per person in the U.S., Japan, and Europe, so there is huge growth potential. The three largest production areas for paper and paperboard include Shandong, Zhejiang and Guangdong provinces.
Key indU.S.try challenges
China faces four specific challenges in paper and paper products manufacturing as its economy grows. The domestic paper industry is one of the most fragmented in the world, with many sub-scale and outdated producers; a shortage of wood fibre and other raw materials; a shortage of water and energy; and environmental pollution. To help offset the fibre shortage, a paper recovery program now recycles more than 14 million tonnes of waste paper every year. In addition, China imported another 12.3 million tonnes of recycled paper in 2004, with the U.S. providing about 60% of the total, making China the world’s biggest buyer of recovered paper. This appetite for recycled paper is expected to create shortages and higher costs in other parts of the world. China’s lack of water is compounded by environmental pollution. In 2003 the government introduced a law to monitor pollution and encourage cleaner production, but enforcement is inconsistent.
Foreign producers looking to establish operations in China should not expect a level playing field. In the short term, non-tariff protection for domestic producers is expected to continue. Foreign producers will almost certainly be held to higher standards for environmental protection and use of resources, potentially resulting in higher capital and operating costs. As with any commodity product, as domestic producers improve their product quality, foreign producers will have to differentiate their products or develop supply chain or other efficiencies to stay competitive.
The opening up of the Chinese paper industry should ultimately benefit both China and its investors. Foreign financing of modern mills equipped with the latest technologies and waste treatment systems will help to ease the shortage of domestic paper, especially the rising need for high-quality products, and reduce environmental pollution. It will also enable foreign investors to increase their margins by capitalizing on the country’s low cost of labour, reduce logistics costs, and to avoid the customs tariffs which apply to imported finished paper products.
Twenty years of vibrant growth have created a large demand for all forms of paper products that is forecast to continue. China has made considerable strides in modernizing business infrastructure, and the government is encouraging China’s largest companies to become global. The pursuit of viable outbound investment is producing some innovative alliances with multinational corporations and expanding the range of options for doing business in China.
A full-text version of the PricewaterhouseCoopers (PwC) publication Paper and Packaging Market in China: China Risks and Rewards is available electronically from PwC’s Web site at: www.pwc.com/forestry.
Bruce McIntyre leads PricewaterhouseCoopers’ Canadian Forest, Paper and Packaging Industry Practice. He can be reached in Vancouver, BC at: email@example.com
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