THE UNUTILIZED POTENTIAL OF PAPER AND BOARD INDUSTRY
Lack of diversification and capacity under-utilization restricts growth
By Syed M. Aslam
Mar 15 - 21, 1999
Paper leaves no part of human activity untouched today. Without paper we will be deprived of many necessities and comforts that we take as granted. We cannot imagine the life without newspapers, magazines and books to read; copies, diaries and journals to write on and so many such other items which are considered to be necessary for routine work.
The increase in demand for paper and paperboard products, the worldover, is obvious from the drastic increase in the production of paper and paperboard products globally.
Over 43 per cent of the wood harvested in the world in 1997 was used to manufacture paper and paperboard which is 3 per cent more than it was used four years ago. In 1993, wood pulp production required 618 million cubic meters of wood which was equivalent to 40.39 per cent of the total global industrial harvest of wood. The consumption of paper including newsprint and paperboard is increasing faster than any other forest product.
The world uses five-times more paper and paperboard today than in 1950 and the use is expecetd to double again in the year 2010. The global production touched record 286 million tonnes in 1996 as compared to 57 million tonnes in 1950 and an increase of over three-and-half fold alone from 77 million tonnes in 1961. With the exception of 1974 and 1975 it has witnessed a constant growth.
Despite the huge increase in global production, the per capita consumption in developed countries remains much higher than that in the developing nations. Over 70 per cent of the global paper output is consumed by 20 per cent of the world population living in North America, Western Europe and Japan. Though per capita paper consumption is about 46 kilogram, it is only partially true as consumption in developing countries remain too small as compared to their developed counterparts.
The US is the biggest user of paper and paperboard with per capita consumption of 320 kg followed by Japan 232 kg, Germany 200 kg. In contrast, per capita consumption in Brazil which houses the biggest forest area in the world with the exception of Russia is just 31 kg while in China it is 24 kg and India is just 3 kg.
The US is not only the biggest consumer of paper but also is the biggest producer. Western Europe and Japan, along with the US, which comprise less than 15 per cent of worlds population, consume two-thirds of the paper and paperboard produce.
Forest area plays an import role in the development of paper and paper board industry as it provides the basic raw material for it. Today forests cover one-fourth of the total land area of the world excluding Antarctica and Greenland. Seven countries Russia, Brazil, Canada, US, China, Indonesia and the Democratic Republic of Congo (former Zaire) hold over 60 per cent of the worlds forest area.
However, forest area constitute just 4.8 per cent or 4.2 million hectares in Pakistan which is far below the internationally acceptable ratio of 20-30 per cent necessary for the balanced economy. In addition, actual production from the forest area in Pakistan is even smaller as only one-third of it is productive while the remaining two-thirds is maintained for environmental protection.
Pakistan is highly dependent on the import of a variety of paper products in general and raw materials such as pulp and waste in particular. Local production meets only part of the national demand of six basic products duplex board, writing/printing paper, kraft paper, tissue paper, poster paper and corrugated medium paper. The demand for newsprint is totally met thorough imports. The value of paper products imported into Pakistan has increased twenty-fold from Rs 270 million in 1975-76 to Rs 5,412 million in 1995-96.
While there are number of paper mills in the organized sector in Pakistan which are engaged in the manufacture of various paper products in Pakistan, the prices of locally manufactured paper is greatly influenced by fluctuation of prices in the international market, the structure of import duty and the demand for a particular type of product. The same is true for the finished paper products imports.
Today two-thirds of the paper, produced globally, is made from non-wood sources such as cotton and rice straw. Wheat straw and kahi (river grass) is used in the manufacture of paper and paperboard in Pakistan. However, diversification remains restricted as the local industry in spite of progress in recent past, still manufactures variety of just a handful of products.
During the last two decades a number of paper mills have been established in the country which are engaged in the manufacture of number of products, however, the country is heavily dependent on paper imports particularly newsprint and pulp which are the basic raw material for all paper based products.
According to statistics, provided to PAGE by Pakistan Pulp Paper and Board Mills Association, 25 mills in the organized sector are producing a total of 254,983 tonnes of paper and paperboard which represents only 78 per cent of their collective production capacity of 324,000 tonnes during 1997-98. This also shows that 22 per cent of the collective production capacity of these mills remained unutilized in 1997-98 inspite of increased demand for the paper products in the country.
The increase in demand is obvious from the volume of quantity and value of paper products, including pulp and newsprint, imported in 1997 and 1998. According to the statistics, a total of 235,555 tonnes of paper products were imported at the cost of Rs 5.5 billion in 1998 depicting a drastic increase of 32 per cent in terms of quantity and over 47 per cent increase in terms of value over 1997.
The statistics also show that the import of paper products totalled Rs 5.5 billion including Rs 1.4 billion of newsprint imports and Rs 1.036 billion of pulp imports. Of the remaining Rs 3.06 billion the biggest amount Rs 1.1 billion was spent on import of duplex and other board followed by Rs 499 million on wrapping/packing paper which are also manufactured locally. This shows the heavy dependence on imports particularly such products as cigarette paper which requires sophisticated technology.
In addition, the annual production and production capacity of the pulp, paper and board mills in the organized sector also show an erratic trend during the last decade indicating the lack of consistent policy to regulate the trade in an efficient manner. Sources in the industry told PAGE that a number of mills have been closed down during the last many years and the capacity under-utilization is obvious from Table 1.
PAPER MILLS IN THE ORGANIZED SECTOR
Talking to PAGE, a highly placed source at one of the mills in the organized sector who requested PAGE not to quote him by name, blamed the cheap imports in the wake of financial crisis in the Far Eastern countries such as Indonesia, Korea and Taiwan. The massive devaluation of currency in the Far Eastern countries, he said, has resulted in liberal imports of paper and paperboard at much lower prices. These cheaper imports are adversely affecting the local paper industry which is already reeling from a depressed local economy.
Import of pulp is subjected to 10 per cent import duty, 15 per cent sales tax and 5 per cent income tax rendering it extremely hard for the local mills to compete with far cheaper imported counterparts. As if this was not enough the locally produced paper is subjected to 5 per cent Central Excise Duty and 15 per cent sales tax. While the later is passed to the consumer, source said, the CED remains the cost of the manufacture to further inflate an already high production cost primarily as paper and paperboard production is highly power incentive. Power alone comprise 18-19 per cent of our production cost which is too high, he added.
The Directors Review in the Annual Report of Century Paper and Board Mills for 1997-98 said that the domestic paper industry is going through difficult times for the last couple of years partly due to depressed economic environment further aggravated after the imposition of economic sanctions in May last year. In addition, it said the government has adopted policies which are favourable to imports particularly from dumping of goods from Indonesia, Korea and Taiwan.
The government has been asked to initiate the following tariff reforms to avert the collapse of the local paper industry:
1) Withdrawal of 5 per cent Excise Duty on locally produced paper and board.
2) Levy anti-dumping duties to combat cheaper imports from Far East.
3) Increase the import duty to discourage paper and board imports into the country.
The source also said that reducing the import duty of basic raw materials such as pulp, chemicals, additives, machinery and spare parts will also help the local industry to reduce the production costs to better compete with imported counterparts.
He claimed that the above factors have rendered local production highly expensive at an average Rs 28,000 per tonne excluding government taxes as compared to an average of Rs 24,000-25,000 for imports. At present, he said, import duty on paper is 25 per cent and on board is 35 per cent.
He said, while the local industry can compete with imported writing/printing paper the lack of technology to produce high quality paper and board has resulted in flooding of market with imported counterparts.
The major concern of the mills seems to be the tax-related issues. The Annual Report 1998 of Pakistan Paper Products Limited, the largest producer of exercise books in the country, lamented that it was "burdened with sales tax and central excise duty whereas other makers of exercise books and paper products remained hidden and the Collectorate of Sales Tax and Central Excise Duty kept their eyes closed. "We paid CED on local and imported paper and paperboard. It is really a sad state of affairs that in spite of having brought to the notice of the CBR, the Collectorate of Sales Tax could not bring thousands of manufacturers of exercise books in the country within the ambit of sales tax, it seems we are perhaps the only one who are paying sales tax on exercise books."
The above concerns were shared by the Chairman and General Secretary of Copy Makers and Paper Products Group of Pakistan. Talking to PAGE, the Groups chairman Sultan Ahmed and General Secretary Mansoor Ilyas said that while the prices of copies remain unchanged over the years the buyers today are getting far less value for their money. During the last two decades the number of pages in Re 1 copy has decreased from 72 to just 40 primarily due to drastic increase in the price of paper from Rs 2 per kilogram to Rs 42 per kilogram at present. Similarly, the number of pages in the best selling Rs 5 copy has been reduced by more than half from 120 to just 52 during the last decade.
They lamented that while all publications including newspapers and even such non-educational publications as showbiz, remain exempted from sales tax, the same has been imposed on copies and exercise books the primary users of which are students. Similarly, stationary items such as pencils, sharpeners, pens and ball points are subjected to sales tax. They claimed that during their numerous meetings, the CBR officials accepted that taxing books and stationary items was wrong but they refused to give it in writing to help rectify the wrong. They demanded of the government to exempt copies from the sales tax just like books and all other publications to help reduce the burden on the parents of school going children.
Over the years education has become extremely expensive due to a drastic increases in tuition fees, transportation charges and in the cost of other related materials. Private school owners have found a novel way to make a profit on sale of copies which they force the children to buy from either their prescribed book shops or school canteens. It has become a common practice that school owners ask their students to buy copies which carry the name of school which usually costs double than the copies available in the open market. In the process the school operators make a cool hundred per cent profit on the forced captive sales.
Sources told PAGE that levying sales tax on copies and stationary items discourages education in a country where even parents of modest means have to increasingly find it harder to absorb the rising costs to educate their children. Parents today are spending thousands of rupees each year on copies and books alone and levying sales tax on copies only increases the cost of education, they added.
So why in spite of more or less stable prices of paper the prices of copies, books, newspapers and publications have increased drastically during the last many years. The industry and trade blame it on number of factors like the constant devaluation of the Pakistani currency over the years and duty structure on the import of not only finished paper product such as newsprint which is not made locally but also on such basic raw material such as pulp used by the industry, sales tax and CED.
The Chairman of All Pakistan Paper Merchants Association (APPMA), Abdul Majeed Memon said that some 500 kinds of paper and paperboard products are manufactured in the world of which import of about 200 varieties are allowed into Pakistan. In addition, there are only 10 paper and board mills which are manufacturing only six kinds of paper locally.
In spite of the protection and incentives the local paper and paperboard industry has failed to pass on the benefit to the consumers. But the same has not discouraged it to ask the government to levy 20 per cent Dumping Duty and reversing the import duty to 65 per cent from 25-35 per cent at present to save the local industry, he added.
Rejecting the demand of the paper and board producers he said that the local industry already enjoys many incentives and advantages. It is based on such easily available cheap raw materials as wheat straw and kahi (river grass) and the cheapest labour available. Moreover, it enjoys loans at a very low mark-up rate on raw materials such as wood pulp and waste paper which is as low as 10 per cent. In addition, he added, the government has recently withdrawn 5 per cent Central Excise Duty on local paper and paperboard.
The local paper and paperboard industry, he said, which has been in full swing since two decades has failed to justify the protection and incentives accorded to it as only one or two units are paying taxes of any considerable amount.
On the other hand the members of APPMA are paying huge amounts in taxes as total incident of 35 per cent import duty, 15 per cent sales tax, 5 per cent advance income tax, 5 per cent Central Excise Duty and other expenses add up to 70 per cent.
However, he did not disagree with the paper and paperboard producers demand for reduction of duty on import of raw materials by themselves but did agree with their claim that imported products like sack kraft paper and coated duplex board are detrimental to their growth and that the cost of local production is high due to high energy prices, financial costs and import duties.
The facts which the producers try to conceal is that the government has already reduced the import duty on waste paper and wood pulp from 25 per cent to 10 per cent in addition to levy of 5 per cent CED on imported finished and semi-finished paper and paperboard products which has failed to reduce prices of locally produced items.
Illustrating just how incompetitively priced the locally produced paper products are, he said that according to ITP (International Trade Price) Manual, issued by the Customs last month, the price of unbleached sack kraft paper is available from $580 per tonne from Portugal to $730 from Austria. At exchange rate of Rs 50 per dollar the C&F prices of the import from above two sources translates into Rs 29,000 per tonne and Rs 36,500 per tonne. The landed costs of this particular finished paper product which is subjected to 25 per cent import duty, 15 per cent sales tax, 5 per cent income tax plus 10 per cent other expenses add up to Rs 46,400 per tonne from Portugal and Rs 58,400 per ton from Austria.
Similarly, he claimed that the cost of coated duplex board, produced locally, comes to Rs 20,000 per tonne with a profit margin of Rs 8,000-9,000 while on an average the landed cost of its imported counterpart is around Rs 34,000.
While a number of items were available at much cheaper rates from the Far East in the recent past, the Pakistan Pulp Paper and Board Mills Association was the only association in Pakistan to raise objections about it in spite of the fact that they themselves imported hard wood pulp from Indonesia at a much lower price of $250-270 per tonne as compared to $ 450 per tonne in the past.
While the interests of the industry and trade remain well protected by the two concerned associations, the consumers of paper and paperboard products are forced to pay constantly increasing prices for the products directly or indirectly.
The under-utilization of the production capacity in spite of the protection and incentives that it enjoys and the huge profit margins which it is earning are the major problems detrimental not only to the growth of the local industry but also its failure to improve the quality of products it make and any reduction in prices.
Producing quality products at affordable prices still remains a dream for the local industry as C&F prices of better quality imports are lower than the locally produced counterparts.
If local production and import trends are any indication despite an overall increase in the volume of local production and declining imports the country is heavily dependent on imported raw materials and quality writing/printing/ wrapping paper to meet commercial and industrial needs.
The absolute dependence on imported newsprint highlights the necessity for investment in this particular sector to help lessen the pressure on foreign exchange for a product which cost Rs 1.4 billion in 1998. The import of newsprint is subjected to 10 per cent duty by the daily newspapers and 25 per cent for all others including commercial importers. As newsprint is used for the printing of low cost books and exercise copies for students, it is imperative that a government which champions the cause of eradication of illiteracy should lower the import duty to a uniform rate of 10 per cent to help encourage education.
The local paper and paperboard industry should be made accountable to justify the prices of its products with stress on benefit to exchequer and the paper consumers vis-a-vis the protection it is allowed to enjoy against imports. Scrutiny of taxes and duties paid by the mill owners on the import of raw materials and its specific use in the production be made so as to determine the exact cost of production to justify prices of locally manufactured products.
It must be assured that the consumers benefit from any reduction in prices of the raw materials from any particular source such as the much cheaper import from the Far East last year. The prices should be constantly monitored and checked both of the local as well as the imported products.
Year Duplex/Paperboard Chip/Other Board Writing/Printing Paper Flutting Paper Paper All kinds Including Tissues Total Production Total Installed Capacity %age Capacity Utilised
Source: Pakistan Pulp Paper and Board Mills Association