Paper prices may surge on rising demand, input costs

The year 2005 saw the domestic paper industry hike prices in three-five tranches, and experts feel the trend may continue this year as well.

Last year, paper prices rose by about Rs 2,000-2,500 a tonne.

"Be it writing paper or newsprint, prices are heading north," said Vineet Nigam, deputy director of Icra.

According to industry experts, while prices of coated paper are likely to remain stable at current levels with little scope for movement, prices of uncoated paper may increase for another two-three years.

While shortage of pulp is the main issue thereby restricting supplies, demand for paper is also on the rise. Further, there is an upward trend globally, said Nigam.

"Annually, the paper demand is growing at around 7 per cent and capacity is increasing at about 4 per cent. As for the hybrid coated, demand has surged 13-14 per cent, while supply has risen marginally, by 7-8 per cent. These factors are keeping prices up, said B Hariharan, group finance director, Ballarpur Industries.

Domestic demand has a huge potential to increase with the per capita consumption one of the lowest in the world at 4.5 kg compared with China's 28.3 kg, Asian average at 26.9 kg and global average at 52.6 kg.

While capacities are expanding at the lower-end of the chain, it is this trend that will ascertain the extent of rise in paper prices, Hariharan added.

Pradeep Dhobale, chief executive officer of ITC Ltd's paper division, however, suggests that there is more to rising prices than the demand-supply mismatch.

"The input costs have risen. Raw material costs have gone up by 30 per cent in the last two years while that of coal by about 20 per cent in the last one year. The trend can be ascertained by the fact that raw material comprises of 50 per cent of input cost and another 20 per cent by energy (including coal and power)," said Dhobale.

Further, the cost of input chemicals like caustic soda have also spiralled, said RR Naryana Murthy, secretary general with Indian Paper Manufacturers Association (IPMA), thereby pushing prices up.

As for the demand-supply situation, "we need to understand that the idea of large inventories does not exist in this sector, unlike the trend globally," Dhobale added.

To boost the sector's potential, there is a need for investment in the backward linkages such as wood, baggasse and waste paper.

"Today, the weakest of these linkages is waste paper where poor recycling channels provide just about 20 per cent to the requirements of the paper industry compared with the global average of 56 per cent," said Murthy.

Imports of waste paper to the country have also seen a decline following an incremental rise in paper manufacturing capacity in China.

Also, the idea of agro-residue being used as a raw material by the domestic paper industry has not been successful as it is Dependant of seasonal factors and without any definite quality specifications.

As per IPMA estimates, India produces around 60 lakh tonne of paper annualy (following a full-utlisation of existing capacity) with the demand rising by an average 5-5.5 per cent. Imports are minimal following a 15 per cent duty.

Writing and printing paper contributes about 49 per cent of the entire produce, industrial paper about 36 per cent and newsprint the remaining 15 per cent, according to data provided by Icra.

ON A ROLL

While prices of coated paper are likely to remain stable, prices of uncoated paper may increase for another 2-3 years

Annually, the total demand for paper is growing at 7 per cent and capacity increase is about 4 per cent

While capacities are expanding at the lower-end of the chain, it is this trend that will ascertain the extent of rise in paper prices

Raw material costs have gone up by 30 per cent in the last two years while that of coal by about 20 per cent in the last one year

To boost the sector's potential, there is a need for investment in the backward linkages such as wood, baggasse and waste paper