Paper sector faces pulp pressure

In the current scenario of high inflation and skyrocketing interest rates, most industries in India are under margin pressure and the Paper industry is no exception.

In our second quarter result analysis for the paper industry, we found that there is good demand for paper products but profitability is under stress due to high raw material prices and interest rates. We analyzed a total 34 companies in the sector, of which 25 companies have shown growth in the top line, while remaining saw their top line reduce.

Paper manufacturers use a variety of raw materials like hardwoods bamboo, recycled fiber, bagasse, wheat straw, rice straw etc. Pulp supply is the main issue in the paper industry. Chile, which is one of the prime source of pulp supply, witnessed sudden production drop in 2010 due to an earthquake in the country which saw raw material prices increase sharply in 2010. Pulp mills in Brazil, Indonesia, Japan, China and Chile have also witnessed increase in hardwood fiber prices in the past year. Wood prices have moderately increased in North America and Europe as well. 

In the first quarter of FY11 Pulp prices were $840 a Tonne which then cooled off to $700 in the subsequent quarter. According to data published on the website PaperPage.com (Pix Pulp Benchmark Index) current prices are $920 per Tonne in US market while $882 per Tonne in European market. Though the prices have cooled in last two months from $971 (US Market) and $967 (Europe), they are still at a high level. 

For the quarter under review, staff expenses grew moderately by 6 per cent while the aggregate interest cost grew by 50 per cent for the companies analyzed. Power and fuel cost increased by 29 per cent reflecting the rise in coal prices. As a net effect of this, we found only 11 companies showed a growth in net profit while 23 companies experienced a drop in profits. For the whole sector, we saw a huge decline in the bottom-line. From a total 34 companies, only 5 managed to grow their top line as well as the bottom-line. 

Paper is an essential product in our day to day life. Right from our newspaper to tissue paper and corporate presentation to marketing leaflets, paper is used everywhere. The growth factors for the industry will be growth in the service industry, government’s education program, corporate spending etc.

Despite this, increasing raw material prices hit companies like Sarda Papers and Simplex Papers which were forced to suspend their production activities. Unless supply side pressure cools off, we don’t see pulp prices coming down. With moderate demand but uncomfortably high prices of pulp, we expect margins to remain under pressure.