China s Pulp and Paper Sector: Supply-Demand Trends and Medium Term Projections

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1 China s Pulp and Paper Sector: Supply-Demand Trends and Medium Term Projections He Dequan China Economic Consulting, Inc and Christopher Barr Center for International Forestry Research (CIFOR) CAF-CIFOR Seminar for EC Asia Pro Eco Project Beijing, November 22, 2005 Partially funded by EC Asia Pro Eco Program

2 China s Paper and Paperboard Industry During , aggregate demand has tripled from 14.6 million to ~ 50 million tonnes China s production has also climbed from 13.7 million tonnes in 1990 to ~ 46 million tonnes in 2005 Historically, much of China s paper production was for low quality and nonwood grades Since 1990s, rapid growth in both demand and capacity for mediumto high-grade products Increasing foreign and domestic investment in large-scale, world class mills ( New China ) China has considerable room for further growth, as per capita paper consumption is still quite low

3 ( 000 tonnes) 4,200 3,600 3,000 2,400 1,800 1, Newsprint Projected Supply and Demand, Consumption Production Newsprint demand correlated to GDP, literacy, advertising During , demand grew from 850,000 to 2.6 m tonnes/yr Demand to increase by 7.2% p.a. to reach 3.9 m tonnes in 2010 Imports of approx. 500,000 tonnes/yr

4 ( 000 tonnes) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 Printing & Writing Projected Supply and Demand, Production Consumption Demand driven by GDP growth, literacy, advertising, education & commercial printing During , demand doubled to reach 13.5 m tonnes Demand to grow 1.2 m tonnes p.a. to reach 19.5 m tonnes in 2010 Rising quality within China, yet imports will grow to 1.6 m tonnes

5 ( 000 tonnes) 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Tissue Projected Supply and Demand, Consumption Production Demand driven by rising pers. incomes, hygienic practices, health concerns During supply and demand climbed from 1.6 to 3.8 million tonnes Demand to grow at 8.0% p.a. to reach 5.6 m tonnes in 2010 Only grade where China is net exporter

6 Containerboard Projected Supply and Demand, ( 000 tonnes) 28,000 24,000 20,000 16,000 12,000 Production Consumption Demand driven by industrial production and consumer spending Consumption up from 7.5 m tonnes in 1995 to 18.5 m tonnes in 2005 Production & quality of corrugated medium and linerboard have increased since , Demand to reach 25.9 m tonnes in 2010, supply to reach 23.9 m

7 Boxboard Projected Supply and Demand, ,000 10,000 Consumption Demand linked to spending on consumer goods and merchandise exports ( 000 tonnes) 8,000 6,000 4,000 2,000 0 Production During , consumption tripled from 2.4 m to 7.5 m tonnes Production growing rapidly -- likely to reach 9.4 m tonnes in 2010

8 China s Growing Demand for Paper m ( 000 tonnes) m 46.7 m New sprint Printing & Writing Tissue/Household Containerboard Boxboard Other Source: He and Barr, 2004

9 ( 000 tonnes) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Means Increased Demand for Pulp Fiber Nonwood Waste Paper (domestic) Waste Paper (import) Wood Pulp (domestic) Wood Pulp (imports) During : Nonwood fiber declining from 40% to 15% of total Waste paper growing from 40% to 58% to reach 35 m tonnes/yr in 2010 Wood pulp growing from 20% to 25%, to reach 15 m tonnes/yr in 2010 Source: He and Barr, 2004

10 China Actively Promoting Integrated Pulp & Paper Development In Tenth 5-Year Plan ( ), government prioritized capacity expansion: paper and paperboard to reach 40 million tonnes/yr wood-based pulp to reach 2.2 million tonnes/yr 42 pulp-paper projects prioritized for integration of fiber supply, wood pulp, and high-grade paper production Foreign investment joint ventures encouraged in: plantation development chemical (> 300,000 tpa) & mechanical pulp (> 100,000 tpa) high-grade paper and paperboard

11 Fiscal Incentives and Capital Subsidies Tariff reductions for priority projects Tax holidays for foreign investors No tax for first 2 years 50 % normal tax rate for first 3 years of profit Loan interest subsidies During , Finance Ministry allocated US$ 1.6 bn (RMB 13.8 bn) to upgrade and expand 21 pulp-paper mills Discounted commercial loans and extended terms of repayment

12 Large Subsidies for Fast-Growing Plantation Development. Government is budgeting RMB 70 billion to finance 13.3 million ha of FGHY plantations for (> US$ 600 million/year) Of which, target for commercial use = 10.8 million ha, including 5.8 million ha for pulpwood Ministry of Finance to allocate 20% (US$ 1.7 bn) as loan interest subsidies State-owned banks to provide 70% (US$ 6.1 bn) as discounted loans Local governments to provide 3% Plantation companies to provide 7% from commercial sources

13 but Major Challenges Remain China has proven it is very good at planting massive areas. But pulp plantations will be limited by: Competition for land, uncertain tenure Plantations spread out and in small blocks Limited genetic material and variable silvicultural practices Restrictive harvesting quota scheme Can China achieve FGHY plantation targets on a sustainable basis? At what delivered wood cost for pulp producers? Will high wood costs in China allow pulp producers to compete with imports from Brasil or Indonesia?

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