Despite the risks, Asia presents a tempting treat: in a sluggish international environment, the Asian pulp and paper industry offers some exciting prospects--if you fancy the risks.

After a long, drawn out recovery from the aftershocks of a major financial crisis and a period in the doldrums, Asia was just starting to look like a promising bet again. Then came SARS (Severe Acute Respiratory Syndrome) to spoil the party. The impact of the epidemic on the region's financial prospects is not yet clear, but it does not appear to be the precursor of an apocalyptic financial meltdown.

That is not to say that the tragic development of SARS in China and its subsequent spread around the globe will not cause serious difficulties for individuals and the general economy. However, the early indications are that the disease is being controlled and the impact of SARS, although terrible for those involved, has not completely dashed hopes of an Asian financial renaissance.

As Ilkka Kuusisto, associate principal with Jaakko Poyry in Singapore, explained, "Things should start to get better for Asia. They suffered quite a bit after the Asian currency crisis and then alter that 2000 and 2001 were quite poor years. Then came the buildup to the war in Iraq when no one wanted to do anything and now the region has been hit by the SARS--but if they can get on top of that then things should start to look up. At the moment, though, the economies are 1-2% down on the growth they should have due to SARS."

BETTER YEAR

Epidemiological events aside, to see just how well non-Japan Asia was doing in an uncertain global market until the latest crisis you need only look at the growth numbers (Figure 1).

[FIGURE 1 OMITTED]

Commenting on the region's performance in a recent paper, the director of the Asia and Pacific department at the International Monetary Fund (IMF), David Burton, said, "Economic performance in the Asia region was quite impressive in 2002, with growth picking up smartly, even though the recovery in industrial country growth was relatively weak. Excluding China, India, and Japan, growth in the region accelerated to 4.25 % last year from only 1.75% in 2001. And non-Japan Asia was the fastest growing region in the world with real GDP expanding by more than 6 %, as growth in China increased to 8%."

For the pulp and paper" industry, GDP growth correlates closely with consumption increases so that should translate into good news for producers. As Kuusisto explained, "The fastest growing market is China of course, but China itself is a big market and different parts are growing at different rates. Some of the other smaller countries are growing really fast as well--Thailand and Vietnam, for example--but countries such as Singapore and South Korea can be considered to be much more mature markets."

In fact, Kuusisto believes that as Korea is already among the most advanced papermaking nations in Asia and one that remains focused on the export market, it will have to keep pushing toward higher value-added products if it is to stay relevant as other countries catch up technologically. As he pointed out, "South Korea is very much dependent on export markets. They have been growing slowly, but excess capacity and competition from cheaper countries means that they really have to look at developing higher value-added grades in the long term, such as coated papers."

But even if Korea's domestic market isn't booming at the same rates seen a decade or two ago, there should be plenty of other growth to exploit across the region. "Packaging grades for industry represent the main driver for new capacity across Asia, but printing papers are also doing quite well as new markets open up and more people read newspapers and so on," Kuusisto said. "Tissue is growing a bit, but really it's mostly accounted for by population growth. It's not that dramatic."

BIG PLANS

China has played a key part in the recent economic success of Asia through rapid export growth and this is likely to develop even further with the country's entry into World Trade Organization (WTO). Not only that, but domestic consumption and production of pulp and paper is expected to grow very rapidly.

According to Professor Zhong Xiang-Ju, professor emeritus and senior adviser, international liaison, to the China Technical Association of the Paper Industry (CTAPI), China's total paper and paperboard production for 2002 was estimated to be around 36 million metric tons--up 12.5% on the previous year. On top of that, further massive growth is expected to follow.

As Professor Zhong indicated, "A goal of 50-60 million metric tons of paper and paperboard production has been set for the year 2010, hoping to bring the per capita consumption to not any less than 40 kilograms per capita."

Clearly, this will have enormous implications for capacity expansion, not to mention trade flows in the forestry and wastepaper markets.

LOOKING UP

While China may be the new 800-pound gorilla of the region, a look at some of the other countries in the region indicates that it is not the only one doing well in terms of economic growth and its consequent impact on paper consumption. As Burton's IMF report showed, improved domestic demand and an easing of monetary and fiscal policies played important roles in last year's improved growth performance, especially in Korea, Malaysia, Singapore and Thailand. However, overcapacity continues to taint the economic picture in several sectors and that appears to apply to sections of the pulp and paper industry.

Under a modestly positive scenario, Burton predicts that a strengthening global economy would underpin growth of about 6% in non-Japan Asia in 2003-2004. China would come in at 7.5% over that period, while countries such as Malaysia could see growth of more than 5%. However, progress could well be slower in Indonesia at 3.5% faced with repercussions from the terrorist attack in Bali.

That last point was reinforced by the executive director of the Indonesian Pulp & Paper Association (IPPA), Kahar Haryopuspito. "Usually, we get the data from our members several months after it happens, so the numbers we're seeing are not that bad," he said. "But we do hear things from people and it appears that now things are not quite as good as they could be in the domestic market because of the impact of the Bali bombings and things like SARS. We still expect to see some growth this year though."

Of course, when people look at the Indonesian paper industry, Asia Pulp & Paper (APP) inevitably dominates the discussion. Best known as the largest ever emerging market corporate debt default--the group's debt stood at a tad over US$13 billion when it suspended repayments in March 2001--the reverberations from APP's default are still being felt today.

Although the company finally appears to be getting close to securing a deal with its creditors, it has been a long, drawn out process and has helped dampen enthusiasm for foreign direct investment in Indonesia's pulp and paper industry. A point made by Kahar Haryopuspito, "So far we haven't heard much that's definite about any big plans for new investments and there is overcapacity in several grades at the moment."

As Kuusisto explained, "APP has affected the whole situation in Indonesia. It's all in the hands of IBRA [the Indonesian restructuring bank that led many of the negotiations] and the banks now. But APP is still in operation and generating out put. The company is busy in China and continues to invest backed with money from Chinese banks."

Indeed, APP's financial problems may even have forced output higher than normal and impacted prices across the region, according to one commentator. The accusation is that the group's need for cash has kept it churning out the tonnage (Table 1) at all costs and this has prompted governments such as Korea and Malaysia to complain about alleged "dumping." But whether that is true or not, APP's own figures appear to show some strengthening in the market over last year even if there has been weakness in recent weeks.

That is not to say there is no new investment in Indonesia, however, and there is absolutely no shortage of un-funded plans. As it stands now, the odd new paper machine and upgrade still appear, but nothing like in the boom years when APRIL (Asia Pacific Resources International) and APP were dominating headlines with massive investments each year.

Longer term though, Indonesia's entire pulp and paper sector could face most risk from the pressure being exerted by environmental groups, with several calling on Western companies to bans the use of wood harvested in Indonesia's forests.

CHECK DRIVERS

By highlighting the performance of the paper industry in certain countries (as we have done in the related features on Thailand and Vietnam, available on www.tappi.org), it is tempting to view Asia as a region of winners and losers. However, no-one should be under any illusions about what the real drivers are in this game.

Asia is very far from being a homogeneous industrial or economic landscape. The relative economic success of certain countries will always be important. But in the long term, China's economic progress, or perhaps even the lack of it, will now influence every serious investment decision across Asia's forest products industry for the foreseeable future. As such, it is impossible to look at Asian paper companies without reference to one of the world's largest potential growth markets.

Indeed, the effects are likely to be felt even further afield. For example, late last year the country's accession to tire WTO prompted the imposition of temporary antidumping tariffs on coated art paper imported from the United States, South Korea and Japan. (A 29.6% duty on products item MeadWestvaco; 5.6-31.1% on South Korean papermakers, including Hansol, Shinho, Shinmoorim, Hankuk and Kye Sung; 23.9% on Japan's Nippon Paper Industries and 56.5% on Oji Paper.)

As Burton at the IMF argues, advanced manufacturing economies such as Korea and Singapore should benefit from increased production linkages with China in the medium term, but technology transfer will allow China to catch up quickly and that is something the Koreans especially will have to be aware of. At the same time, countries with a comparative advantage in agricultural and primary products--such as Thailand, Malaysia, Indonesia, and Vietnam-could experience increased exports of these products, generating new opportunities for the pulp and paper industry. Despite all the concerns prompted by SARS and the threat of socio-economic instability, it looks as though Asia will be one to watch for some time to come.

APP PRODUCTION VOLUMES (1000 metric tons)

                                              2002
              2000   2001   2002     Q1     Q2     Q3     Q4

INDAH KIAT
Pulp          1777   1797   1812    443    453    478    438
Paper          616    589    631    152    160    164    155
Packaging                   1182    310    307    301    264

TJIWI KIMIA
Paper          949    857    939    237    239    232    231
Stationery     155    183    195     51     58     46     40
Packaging       69     52     54     12     14     13     15

PINDO DELI
Paper          631    551    627    153    164    161    149
Tissue          45     42     53     11     14     15     13
Packaging       56     47     45     12     11     10     12

LONTAR PAPYRUS
Pulp           572    620    657    160    152    164    181
Tissue          43     42     47     12     12     12     12

APP AVE REALIZED SALES PRICES ($/tonne)

                                              2002
              2000   2001   2002     Q1     Q2     Q3     Q4

INDAH KIAT
Pulp           508    320    340    304    320    368    366
Paper          707    676    678    637    659    714    703
Packaging      448    351    382    343    385    415    385

TJIWI KIMIA
Paper          682    703    719    668    711    738    757
Stationery    1298   1072   1071   1010   1003   1110   1160
Packaging      481    402    418    357    441    469    404

PINDO DELI
Paper          723    712    751    699    726    796    784
Tissue         980    968    958    921    942    969   1000
Packaging      720    556    523    535    517    530    511

LONTAR PAPYRUS
Pulp           510    311    344    309    321    370    375
Tissue         805    777    756    722    750    772    779

Source: APP

Table 1: APP's production volumes and sales prices

Editor's Note: Information on the Vietnam and Thailand pulp and paper markets is available online. Go to www.tappi.org, click on Solutions!, and click on "Online Exclusives." After July, click on "Online Exclusives Archives" on the left hand panel.

IN THIS ARTICLE, YOU WILL LEARN:

* How the Asian market is coping with the SARS epidemic

* Growth trends in China and other Asian countries

* The effect of APP's financial woes on the Asian market

ADDITIONAL RESOURCES:

* Related profiles of the Vietnam and Thailand pulp and paper markets: Go to www.tappi.org, click an Solutions!, and click on Online Exclusives July.

* "China's paper industry: Entering the WTO era," by Hannu Oinonen, Solutions!, March 2003, p. 28. (Also available online at www.tappi.org, free downloads for PIMA and TAPPI members.)

* "Europeans look east for the long term," Jim Kenny, Solutions!, June 2002, p.59 (Also available online at www.tappi.org, free downloads for PIMA and TAPPI members.)

Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].