Any Westerner with an interest in science almost certainly knows who Galileo, James Watt and Charles Babbage are. The Italian made the first telescope powerful enough to look at the moon, the Scot constructed the steam engine that triggered the Industrial Revolution, while the Englishman built the first mechanical computer. Ask the same question in respect to Cai Lun and it is likely the same Westerner will give you a blank look. Not so, a Chinese.
The product Cai invented is ubiquitous and without it we would have no libraries or books. It is paper. In the year 105, the chief eunuch to the Emperor He of the Han Dynasty discovered that a mash up of fish net, bark and cloth was far better for writing on than silk.
Thirteen centuries later Marco Polo was still writing about his Chinese travels on calf hide (parchment). But knowledge of paper-making slowly filtered along the Silk Road to the West. Fast forward to the present day, and the Chinese paper industry now hopes Xi Jinping’s modern reckoning of the Silk Road – his much-touted “One Belt, One Road” scheme – may prove to be the saviour of an industry that has been plagued by overcapacity for years.
China overtook the US as the world’s biggest paper producer in 2009. But as industry expert Guo Yongxin tells the Economic Observer it has been at the expense of profitability. Guo believes the industry has overcapacity of 20%, a legacy of excessive expansion as mills sought economies of scale.
And as the Business Times also reports, Chinese firms’ attempts to expand overseas have not been entirely successful either. It profiles Nine Dragons Paper’s painful experience in Vietnam. In 2008, Asia’s largest containerboard manufacturer spent $22.8 million on a paper mill capable of producing 100,000 tonnes of paper per annum (tpa).
Nine Dragons wanted to take advantage of Vietnam’s plentiful forestry resources. It had planned to expand capacity to 500,000 tpa by 2013. Its expansion scheme, however, was undone by a wave of anti-Chinese protests which swept through the country in May 2014, leading to the destruction of 460 China-funded factories (see WiC237).
Business Times says Nine Dragons is now considering moving its paper production back to China, although the Economic Observer offers a contradictory report that it will reopen its Vietnamese plant.
Meanwhile Shandong Sun Paper, a leading maker of coated packaging board, set up shop in Laos in 2008. It intended to plant 100,000 hectares of trees that could generate 300,000 tpa of paper product. This would have enabled the company to improve its self-sufficiency ratio from 40% to 100%. However, since Laos is land-locked it also needed to build port facilities in Vietnam, which it subsequently discovered would make the project uneconomic.
Both companies may hope China’s Silk Road scheme will generate subsidies and incentives that could improve their returns. But the solution to the profit squeeze they face may lie closer to home where local governments’ effort to reduce capacity is starting to bear fruit.
Shandong province is the country’s largest paper producer, responsible for 17% of annual output. During 2014, 4.9 million tonnes of outdated capacity was weeded out (China produced 118 million tonnes of machine-made paper and paperboard in 2014). By 2020, Shandong hopes to retire a further three million tonnes of production capacity from factories using older, less technologically up-to-date equipment.
Further south in Guangdong province, Dongguan’s government has also shut down small mills.
During a recent analysts’ briefing executives at Lee & Man Paper said that two million tonnes might be retired in Guangdong province alone during 2015. As a result, containerboard capacity may actually fall for the first time this year.
As smaller mills disappear, bigger players have been expanding their market share and are also starting to benefit from the booming e-commerce sector, which now accounts for 10% of overall containerboard demand for packaging.
In May, Lee & Man and Nine Dragons increased containerboard prices in Guangdong, and followed suit on the eastern seaboard last month. These price rises have fuelled share price appreciation. Nine Dragons, for example, has seen its share price rise 40% in the past three months.
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