The post-liberalisation decline in the effective protection rate for the domestic paper industry has resulted in domestic prices being linked to international demand-supply dynamics, according to Crisil in its latest publication of Crisil Insight.

High international paper prices till 1995-96 had enabled domestic manufacturers to increase domestic prices and maintain profitability. International paper prices started declining from 1997 and remained low in 1998 which, coupled with low import duty for newsprint, led to large-scale imports of writing and printing paper in the guise of newsprint. This resulted in lower realisations for domestic players in 1997 and 1998 besides affecting offtake.

The pressure on domestic realisations, coupled with increasing raw material (due to limited availability) and power costs (due to dependence on grid power), had an adverse impact on the profitability of major players and also led to the closure of a number of smaller capacities.

Higher imports resulted in the share of the top 10 domestic players in the paper and board market declining to 29 per cent in 1997-98 from 31 per cent in 1996-97. Though the four leading newsprint companies account for 83 per cent of production, they accounted for only 28 per cent of domestic sales due to cheaper imports entering the Indian market.

Future scenario
In its publication Crisil says it expects the writing and printing paper segment to grow at a higher rate in the medium term compared to the past CAGR of 7.1 per cent, because of higher per capita incomes, literacy levels and lower diversion of newsprint to this segment.

The industrial paper segment is expected to register a growth of around 9 per cent and emerge as the largest sector in the medium term due to steady end-user growth especially from the consumer durables industry. The newsprint segment is expected to witness a slowdown in demand compared to the past due to lower diversion to the writing and printing paper segment. Overall, Crisil envisages the paper demand to grow at around 8 per cent until 2002.

Crisil expects the demand-supply gap in the case of writing and printing paper to narrow in the medium term due to higher demand and relatively low capacity additions. While industrial paper demand is expected to continue to exceed capacity over the medium term, Crisil expects that the existing players will increase operating rates to meet demand.

Besides, the unorganised sector is also expected to become operational increasingly and contribute to supplies when prices improve significantly. Despite the lack of capacity additions in the newsprint segment, Crisil expects operating rates to remain low due to cheap imports from Russia and Korea following low tariff barriers.

Product price trends
In the 1998-99 and 1999-2000 budgets, the import duty on writing and printing paper was increased moderately and, coupled with the depreciation of the rupee, the effective protection rate increased, enabling domestic players to raise prices moderately and improve profitability. International prices have currently begun to firm up in line with pulp prices and hence Crisil expects that domestic writing and printing paper prices will rise further.

Industrial paper prices have remained low in 1997-98 and 1998-99 due to increased competition following the commissioning of new capacities. This trend is expected to continue in the short term with the larger players attempting to further increase market share by matching the unorganised sector on price. Over the medium term, Crisil expects that consolidation of capacities and increasing demand for value added boards will lead to a moderate increase in prices.

Newsprint prices recovered marginally in 1998-99 due to stricter implementation of the end-user criterion in case of imports, and steady international prices. However, due to dumping of low-priced Korean and Russian newsprint in global markets, including India, domestic players have been forced to take lower realisations in 1999-2000. Crisil expects this scenario to continue in the short term.

Raw material scenario
Domestic availability of raw material is expected to be sufficient to meet current production levels but future capacities would have to be increasingly based on imported pulp, non-conventional raw materials and waste paper.

Industry profitability
The operating margins of players in the writing and printing paper segment is expected to improve in the short to medium term due to higher volumes and realisations while the margins of industrial paper producers are likely to be maintained in the short term despite larger volumes.

However, the margins of newsprint producers would continue to remain under pressure from low priced Korean and Russian imports. According to Crisil, low cost of production, economic size, presence in the value added product segments, captive generation facilities and well established distribution networks would be crucial for profitability in the paper industry.

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