Will China's monster mills wake up the west?

Last month, I wrote about my latest trip to China and examined some of the huge paper mills being built there. Even if these monster mills don't scare Western paper companies now, they should at least raise some eyebrows and cause some spreadsheets to be opened. Richard Pratt, chairman of Australia's Visy Industries, had the same reaction during his travels in China and outlined his thoughts in an excellent keynote address to the 2005 TAPPI Corrugated Packaging Conference, held in Las Vegas September 26-27. Anyone working in the pulp and paper industry would be wise to take a close look at some of his observations.

Pratt noted that the rate of growth and modernization of the Chinese paper and packaging industry is nothing short of staggering. "Since 2000, China has posted annual economic growth of 8.5%. Production of corrugated packaging rose a staggering 16% compared to less than 3% in the USA and less than 2% in Europe. In almost every industry--including paper and packaging--the best in China is equal to the best in the world," he said. In a more recent report, the consulting firm Research and Markets said that China's paper and paperboard production increased by 15.1% from 2003 to 2004, generating 49.5 million metric tons. Pratt also noted that U.S. imports of packaged products from China now exceed US$ 130 billion/yr causing many American packaging companies to lose business to China.

While these changes are extreme in and of themselves, Pratt predicted that the next phase of China's development--the exporting of Chinese capital--will have even more impact on Western markets. "Expect to see dramatic increases in direct Chinese investment across a range of industries around the world. Much of it will be aimed at securing long term supplies of the raw materials China needs to continue its growth--including fiber, and especially long fiber," he said.

Pratt stated that in 2004, the Chinese government announced it will spend US$ 24 billion over the next six years in a massive forestation and pulp making program. As part of the plan, China will plant 5 million hectares of fast-growing trees and build several 500,000 metric ton/yr pulp mills in the Southeast. The plan also calls for building a host of smaller paper mills near bamboo plantations in the Southwest.

What does this means to Western paper companies? Pratt's answer is simple: "A Western papermaker who cannot compete on price as an exporter to China will not survive. Nor will any Western company that can't compete against Chinese imports in their own home markets. The message is get efficient or get out." Pratt predicted that inefficient plants will be replaced by two different types of greenfield mills: mini mills serving local markets and mega mills supplying entire regions.

PRICE TAKERS VS PRICE MAKERS

Finally, he noted that merely selling products won't cut it anymore. "Our industry must move from being mostly selling-focused to being very marketing-focused," said Pratt. "We have to do things in a way that makes our customers more profitable. The simple definition I use to describe the difference between selling and marketing is that sellers are price takers while marketers are price makers. Price makers don't just say 'we make paper or boxes and what price will you pay?' They constantly strive for innovation and new applications for their product, even well outside their traditional industry."

Here are some of the other trends Pratt outlined:

* Linerboard grammages must continue to go down.

* Boxmakers must have shorter production runs, better graphics, shelf-ready and display-ready designs, contract packing, and litho laminates.

* Microflutes as the primary and secondary pack.

* RFID tagging will grow rapidly.

* New services like short-run digital printing.

* Bag-in-box systems, plastic and paper combinations, timber and paper combinations for pallets, biodegradable plastics in boxes, and more.

In other words, innovation will be the salvation of the world's corrugated industry, and lack of innovation will be its death sentence. It's up to you to decide.

Editor's Note: For Richard Pratt's full speech, go to the Internet: http://newsmanager.commpartners.com/tappiaotc/issues/2005-10-26.html.

ALAN ROOKS

Editorial Director

Contact Alan at [phone], or by e-mail at: [e-mail]

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