Paper and Board Emerging Market Overview
on India and Turkey
PIMA/TAPPI Leadership Conference
March 11-15, 2007
Jacksonville, FL
Pöyry Forest Industry Consulting
Soile Kilpi, Associate Principal
Agenda
This presentation discusses the fundamental market factors describing
the market attractiveness in the emerging markets of India and Turkey.
Introduction
• World paper and board markets overview
Emerging markets
Substitution
• India and Turkey as a market
– Demand
– Supply
Supply
Opportunities &
Challenges
– Substitution
– Entrants (investment)
– Market opportunities and challenges
• Conclusions
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Entrants
Demand
Key Messages
India and other emerging markets provide the next growth market to be
pursued after the China boom.
• Asian demand growth continues to dominate the global industry and opens
opportunities in long term growth markets.
India
• India yet plays a small role, with potential to expand much further.
• Need to improve industry competitiveness through investments.
Consolidation and capacity restructuring is an avenue for growth.
• International acquisition opportunities exist but need to be driven by a clear
strategy.
• Raw materials remains a major issue but the industry can still grow without
total control over pulp supply.
Turkey
• Growth stage market due to positive developments in key economic drivers
and structural changes both in the industry and market environment.
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World Paper and Board Markets Overview
Global Paper and Board Consumption
Asia is already as large a market as Europe or North America
Rest of World
11%
China
15%
Rest of Asia
8%
India
2%
Europe
26%
Japan
10%
North America
28%
Total Consumption: 358 million tons (2005)
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Global Paper and Board Demand Growth to 2020
All of the industry growth in the future will be concentrated in the
developing markets.
Market growth (2005-2020), %/a
6
India
Russia
5
China
4
Eastern
Europe
Middle East
Latin
America
Africa
3
Rest of
Asia
excl..
Japan
2
1
Asia (non Japan) Average 3.5 %/a
Global Average 2.1%/a
Oceania
Western Europe
Mature Market Average 0.5%/a
North America
Japan
0
0
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20
40
60
Share of consumption in 2004 (358 million tons), %
80
100
Paper and Board Consumption per Capita
There are drastic regional differences in paper and board consumption.
Per capita consumption in developed countries is close to 300 kg/a, where
as in Asia (excluding Japan and China) consumption is 17 kg/a.
Per capita consumption/kg
300
200
100
46kg
7kg
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Tu
rk
ey
In
di
a
Af
ric
a
C
Ea
hi
na
st
er
n
Eu
ro
La
pe
tin
Am
er
ic
a
M
id
dl
e
Ea
st
R
es
to
fA
si
a
ce
an
ia
O
Ja
pa
n
W
.E
ur
op
e
of
R
es
t
ou
nt
rie
s
C
or
di
c
N
N
or
th
Am
er
ic
a
0
Production and Production Growth 2005-2020
Production will remain flat, with a risk of decline in North America and
Japan. Over 60% of incremental production is forecast to be in Asia over
the next 15 years.
Growth of Production 2005-2020
Production 2005
North America
China
Western Europe
Rest of Asia
China
Eastern Europe
Rest of Asia
Western Europe
Japan
Latin America
Latin America
Other regions
Eastern Europe
North America
Other regions
Million tons
0
20
40
Source: Pöyry Consulting
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60
80
100 120
Japan
Million tons
0
10
20
30
40
50
60
GDP and Paper Consumption per Capita
Markets in North America, Europe, Japan and ANZ have reached maturity,
while China and other emerging markets are at the beginning of their
growth phase.
350
Consumption, kg per capita
North America
Time series
1980-2020
300
2005
2010
2015
2020
1980
Japan
250
Nordic countries
Rest of W. Europe
200
Australia/NZ
150
100
China
E. Europe
50
Latin America
2005 world
cross-section
curve
0
0
10000
20000
30000
40000
GDP per capita, USD 2003 prices
Source: Pöyry Consulting
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50000
60000
Global Market Direction
Attention is turning into emerging markets in developing countries.
Paper and Board Market cycle stage
• Markets in developed countries are mature or declining
• Paper and board markets are in the growth stage in developing countries
– Population growth
– GDP growth
– Urbanization
Paper and Board Market hot spots with positive growth
• Asia
– China –”the big boom”
– India –”the next boom”
– Other smaller markets: Turkey, Indonesia, Malaysia
• Eastern Europe
• Latin America
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Emerging Markets
India Key Facts
An emerging economy with growing significance in the global economy.
•
•
•
•
•
•
Area: 3,287,590 sq km
Population: 1,095 million
Population growth rate: +1.4%
Median age: 24.9 years
Literacy rate: 59.5%
GDP: $875.9 billion
– Average 10 year growth rate of 7%,
reducing poverty by about 10%. India
achieved 8.5% GDP growth in 2006,
significantly expanding manufacturing.
• GDP per capita: $3,700
• GDP composition by sector:
– Industry 19%
– Agriculture 20%
– Services 60%
• Labor force: 509.3 million
Source: UN, CIA Fact book, The Economist
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• The government has reduced controls on
foreign trade and investment. However,
tariff spikes in sensitive categories,
including agriculture, and incremental
progress on economic reforms still hinder
foreign access to India's vast and growing
market.
• Privatization of government-owned
industries continues to generate political
debate.
Turkey Key Facts
An emerging economy located on the boarders of Europe and Asia.
•
•
•
•
•
•
Area: 780,580 sq km
• Reached a Customs Union agreement
Population: 73 million
with the EU in 1995 and has begun
accession negotiations in 2005.
Population growth rate: +1.5%/a
Median age: 28.1 years
Literacy rate: 86.5%
GDP: $362.6 billion
– One of the fastest growing economies in
the world.
• GDP per capita: $4,947
• GDP composition by sector:
– Industry and manufacturing 12%
– Agriculture 30%
– Services 58%
• Labor force: 24.7 million
– Est. 10% unemployment
– 1.2 million work abroad
Source: UN, CIA Fact book, The Economist
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• Gradually opened up its markets through
economic reforms by reducing
government controls on foreign trade and
investment and privatization.
Paper and Board Demand
Paper and Board Demand in Non-Japan Asia
Non-Japan Asia paper and board consumption will nearly double by 2020.
Both India and Turkey are forecasted to have aggressive growth.
200
Million tons
Forecast
175
150
Turkey
125
100
India
75
Rest of Non-Japan Asia
50
25
0
1980
1990
Source: Pöyry Consulting
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2000
2005
2010
2015
2020
Development of Per Capita Consumption of Paper and Board
Over the past decade India’s per capita paper and board consumption has
grown 4.3% annual average, while Turkey has grown faster by 5.8% annual
average.
50
Per capita/kg
45
40
35
30
25
20
15
10
5
0
1996
16
1997
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1998
1999
2000
2001
India
Turkey
2002
2003
2004
2005
Demand Is Growing
Socio-economic developments are driving strong paper and board
demand growth in emerging markets.
• Strong total paper and board
demand growth forecast
• India forecasted growth:
– 2003-2010: 6.5%
– 2010-2020: 6.0%
• Turkey forecasted growth:
– 2003-2010: 5.5%
– 2010-2020: 3.7%
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Drivers for growth
• Growing GDP
• Increasing personal income
• Young population
• Advancements in education system
• Literacy rate improving
• Urbanization
• Demand for Western products
• Hygiene programs and initiatives
Paper and Board Production
Leading Global Paper and Board Producers
European and North American producers dominate the global industry
Stora Enso
Int. Paper
UPM
Georgia-Pacific
Oji Paper
Weyerhaueser
Nippon Paper
Smurfit-Kappa
APP
Existing capacity
New projects
Smurfit-Stone
0
Source: Pöyry Consulting
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2
4
6
8
Million tons
10
12
14
16
18
Leading Paper and Board Producers in India
The Indian industry remains in the hands of local producers and is small
by global standards, but a number of planned expansions are underway.
Top 5 players hold 24% of total production.
BILT
ITC
West Coast/Rama
Khanna
TNPL
APPM
HPC
JK Paper
Aggarwal
Century
Existing capacity
New Projects
Hindustan Newsprint
0
100
Source: Pöyry Consulting
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200
300
400
500
1000 tons
600
700
800
900
Leading Paper and Board Producers in Turkey
Local players dominate the Turkish paper industry. Top 5 players hold
39% of total production. Of the global players’ G-P has acquired presence
in the market, where as SCA has a share in Selkasan.
+ new large
scale PM
Modern Karton
Mopak Kagit Karton
Kartonsan
SEKA
Kahramanmaras Kadit
Tire Kutsan
Halkali Kagit
Georgia-Pacific
Selkasan
Kombassan
0
Source: Pöyry Consulting
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50
100
150
200
1000 tons
250
300
350
Global Asset Quality Comparison, 2006
New capacity in Asia is changing the long-term competitiveness of the
industry.
300
Weighted average PM capacity, 1 000 t/a
2006
250
Nordic
Countries
North
America
200
China
Western
Europe
150
Japan
Other
Weighted average
capacity 165 000 t/a
Africa
Eastern
Europe
100
Latin
America
50
Turkey
India
Weighted average
technical age 18 years
0
30
25
20
15
10
Technical age, years
Source: Pöyry Consulting
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5
0
*) China data include identified,
industrial scale machines only
Papermaking Fiber Development in India
Despite the growth in paper and board demand, fiber supply has remained
relatively static.
6
Million tons
5
4
Recovered Paper
3
Non-Wood Pulp
2
1
Wood Pulp
0
1995
1996
1997
Source: Pöyry Consulting
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1998
1999
2000
2001
2002
2003
2004
2005
Cost Competitiveness – Hardwood Pulp
An Indian pulp mill has a major cost disadvantage as a result of high wood
cost
700
USD/ton
600
Distribution
Pulp trend price range
Depn @ 5%
500
400
Duties
Capital
@ 10%
300
Conversion
200
Wood
100
0
Indonesia
Source: Pöyry Consulting
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India
Pulp and Recycled Fiber Imports to India
Fiber imports to India have increased steadily, especially for recycled fiber.
2000
1000 tons
1800
1600
Recycled Fiber
1400
1200
1000
800
600
Pulp
400
200
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: World Trade Atlas
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Production Base
The major players on the markets are small local companies. Average
machine capacity is low and old.
• The paper and board industries in India and Turkey are yet firmly in the hands of local
companies
– Global paper industry players have not gained strong production asset position in India or
Turkey
• Company size in both markets is small in comparison to global players
– Both India and Turkey have history of government ownership in the forest industry, but
privatization is in progress
– Indian paper industry is highly fragmented
• Paper machines in India and Turkey have low capacity with high technical age
• India can compete China in paper and board production with competitively scaled
machines
– Imported pulp supports the competitiveness
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Substitution
Substitution Trends Threatening Paper and Board Consumption
The global paper substitution from electronic communication and plastics
in packaging are present but not as prevailing in the emerging markets.
Paper based vs. Electronic communication
Electronic communications infrastructure
• Communication technology infrastructure is not readily available in non-urban areas
• Developing countries such as India are unlikely able to leap straight to the IT enabled
communication and media mode and by pass the traditional paper intensive mode
The Internet
• In India 3.5% of population has access to the Internet
– Share growing aggressively in urban areas
• In Turkey the Internet penetration is 21%
– Lower than in Europe in general
Paper based vs. Plastic packaging materials
• Growth in use of packaged goods as life style changes (urbanization) and
manufacturing off-shoring from developed countries increase need for packaging
materials
• Global trends for plastic substitution in many end-use applications
– Cost advantage (increases in oil price level the advantage): production & transportation
– Innovation advantage: production & end-product differentiation
Source: Internet World Statis
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Entrants
Global Paper and Board Industry Concentration
In India top five producers hold 24% market share. Lack of industry
consolidation makes entry by new players relatively easy. Turkey has
higher consolidation rate with 39% top five market share.
100
Regional market share of top 5
1995
2005
80
60
40
20
0
North
America
Source: Pöyry Consulting
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Western
Europe
Japan
Non-Japan
Asia
Latin
America
Global
Acquisition and Investment Activity
Consolidation has not been the major driver in the industry’s development
in Asia. Industry investments have flown towards building and upgrading
capacity instead of acquisitions.
North America, Europe and Japan
China and Rest of Asia
Acquisitions
10 %
Acquisitions
55 %
Fixed
Investments
Source: Pöyry Consulting
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45 %
90 %
Fixed Investments
Market Entrants
Low consolidation provides attractive market entry opportunities especially
in India. Exports to Turkey from high cost efficiency locations could
provide an attractive entry opportunity.
Barriers to entry
• Lowered since the markets are opening to foreign capital
• Old fragmented assets are available on the market
Foreign investment in local capacity
• Common to gain assets through first established joint venture or strategic alliance
• Assets are acquired after initial testing and learning period
Imports
• Imports are at moderate volume level but growing in both markets
• India is a net importer
– Paper and board imports have increased by 30% since 2001
• Turkey is a strong net importer
– Paper and board imports have nearly tripled since 2001
Increased foreign investment expected
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Conclusions
Paper and Board Demand and Supply Development
Both markets are unsaturated markets in terms of consumption and
production. There is a long-term opportunity to increase capacity and
restructure the industry.
India forecasted demand supply balance
20
15
10
Million tons
Turkey forecasted demand supply balance
10
Million tons
Forecast Consumption
Further capacity increase
or import opportunity
(2.5 million tons)
Further capacity
increase or import
opportunity
(10 million tons)
Current
Consumption
Planned
capacity
Forecast
Consumption
5
Current
Consumption
Current capacity
Current imports
5
Current capacity
Current production
Current production
0
0
2005
Source: Pöyry Consulting
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2020
2005
2020
Conclusions
• Both India and Turkey are at the market growth stage, offering opportunities
for long-term viability and market development.
• Demand is growing due to positive developments in several key socioeconomic drivers.
– GDP, household income, education level, urbanization, industrial production,
privatization
• Production structure has improved significantly in Asia, but India lags
behind. Some investment risks must be taken…
• Local producers have strong hold of the fragmented markets.
Instead of jumping the bandwagon, need for strategy
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PIMA/TAPPI Leadership Conference
Thank You!
Pöyry Forest Industry Consulting Inc.
Soile Kilpi, Associate Principal
580 White Plains Road, Tarrytown NY 10591
p: 914-495-4344
c: 914-643-2767
soile.kilpi@poyry.com