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I look for opportunities to invest where the expected value is sufficiently greater than the cost to invest and look to invest the appropriate portion of the total funds available. To make a gambling analogy, a highly favorable investment would be one where you could invest $1 on a flip of a... More
  • Outlook for the Chinese Paper Industry 1 comment
    Aug 5, 2010 12:37 AM
    Outlook for the Chinese Paper Industry:  Not That Rosy:
       This article examines the macro state of the Chinese Paper market based on several research reports that have recently studies this issue.    

         The economics of the Chinese paper manufacturing industry are poor. Massive government subsidies to the Chinese paper industry has allowed it to under-cut worldwide competitors and show tremendous growth through exports. However, the Chinese paper industry has shown poor profitability. Inherently, it has no competitive advantages. It has no pricing power as paper is a commodity business and, in the last decade, real paper prices have fallen while input costs have risen. China is experiencing oversupply as its production capacity continues to grow while domestic demand, while growing, is still very weak. Similarly, there is excess supply and capacity in the global market. 
    Growth: The Chinese paper industry has shown tremendous growth. Since 2000, China has tripled its paper production. Since 2002, the number of paper manufacturing companies has steadily increased, recently growing from 8,376 in 2007 to 8,731 in November of 2008.   China became the world’s largest production of paper in 2008. In 2009, China accounted for over 17% of the world’s output. 
    Lack of Competitive Advantages:   China lacks the natural resources for paper and has no labor cost advantage. China’s forest base is among the smallest in the world per capita. Consequently, China is the largest importer in the world of pulp and recycled paper. These raw materials, which make up 3/4ths of the cost of producing Chinese paper, as well as electricity, coal, and transportation, have nearly doubled in price in the last decade. Recycled paper by itself accounts for over half of the costs. Labor costs are only a small part of the costs, 4% but increase to 6% for the larger companies with more professionalized staff, similar to U.S. companies where it is 85. China has no technological advantages. 
    Poor Pricing Power: Paper production is a commodity business. International Paper, the largest paper company in the world, reports that there are low barriers to entry. Many believe paper demand will decrease in an increasingly digital world. Paper prices have performed poorly over the past decade, while prices of component materials have shown double and triple increases. The price of recycled paper has increased 160% between 2000 and 2008. However, real paper prices have fallen in the last decade. Companies that own their own raw material suppliers, referred to as backwardization, have better pricing power and are better positioned to receive government subsidies. 
    Overcapacity and Weak Demand: Capacity growth has not slowed – the two largest companies, Nine Dragons and Lee & Man, have aggressively added to capacity, going from 8 million tons in 2007 to 15 million tons in 2009. The growth has led to the Chinese market is saturated – it cannot absorb the present or planned output of Chinese paper. Exports have led the growth as domestic demand only captures a small part of the Chinese paper industry’s expansion. However, there is also global overcapacity. In 2009, year-on-year fixed-asset investment in China’s paper industry grew 21.5%, despite rapidly falling paper demand. 
    Poor Profitability: The result has been poor profitability for the Chinese paper industry whose rapid growth has not been fueled by positive economic or competitive advantages but by government subsidies of 33 billion dollars from 2002 to 2009. As some of the pressures for the industry have recently eased – raw materials are down from their highs and paper prices are up from their lows – year over year reporting may show some improvement. However, the general characteristics for the Chinese paper industry remain as described.

    Sources for this article:
    No Paper Tiger: Subsidies to the Chinese Paper Industry, link at;
    China's Pulp and Paper Industry: What Low-Cost Labor Advantage, link at


    Themes: China, Paper
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  • Business Economics Analyst
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    Comments (2562) | Send Message
    Author’s reply » One correction on a typo: International paper has approximately 25 paper mills in Asia, not 28.
    5 Aug 2010, 01:57 PM Reply Like
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