Tubulent Times for Printing Paper Industry

Korea Times (Seoul, Korea), March 22, 2001 | Go to article overview

Tubulent Times for Printing Paper Industry


Winning the Cost Game through Consolidation

The Korean printing paper industry is walking a thin line between survival and a major meltdown. It is facing a tough situation with over-capacity, increasing raw material, overseas threats, and subsequent decreasing profitability. In such dire market conditions, market restructuring through industry consolidation is the only solution to create a healthy industry that can successfully withstand the turbulent times ahead.

Over-capacity and high fragmentation

Over-capacity in the Korean printing paper industry has been an ongoing problem and once hit an all time high in 1998 at 31%. On the surface, the major cause for this can be attributed to the Asian financial crises and the correlation between printing paper demand and economic growth.

However, at the core of this problem lies chronically ill advised capital investment decisions going back to the early nineties. Despite this current state of obvious over-capacity, facility expansions are remarkably still going on. In 1997, immediately prior to the crises, Shinho expanded its facilities by 225,000 metric tons, Shinmoorim did the same in 1999 by 198,000 and Hankuk is scheduled to finish their expansion of 80,000 metric tons by 2001. The negative effects of such over-capacity will ripple through the industry through the form of lower mill utilization rates, higher operating costs, lower productivity, higher inventory costs, and the eventual lowering of prices through discounts and rebates. Unfortunately, many of these signs are already being felt today as most mills have already drastically reduced their production days per week while prices have fallen dramatically this past month.

One of the main reasons behind such over-capacity is that there are just too many decision-makers in the industry. Although 48% of the market is captured by the top five firms, this is far below developed markets such as North America where the figure is closer to 60% (70% for coated freesheet and 56% for uncoated freesheet). This over-competition in the printing paper ground is especially high in comparison to other paper grounds such as newspaper, white duplex paper, and sanitary paper where the top three firms possess a much healthier 70% of the market.

The closing door to alternate markets

With this worsening situation in capacity, many companies have chosen to look overseas to rid their inventories and achieve sales. Indeed, exports at the height of industry over-capacity in 1998 reached an all-time high of 53% of total production and are currently hovering at around 40%, mostly to China. However, the option to export has neither been voluntary or attractive. This is because export prices are even lower than domestic prices due to lower-priced competition from Indonesia and China as well as competition from the same players from home.

Now, even this option is closing on Korean printing paper companies.

Recent reports have noted that the flood of local Chinese manufacturers' inventory goods into the market as well as the increase in Chinese capacity has caused China to limit imports of printing paper. These factors have exacerbated the already low export prices bringing it down from 900 to 950 US dollars in the second quarter of this year to almost 815 dollars within one quarter.

The squeeze from rising pulp prices and cheap imports

At an average of 70% of costs of goods sold (COGS) coming from raw material costs, the paper industry is in constant watch of pulp price trends.

Unfortunately, the news is not good. Average pulp prices have increased steadily from roughly 400 US dollars last year to nearly 700 dollars in June. Furthermore, recent reports have stated that pulp prices are expected to continue to increase until 2003. A few reasons for this rise has been the lack of expansion of facilities by pulp manufacturers, the decrease in Indonesian exports due to internal consumption, and the overall increase in global pulp demand. …

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