Market Forces: Supply and Demand
Understanding trends, drivers, elasticity and revenues
(With example of ITC paperboard & specialty papers division)
Indian Paper Industry Structure:
* The Indian paper industry accounts for about 2% of the world production of paper & paperboard; currently ranks 15th in the world. * Estimated turnover of Rs. 25,000 crore approximately; contribution of about Rs. 2920 crore to the exchequer. * The industry provides employment to more than 0.12 million people directly and 0.34 million people indirectly. * Over 800 players are currently present in the industry and the total estimated capacity is about 11.1 million Metric Tonnes. * Most mills in India are small; a few mills have integrated manufacturing operations or the facility for manufacturing paper from pulp. This, along with government policies, has resulted in the industry becoming highly fragmented, with a large number of companies having small capacities. * The Indian paper industry had been classified on the basis of size, grades manufacturers and raw materials utilized.
The Indian paper industry is chiefly categorised into writing and printing (W and P), paperboard and newsprint, of which paperboard accounts for the largest share of market in volume terms, while W and P is the largest in value terms. This industry is highly fragmented. Wood-based pulp, wastepaper and agri-residues are the main raw materials used to manufacture paper. As domestic wood supply is inadequate compared to demand, and wastepaper recovery mechanism is not very robust, raw material availability remains a constraint for the paper industry.
Growth Drivers (forces behind demand and supply increment):
Several factors are triggering the Indian paper industry to a new height. These include: * Economic growth
* Increasing literacy rate
* Increasing government spending on education
* Population growth
* Changing demography
* Increasing living standards
* Increase in advertising and printing
* Government incentives
The Indian paper industry size will be around 38 million tonnes by year 2025 and is currently growing at an average of 10% across segments.
The main costs for paper manufacturing are raw materials, power, fuel and chemicals. Transportation and employee costs also account for a substantial part of total costs. Setting up a paper business calls for a substantial capital outlay. A new, integrated unit with captive power, with in-house pulping facility and a co-generation plant will require an investment of Rs 80,000-100,000 per tonne of paper output. An investment of around Rs 4,000 million is required to set up a 50,000 tonne per annum plant.
The domestic demand for papers (including newsprint) has been steadily growing over the years. It has grown at a 4 year CAGR of around 7 % to reach around 10.8 million tonnes in 2010-11. The paper industry market size (including newsprint) in 2010-11 was estimated at Rs. 445 billion. Of all the segments, paperboard has been the highest value segment, accounting for a share of about 42% of the total market size. Variety-wise demand over the years has been as follows:
Paper has also enjoyed a relatively healthy demand due to the following factors: * Lifecycle of a paper product from manufacture to consumption and disposal is short (paper is used more in the nature of a consumption good and not as a durable) * Widely used, right from an individual to a company
* No real low cost substitute for paper
While India accounts for nearly 15 per cent of the world population, it consumes only 3 per cent of the global paper production. The country's per capita paper consumption at about 9 kg is low as compared to the world average of around 55 kg.
Elasticity of demand:
In the paper business, the level of substitution has remained relatively low. While W&P paper does not face any...