IMPACT OF RECESSION AND INFLATION OF INDIAN PAPER INDUSTRY

EXECUTIVE SUMAMRY

PAPER... it is a piece of our lives!

Early attempts at achieving ways of communication and recording thoughts involved the

use of waxed boards, leaves, bronze, silk, and clay tablets. It wasn't until the invention of

paper that information could be recorded and passed on cheaply and in greater quantity.

In 4000 B.C. ancient Egyptians invented the first substance like paper as we know it. The

word ``paper'' actually comes from the word `papyrus'. Papyrus was a woven mat of

reeds, pounded together into a hard, thin sheet. Later on in history, the ancient Greeks

used a kind of parchment made from animal skins for the same purpose. In India the

history of handmade paper started in the year 1522 A.D when Emperor Babar came to

India.

Though the Indian paper industry is more than 100 years old, its growth has been slow

until the 1950's. Like any other commodity, paper too goes through a cyclical trend

depending upon the demand-supply scene in the international markets. The prices in the

domestic market are inextricably linked with the paper price movements internationally.

In the last few years international prices have been so weak, that consequently the Indian

paper industry underwent a recession, emerging out of its rough patch only in the last

quarter of 1999.

With the reduction of worldwide recession however, investments in this area have been

encouraging. The total production of paper and board has improved, with newsprint

output showing the most growth. Prices have burgeoned in line with international trends.

Paper Process

The paper industry in India could be roughly categorised into three according to the raw

material used (1) wood based (2) agro based and (3)waste paper based. A wide range of

raw materials, such as bamboo, wood grass, bagasse, rice and wheat straw, jute, rags and

waste paper is available for paper and board making.

The paper making process begins with the debarking of the logs. The logs are then sent

through a series of chippers that break them down into small pieces. The tiny fragments

are then pressure cooked with chemicals in a large vat called a digester to separate the

fibers. At this point, recovered fibers are often added to the pulp.

In the final stage of preparation, the wood pulp is cleaned, refined, bleached, and run

through a series of beaters until it is a fine slush. Fillers and other additives can be

included. When the preparation is complete, the slush is pumped onto a fast-moving wire

screen where it dries to become a continuous sheet of paper.

As the slush travels down the screen, excess water is drained leaving a crude paper sheet

called the `web'. The web is then squeezed between rollers to remove remaining moisture

and ensure uniform thickness and smoothness. Finally, the web is run through a series of

heated rollers to remove any residual water. The finished paper is spooled onto `parent

rolls', which can be 30 feet wide and weigh 25 tons. The parent rolls are run through a

machine called a slitter, which cuts them into smaller, more manageable rolls.

On the paper

There are a number of universities and institutions in the country that offer a graduate and

postgraduate degree in paper and pulp technology. The Institute of Paper Technology at

Saharanpur, which is part of University of Roorkee, offers Bachelor, Master and Doctoral

degrees in Pulp and Paper Engineering. It offers a doctorate in subjects such as: Pulping,

Paper making, Printing, Environmental Pollution, Energy Management, Instrumentation.

Paper Properties and other areas of pulp and paper science and engineering. Study

courses of 4 years duration are also conducted for which an all-India entrance

examination is held every year. The university offers a 2-year diploma too in paper and

pulp technology and process instrumentation. In addition to the regular courses, the

institute runs industry specific courses for mill personnel and paper traders. Amaravati

University is another that offers similar courses.

Opportunities

There are a number of opportunities for people from different fields. A great number of

chemical, mechanical, electrical and environmental engineers are part of the paper

industry as are instrumentation and process control people. The engineers oversee the

various stages of pulp manufacturing and paper making. Diploma holders and science

graduates or postgraduates can be employed as technicians for lab analysis work or as

quality and process control analysts. On the commercial side, anyone with a materials

management background, finance and accounts, sales and marketing can fit in. One of the

important jobs in the industry is of the `agricultural wing'. This department runs and

operates a 'seed farm' or nursery for stocking saplings to be replanted. Agricultural

graduates are best suited for this work.

Diploma holders in engineering and B.Sc and M.Sc graduates can also work in

downstream industries like newsprint making and the carton manufacturing industry.

Pollution being such a constant hazard facing this industry there is always place for

environmental engineers whose chief duty it is to see that the impact on the environment

is minimal. The Centre for Science and Environment, a non-governmental organisation,

carried out its first green rating of India's paper and board industry last year.

With several technological changes taking place in the paper industry, the government

has to rethink its land use policies and conservation strategies to protect the natural

resources. While countries like Indonesia, Malaysia and Philippines have already

emerged as `paper tigers'; India is being looked upon as the country with the maximum

growth potential.

Concept of Recession

Though no one likes or wants a recession, almost everyone appears (looking at

WEF, Davos) reconciled to one in the United States. Meanwhile, politicians

continue to downplay any fears of global repercussions, citing decoupling of the

United States and other economies as a buffering factor. But what is the reality

for countries like India?

It would be naïve to imagine that a recession in the United States would have no

impact on India. The United States accounts for one-fourth of the world GDP and

any significant slowdown is bound to have reverberations elsewhere. On the

other hand, interdependencies between the US economy and emerging

economies like India and China has reduced considerably over the last two

decades. Thus, the effect may not be as drastic as would have been the case in

the 1980s.

Even so, fears of a US recession led to panic in the Indian stock market. January

21 and 22 saw a meltdown with a mind-boggling US$450 billion in market

capitalization being vaporized. An unprecedented interest cut by the Fed led to a

bounce-back on January 23 and at the time of this writing, the benchmark index

(BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi.

History might hold a clue here. The last time the bubble burst (2001–2002), the

DJIA went down by 23%, while the Indian Index fell by 15%.

Much has happened between then and now. The Indian economy has shown a

robust and consistent growth trajectory and the projection for 2008 is 9%. Indian

exports to the United States account for just over 3% of GDP. India has a healthy

trade surplus with the United States.

In other words, the effects of this recession on India may be quite distinct from

those of the past. Here are some areas worth following:

1. A credit crisis in the United States might lead to a restructuring of asset

allocation at pension funds. It has been suggested that CalPERS is likely to shift

an additional US$24 billion to its international portfolio. A large portion of this is

likely to flow into India and China. If other funds follow suit, a cascading effect

can be expected. Along with the already significant dollar funds available, the

additional funds could be deployed to create infrastructure—roads, airports, and

seaports—and be ready for a rapid takeoff when normalcy is restored.

2. In terms of specific sectors, the IT Enabled Services sector may be hit since a

majority of Indian IT firms derive 75% or more of their revenues from the United

States—a classic case of having put all eggs in one basket. If Fortune 500

companies slash their IT budgets, Indian firms could be adversely affected.

Instead of looking at the scenario as a threat, the sector would do well to focus

on product innovation (as opposed to merely providing services). If this is done,

India can emerge as a major player in the IT products category as well.

3. The manufacturing sector has to ramp up scale economies, and improve

productivity and operational efficiency, thus lowering prices, if it wishes to offset

the loss of revenue from a possible US recession. The demand for appliances,

consumer electronics, apparel, and a host of products is huge and can be

exploited to advantage by adopting appropriate pricing strategies. Although

unlikely, a prolonged recession might see the emergence of new regional

groupings—India, China, and Korea?

4. The tourism sector could be affected. Now is the time to aggressively promote

health tourism. Given the availability of talented professionals, and with a distinct

cost advantage, India can be the destination of choice for health tourism.

5. A recession in the United States may see the loss of some jobs in India. The

concept of Social Security, that has been absent until now, may gain momentum.

6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are

pushing for government intervention and rate cuts. What is conveniently forgotten

in this debate is that a stronger Rupee would reduce the import bill, and narrow

the overall trade deficit. The Indian central bank (Reserve Bank of India) can

intervene anytime and cut interest rates, increasing liquidity in the economy, and

catalyzing domestic demand. A strong domestic demand would also help in

competing globally when the recession is over.

In summary, at the macro-level, a recession in the US may bring down GDP

growth, but not by much. At the micro-level, specific sectors could be affected.

Innovation now may prove to be the engine for growth when the next boom

occurs.

For US firms, who have long looked at China as a better investment destination,

this may be a good time to look at India as well. After all, 350 million people with

purchasing power cannot be ignored. This is not a sales pitch for India, but only a

gentle suggestion to US corporations.

The USA Economy

The largest and still the most important market in the world, the United States of

America’s economy is driven by consumers but is troubled by high debt levels.

The United States of America (US or USA) has the world’s largest economy.

According to the CIA World Factbook, 2007 GDP is believed to be $13.84 trillion.

This is three times the size of the next largest economy, Japan, which has a GDP

of $4.4 trillion. US dominance has been eroded however by the creation of the

European Union common market, which has an equivalent GDP of over $13

trillion, and by the rapid growth of the BRIC economies, in particular China, which

is forecast to overtake the US in size within 30 years.

The recent failure in the US housing and credit markets have resulted in a

slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in

2008 it is projected to be just 0.9%, down from the 10-year average of 2.8% (see

chart at end of article).

In common with most developed countries, Services is the key sector of the

economy. In 2007, services made up 78.5% of GDP, industry 20.5% and

agriculture less than 1%.

Around two-thirds of the total production of the country is driven by personal

consumption. Although the US is often referred to as a free market economy, this

is not entirely true, since there are government regulations protecting certain

sectors, notably energy and agriculture. It can be more accurately described as a

‘consumer economy’.

Since the US economy is also the largest economy in the world, and the US

consumer drives two thirds of the US economy, the US consumer is also a big

driver of global economic activity.

The forces of supply and demand directly drive the price levels of goods and

services. What to produce, and how much of it is to be produced depends on the

price level fixed by the interaction of supply and demand.

The role of government in the US economy is crucial when it comes to decision-

making regarding monetary and fiscal policies. The federal government takes all

the necessary initiatives to ensure the growth and stability of the United States.

The US government makes full use of economic tools such as money supply, tax

rates, and credit control, among other things, to adjust the rate of economic

growth. For the most part, the US Federal Government also regulates the

operations of private business concerns in order to prevent monopolies.

The government renders a number of direct services in the form of providing

support for national defense, monetary aid for research and development

programs, and funds for highway construction & infrastructure in general.

The question of national debt is a controversial one within the US. At the start of

2008, the US federal debt stood at $9.2 trillion. This is a worrying 67% of GDP

and equates to $79,000 for each American taxpayer, a number just over 117

million people. To add to the concern, American consumers are also increasingly

dependent on debt and have been re-mortgaging their houses to higher loan

amounts, and using the extra cash to fund high street purchases.

This debt figure is the largest in the world in absolute terms, but as a percentage

of GDP it is less than Japan and similar to several European countries.

Most of the debt is funded by central banks and sovereign wealth funds from

Asia, Europe and the Middle East.

The trend of the real GDP growth rate of the US economy is shown in

US Sub Prime Crisis

The subprime mortgage crisis is an ongoing economic problem manifesting itself

through liquidity issues in the global banking system owing to foreclosures which

accelerated in the United States in late 2006 and triggered a global financial

crisis through 2007 and 2008. The crisis began with the bursting of the US

housing bubble and high default rates on "subprime" and other adjustable rate

mortgages (ARM) made to higher-risk borrowers with lower income or lesser

credit history than "prime" borrowers. Loan incentives and a long-term trend of

rising housing prices encouraged borrowers to assume mortgages, believing they

would be able to refinance at more favorable terms later. However, once housing

prices started to drop moderately in 2006–2007 in many parts of the U.S.,

refinancing became more difficult. Defaults and foreclosure activity increased

dramatically as ARM interest rates reset higher. During 2007, nearly 1.3 million

U.S. housing properties were subject to foreclosure activity, up 79% from 2006.

The mortgage lenders that retained credit risk (the risk of payment default) were

the first to be affected, as borrowers became unable or unwilling to make

payments. Major banks and other financial institutions around the world have

reported losses of approximately U.S. $435 billion as of July 17, 2008.Owing to a

form of financial engineering called securitization, many mortgage lenders had

passed the rights to the mortgage payments and related credit/default risk to

third-party investors via mortgage-backed securities (MBS) and collateralized

debt obligations (CDO). Corporate, individual and institutional investors holding

MBS or CDO faced significant losses, as the value of the underlying mortgage

assets declined. Stock markets in many countries declined significantly.

The widespread dispersion of credit risk and the unclear effect on financial

institutions caused lenders to reduce lending activity or to make loans at higher

interest rates. Similarly, the ability of corporations to obtain funds through the

issuance of commercial paper was affected. This aspect of the crisis is consistent

with a credit crunch. The liquidity concerns drove central banks around the world

to take action to provide funds to member banks to encourage the lending of

funds to worthy borrowers and to re-invigorate the commercial paper markets.

The subprime crisis also places downward pressure on economic growth,

because fewer or more expensive loans decrease investment by businesses and

consumer spending, which drive the economy. A separate but related dynamic is

the downturn in the housing market, where a surplus inventory of homes has

resulted in a significant decline in new home construction and housing prices in

many areas. This also places downward pressure on growth. With interest rates

on a large number of subprime and other ARM due to adjust upward during the

2008 period, U.S. legislators, the U.S. Treasury Department, and financial

institutions are taking action. A systematic program to limit or defer interest rate

adjustments was implemented to reduce the effect. In addition, lenders and

borrowers facing defaults have been encouraged to cooperate to enable

borrowers to stay in their homes. Banks have sought and received over $250

billion in additional funds from investors to offset losses. The risks to the broader

economy created by the financial market crisis and housing market downturn

were primary factors in several decisions by the U.S. Federal reserve to cut

interest rates and the economic stimulus package passed by Congress and

signed by President George W. Bush on February 13, 2008. Both actions are

designed to stimulate economic growth and inspire confidence in the financial

markets.

Background information

The term subprime lending refers to the practice of making loans to borrowers

who do not qualify for market interest rates owing to various risk factors, such as

income level, size of the down payment made, credit history, and employment

status. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of

March 2007 with over 7.5 million first-lien subprime mortgages outstanding.

Approximately 16% of subprime loans with adjustable rate mortgages (ARM)

were 90-days delinquent or in foreclosure proceedings as of October 2007,

roughly triple the rate of 2005. By January 2008, the delinquency rate had risen

to 21% and by May 2008 it was 25%.

Number of U.S. Household Properties Subject to Foreclosure Actions by

QuarterSubprime ARMs only represent 6.8% of the loans outstanding in the US,

yet they represent 43.0% of the foreclosures started during the third quarter of

2007. During 2007, nearly 1.3 million properties were subject to 2.2 million

foreclosure filings, up 79% and 75% respectively versus 2006. Foreclosure filings

including default notices, auction sale notices and bank repossessions can

include multiple notices on the same property. More homeowners continue to

receive foreclosure notices, with one in every 519 households receiving a

foreclosure filing in April, 2008.

The estimated value of subprime adjustable-rate mortgages (ARM) resetting at

higher interest rates is U.S. $400 billion for 2007 and $500 billion for 2008. Reset

activity is expected to increase to a monthly peak in March 2008 of nearly $100

billion, before declining. An average of 450,000 subprime ARM are scheduled to

undergo their first rate increase each quarter in 2008.

Understanding the causes and risks of the subprime crisis

The reasons for this crisis are varied and complex. Understanding and managing

the ripple effect through the world-wide economy poses a critical challenge for

governments, businesses, and investors. The crisis can be attributed to a

number of factors, such as the inability of homeowners to make their mortgage

payments; poor judgment by the borrower and/or the lender; and mortgage

incentives such as "teaser" interest rates that later rise significantly. Further,

declining home prices have made re-financing more difficult. As a result of

innovations in securitization, risks related to the inability of homeowners to meet

mortgage payments have been distributed broadly, with a series of consequential

impacts. There are four primary categories of risk involved:

Credit risk: Traditionally, the risk of default (called credit risk) would be assumed

by the bank originating the loan. However, due to innovations in securitization,

credit risk is frequently transferred to third-party investors. The rights to mortgage

payments have been repackaged into a variety of complex investment vehicles,

generally categorized as mortgage-backed securities (MBS) or collateralized

debt obligations (CDO). A CDO, essentially, is a repacking of existing debt, and

in recent years MBS collateral has made up a large proportion of issuance. In

exchange for purchasing MBS or CDO and assuming credit risk, third-party

investors receive a claim on the mortgage assets and related cash flows, which

become collateral in the event of default.

Asset price risk: MBS and CDO asset valuation is complex and related "fair

value" or "mark to market" accounting is subject to wide interpretation. The

valuation is derived from both the collectibility of subprime mortgage payments

and the existence of a viable market into which these assets can be sold, which

are interrelated. Rising mortgage delinquency rates have reduced demand for

such assets. Banks and institutional investors have recognized substantial losses

as they revalue their MBS downward. Several companies that borrowed money

using MBS or CDO assets as collateral have faced margin calls, as lenders

executed their contractual rights to get their money back. There is some debate

regarding whether fair value accounting should be suspended or modified

temporarily, as large write-downs of difficult to value MBS and CDO assets may

have exacerbated the crisis.

Liquidity risk: Many companies rely on access to short-term funding markets for

cash to operate (i.e., liquidity), such as the commercial paper and repurchase

markets. Companies and structured investment vehicles (SIV) often obtain short-

term loans by issuing commercial paper, pledging mortgage assets or CDO as

collateral. Investors provide cash in exchange for the commercial paper,

receiving money-market interest rates. However, because of concerns regarding

the value of the mortgage asset collateral linked to subprime and Alt-A loans, the

ability of many companies to issue such paper has been significantly affected.

The amount of commercial paper issued as of October 18, 2007 dropped by

25%, to $888 billion, from the August 8 level. In addition, the interest rate

charged by investors to provide loans for commercial paper has increased

substantially above historical levels.

Counterparty risk: Major investment banks and other financial institutions have

taken significant positions in credit derivative transactions, some of which serve

as a form of credit default insurance. Due to the effects of the risks above, the

financial health of investment banks has declined, potentially increasing the risk

to their counterparties and creating further uncertainty in financial markets. The

demise and bailout of Bear-Stearns was due in-part to its role in these

derivatives.

Understanding the effect on corporations and investors

Average investors and corporations face a variety of risks owing to the inability of

mortgage holders to pay. These vary by legal entity. Some general exposures by

entity type include:

Bank corporations: The earnings reported by major banks are adversely affected

by defaults on mortgages they issue and retain. Companies value their mortgage

assets (receivables) based on estimates of collections from homeowners.

Companies record expenses in the current period to adjust this valuation,

increasing their bad debt reserves and reducing earnings. Rapid or unexpected

changes in mortgage asset valuation can lead to volatility in earnings and stock

prices. The ability of lenders to predict future collections is a complex task

subject to a multitude of variables. Additionally, a bank's mortgage losses may

cause it to reduce lending or seek additional funds from the capital markets, if

necessary to maintain compliance with capital reserve regulatory requirements.

Mortgage lenders and Real Estate Investment Trusts: These entities face similar

risks to banks. In addition, they have business models with significant reliance on

the ability to regularly secure new financing through CDO or commercial paper

issuance secured by mortgages. Investors have become reluctant to fund such

investments and are demanding higher interest rates. Such lenders are at

increased risk of significant reductions in book value owing to asset sales at

unfavorable prices and several have filed bankruptcy.

Special purpose entities (SPE): Like corporations, SPE are required to revalue

their mortgage assets based on estimates of collection of mortgage payments. If

this valuation falls below a certain level, or if cash flow falls below contractual

levels, investors may have immediate rights to the mortgage asset collateral.

This can also cause the rapid sale of assets at unfavorable prices. Other SPE

called structured investment vehicles (SIV) issue commercial paper and use the

proceeds to purchase securitized assets such as CDO. These entities have been

affected by mortgage asset devaluation. Several major SIV are associated with

large banks.

Investors: Stocks or bonds of the entities above are affected by the lower

earnings and uncertainty regarding the valuation of mortgage assets and related

payment collection. Many investors and corporations purchased MBS or CDO as

investments and incurred related losses

Causes of the crisis

The housing downturn

Further information: United States housing market correction

Subprime borrowing was a major contributor to an increase in home ownership

rates and the demand for housing. The overall U.S. homeownership rate

increased from 64 percent in 1994 (about where it was since 1980) to a peak in

2004 with an all time high of 69.2 percent.

This demand helped fuel housing price increases and consumer spending.

Between 1997 and 2006, American home prices increased by 124%. Some

homeowners used the increased property value experienced in the housing

bubble to refinance their homes with lower interest rates and take out second

mortgages against the added value to use the funds for consumer spending. U.S.

household debt as a percentage of income rose to 130% during 2007, versus

100% earlier in the decade.

A culture of consumerism is a factor. In the early 2000s recession that began in

early 2001 and which was exacerbated by the September 11, 2001 terrorist

attacks, Americans were asked by the current President, George W. Bush, to

spend their way out of economic decline and "Get down to Disney World in

Florida." This call linking patriotism to shopping echoed the urging of former

President Bill Clinton to "get out and shop", and corporations like General Motors

produced commercials with the same theme.

Existing Homes Sales, Inventory, and Months Supply, By QuarterOverbuilding

during the boom period, increasing foreclosure rates and unwillingness of many

homeowners to sell their homes at reduced market prices have significantly

increased the supply of housing inventory available. Sales volume (units) of new

homes dropped by 26.4% in 2007 versus the prior year. By January 2008, the

inventory of unsold new homes stood at 9.8 months based on December 2007

sales volume, the highest level since 1981. Further, a record of nearly four million

unsold existing homes were for sale,including nearly 2.9 million that were vacant.

This excess supply of home inventory places significant downward pressure on

prices. As prices decline, more homeowners are at risk of default and

foreclosure. According to the S&P/Case-Shiller price index, by November 2007,

average U.S. housing prices had fallen approximately 8% from their Q2 2006

peak and by May 2008 they had fallen 18.4%. However, there was significant

variation in price changes across U.S. markets, with many appreciating and

others depreciating. The price decline in December 2007 versus the year-ago

period was 10.4% and for May 2008 it was 15.8%.Housing prices are expected

to continue declining until this inventory of surplus homes (excess supply) is

reduced to more typical levels.

Role of borrowers

A variety of factors have contributed to an increase in the payment delinquency

rate for subprime ARM borrowers, which recently reached 21%, roughly four

times its historical level.[16]

Easy credit, combined with the assumption that housing prices would continue to

appreciate, also encouraged many subprime borrowers to obtain ARMs they

could not afford after the initial incentive period. Once housing prices started

depreciating moderately in many parts of the U.S. (see United States housing

market correction and United States housing bubble), refinancing became more

difficult. Some homeowners were unable to re-finance and began to default on

loans as their loans reset to higher interest rates and payment amounts. Other

homeowners, facing declines in home market value or with limited accumulated

equity, are choosing to stop paying their mortgage. They are essentially "walking

away" from the property and allowing foreclosure, despite the impact to their

credit rating.

Mortgage fraud by borrowers from US Department of the Treasury

Misrepresentation of loan application data is another contributing factor. In a

January 13, 2008 column in the New York Times, George Mason University

economics professor Tyler Cowen wrote, "There has been plenty of talk about

'predatory lending,' but 'predatory borrowing' may have been the bigger problem.

As much as 70 percent of recent early payment defaults had fraudulent

misrepresentations on their original loan applications, according to one recent

study. The research was done by BasePoint Analytics, which helps banks and

lenders identify fraudulent transactions; the study looked at more than three

million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications

with misrepresentations were also five times as likely to go into default. Many of

the frauds were simple rather than ingenious. In some cases, borrowers who

were asked to state their incomes just lied, sometimes reporting five times actual

income; other borrowers falsified income documents by using computers."

US Department of the Treasury suspicious activity report of mortgage fraud

increased by 1,411 percent between 1997 and 2005.

Role of housing investors and speculators

Speculation in real estate was a contributing factor. During 2006, 22% of homes

purchased (1.65 million units) were for investment purposes, with an additional

14% (1.07 million units) purchased as vacation homes. During 2005, these

figures were 28% and 12%, respectively. In other words, nearly 40% of home

purchases (record levels) were not primary residences. NAR's chief economist at

the time, David Lereah, stated that the fall in investment buying was expected in

2006. "Speculators left the market in 2006, which caused investment sales to fall

much faster than the primary market."

While homes had not traditionally been treated as investments like stocks, this

behavior changed during the housing boom. For example, one company

estimated that as many as 85% of condominium properties purchased in Miami

were for investment purposes. Media widely reported the behavior of purchasing

condominiums prior to completion, then "flipping" (selling) them for a profit

without ever living in the home.Some mortgage companies identified risks

inherent in this activity as early as 2005, after identifying investors assuming

highly leveraged positions in multiple properties.

Role of financial institutions

A variety of factors have caused lenders to offer an increasing array of higher-

risk loans to higher-risk borrowers. These high risk loans included the "No

Income, No Job and no Assets" loans, sometimes referred to as Ninja loans. The

share of subprime mortgages to total originations was 5% ($35 billion) in 1994 ,

9% in 1996 , 13% ($160 billion) in 1999 , and 20% ($600 billion) in 2006. A study

by the Federal Reserve indicated that the average difference in mortgage interest

rates between subprime and prime mortgages (the "subprime markup" or "risk

premium") declined from 2.8 percentage points (280 basis points) in 2001, to 1.3

percentage points in 2007. In other words, the risk premium required by lenders

to offer a subprime loan declined. This occurred even though subprime borrower

and loan characteristics declined overall during the 2001–2006 period, which

should have had the opposite effect. The combination is common to classic

boom and bust credit cycles.

In addition to considering higher-risk borrowers, lenders have offered

increasingly high-risk loan options and incentives. One example is the interest-

only adjustable-rate mortgage (ARM), which allows the homeowner to pay just

the interest (not principal) during an initial period. Another example is a "payment

option" loan, in which the homeowner can pay a variable amount, but any interest

not paid is added to the principal. Further, an estimated one-third of ARM

originated between 2004–2006 had "teaser" rates below 4%, which then

increased significantly after some initial period, as much as doubling the monthly

payment.

Some believe that mortgage standards became lax because of a moral hazard,

where each link in the mortgage chain collected profits while believing it was

passing on risk.

Critics note that the Bankruptcy Abuse Prevention and Consumer Protection Act

did nothing to curtail the predatory practices of credit card companies, such as

exorbitant interest rates, rising and often hidden fees, and targeting minors and

the recently bankrupt for new cards. The bill's critics pointed out that these

practices are themselves significant contributors to the growth of consumer

bankruptcies.

Role of securitization

Borrowing Under a Securitization StructureSecuritization is a structured finance

process in which assets, receivables or financial instruments are acquired,

classified into pools, and offered as collateral for third-party investment. There

are many parties involved. Due to securitization, investor appetite for mortgage-

backed securities (MBS), and the tendency of rating agencies to assign

investment-grade ratings to MBS, loans with a high risk of default could be

originated, packaged and the risk readily transferred to others. Asset

securitization began with the structured financing of mortgage pools in the 1970s.

The securitized share of subprime mortgages (i.e., those passed to third-party

investors) increased from 54% in 2001, to 75% in 2006. Alan Greenspan stated

that the securitization of home loans for people with poor credit — not the loans

themselves — were to blame for the current global credit crisis.

Role of mortgage brokers

Mortgage brokers do not lend their own money. There is not a direct correlation

between loan performance and income. They have a financial incentive for

selling complex, adjustable rate mortgages (ARMs), since they earn significantly

higher commissions.

According to a study by Wholesale Access Mortgage Research & Consulting

Inc., in 2004 Mortgage brokers originated 68% of all residential loans in the U.S.,

with subprime and Alt-A loans accounting for 42.7% of brokerages' total

production volume.

The chairman of the Mortgage Bankers Association claimed brokers profited from

a home loan boom but didn't do enough to examine whether borrowers could

repay.

Role of mortgage underwriters

Underwriters determine if the risk of lending to a particular borrower under certain

parameters is acceptable. Most of the risks and terms that underwriters consider

fall under the three C’s of underwriting: credit, capacity and collateral. See

mortgage underwriting.

In 2007, 40 percent of all subprime loans were generated by automated

underwriting. An Executive vice president of Countrywide Home Loans Inc.

stated in 2004 "Prior to automating the process, getting an answer from an

underwriter took up to a week. We are able to produce a decision inside of 30

seconds today. ... And previously, every mortgage required a standard set of full

documentation." Some think that users whose lax controls and willingness to rely

on shortcuts led them to approve borrowers that under a less-automated system

would never have made the cut are at fault for the subprime meltdown.

Role of government and regulators

Economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act as

contributing to the subprime meltdown. A taxpayer-funded government bailout

related to mortgages during the Savings and Loan crisis may have created a

moral hazard and acted as encouragement to lenders to make similar higher risk

loans.Additionally, there is debate among economists regarding the effect of the

Community Reinvestment Act, with detractors claiming it encourages lending to

uncreditworthy consumers and defenders claiming a thirty year history of lending

without increased risk

Some have argued that, despite attempts by various U.S. states to prevent the

growth of a secondary market in repackaged predatory loans, the Treasury

Department's Office of the Comptroller of the Currency, at the insistence of

national banks, struck down such attempts as violations of Federal banking laws

In response to a concern that lending was not properly regulated, the House and

Senate are both considering bills to regulate lending practices

Lawmakers received favorable treatment from financial institutions involved in the

subprime industry; see Countrywide Financial political loan scandal, below.

Role of credit rating agencies

MBS Credit Rating Downgrades, By QuarterCredit rating agencies are now under

scrutiny for giving investment-grade ratings to securitization transactions (CDOs

and MBSs) based on subprime mortgage loans. Higher ratings were justified by

various credit enhancements including overcollateralization (pledging collateral in

excess of debt issued), credit default insurance, and equity investors willing to

bear the first losses. Critics claim that conflicts of interest were involved, as rating

agencies are paid by the firms that organize and sell the debt to investors, such

as investment banks. On June 11, 2008 the U.S. Securities and Exchange

Commission proposed far-reaching rules designed to address perceived conflicts

of interest between rating agencies and issuers of structured securities. The

proposal would, among other things, prohibit a credit rating agency from issuing

a rating on a structured product unless information on assets underlying the

product was available, prohibit credit rating agencies from structuring the same

products that they rate, and require the public disclosure of the information a

credit rating agency uses to determine a rating on a structured product, including

information on the underlying assets. The last proposed requirement is designed

to facilitate "unsolicited" ratings of structured securities by rating agencies not

compensated by issuers.

Rating agencies have lowered the credit ratings on $1.9 trillion in mortgage

backed securities over the past four quarters. This places additional pressure on

financial institutions to lower the value of their MBS. In turn, this may require

these institutions to acquire additional capital, to maintain capital ratios. If this

involves the sale of new shares of stock, the value of existing shares is reduced.

In other words, ratings downgrades pressure MBS and stock prices lower.

As of July 2008, Standard & Poors (S&P) had downgraded 902 tranches of U.S.

residential mortgage backed securities (RMBS) and CDOs of asset-backed

securities (ABS) that had been originally rated "triple-A" out of a total of 4,083

tranches originally rated "triple-A;" 466 of those downgrades of "triple-A"

securities were to speculative grade ratings. S&P had downgraded a total of

16,381 tranches of U.S. RMBS and CDOs of ABS from all ratings categories out

of 31,935 tranches originally rated, over half of all RMBS abd CDOs of ABS

originally rated by S&P. Since certain types of institutional investors are allowed

to only carry investment-grade (e.g., "BBB" and better) assets, there is an

increased risk of forced asset sales, which could cause further devaluation.

Overview of Paper Industry

The Indian paper industry has been historically divided on a three dimensional

matrix identified by size, grades manufactured and raw material utilized.

Generally, tariff rates have protected smaller units utilizing “unconventional” raw

material. Over the years, the growth of various segments, investments levels in

specific segments, technological changes, industry fragmentation and intensity of

competition have been significantly influenced by the Government tariff policy.

The present Excise duty on Paper is 12 %. The Government of India from time to

time has given some benefits to small industries in order to protect them i.e. the

first 3500 tones produced by a mill is chargeable only @ 8 % and thereafter it is

@ 12 %.

The three main grades of paper manufactured in India are :-

1. Newsprint

2. Writing and printing.

3. Industrial Variety ( Craft paper and Duplex Board )

Over 550 players currently populate the industry and the estimated capacity is

about 7.00 million Metric Tones Per Annum (MTPA). Fragmentation is severe in

the “industrial” (packaging) grades, which rely on “unconventional” raw material

such as waste paper and partly agro residues. This division generally comprises

of units with an average size of about 10000 MTPA and contributes to 45% of the

output of paper and paper boards in the country. Although the other divisions in

the Indian paper industry are also fragmented by international standards, the

degree of fragmentation is less severe. “Newsprint” till about 1995, was the sole

preserve of large public sector units and was well protected by high import tariff

barriers. Nevertheless, imports contributed to about 50% of the domestic

consumption. Since then, new domestic capacity with private investment has

been allowed to be created. This growth has relied namely on De-inked waste

paper as a source of raw material. Currently import duty on newsprint is about

5% and domestic manufacture of newsprint is exempted from excise duty. This

tariff structure for newsprint has seen Indian newsprint price closely mapping

international prices. Imports still constitute about 30% of consumption and

newsprint contributes about 10% of the total production of paper and

paperboards. The number of players in the newsprint segment is relatively limited

and manufacturing capacities are larger than in the packaging grades segment.

Historically, the bulk of the output of “Cultural” grades – comprising of writing,

printing, office stationery paper and specialty paper has been the preserve of

“large” producers, who use forest based raw material in integrated pulping

facilities augmented by imported pulp. This segment has been consistently taxed

at higher rates due to its size and use of “conventional” forest based raw

material. Investment in plant has also been higher. With relatively smaller

number of players and high import tariff protection, prices of end products,

generally perceived to be higher quality, have been high.

Import tariff levels, although much lower now, still continues a significant barrier

to imports. The high investment levels required and limited “conventional” fiber

resources are the major deterrents to growth in this segment for both existing

players as well as new entrants. “Lower end cultural grades” manufactured by

smaller players using unconventional raw materials in low investment, low tech

plants cater to consumers in the price sensitive sub segment of this market. This

sub segment depends significantly on the tariff differential based on size and raw

material for its viability.

The Indian Paper industry is going through substantial changes. Global demand

for paper is expected to grow by about 4% p.a. over the next 5 years. The

domestic demand is expected to grow at about 8% which will result in increase of

demand by 30 Lakh tones approximately over the next 5 years. It is expected

that customs duty on import of paper will decrease from the current level to the

level of 10% over a period of time due to WTO compulsions.

The import of raw material for paper including pulp, waste paper and news print

is likely to increase by at least 15% to 20% in 2005-06 to keep up with growing

demand for paper in the domestic market. Despite to the constraints like over

crowded market and limitation in procuring the desired quality of waste paper,

there are indicators of a revival in the Indian Paper Industry. In the current year,

selling price has marginally increased and enabled the industry to partially offset

the rise in cost of inputs, fuel & labour.

The paper industry has an important social role to play for the country. Use of

paper is considered as an index of cultural growth. Key social objectives of the

Government like eradicating illiteracy, making primary education compulsory etc.

are very much related to the paper industry. The paper industry is also

contributing towards fulfillment of various requirements of the industry as a whole

like information dissemination, publicity etc. which in turn stimulate industrial

growth of the country. The paper industry has, thus, a catalytic role to play not

only for the overall growth of the industry but also for the living standards of the

people. The new millennium is going to be the millennium of the knowledge. So

demand for paper would go on increasing in times to come. Because of paper

industry’s strategic role for the society and also for overall industrial growth, it is

necessary that the paper industry performs well.

FUTURE PROSPECTS

The globalisation of Indian economy has lead to a healthy growth of 6 to 7%

industry and that is growth happening in all the sectors. Moreover the Per Capita

consumption of paper in India is going up with the advent of packaging in the

food industry. Due to environmental concerns, the use of plastics is likely to be

banned by the Government of India within a short span of time. Hence within 2 to

3 years we will be witnessing an explosive growth of packaging in India mainly in

food, textile and export segments.

The exposure to foreign packaging technology and the need to satisfy the export

customers has led to a drastic change in the industrial packing sector. The

corrugators have started using high BF, high GSM paper instead of the regular

grades and shifting from 7 ply and 9 ply boxes to 5 ply and 3 ply boxes. The

above change has resulted in more aesthetic and cost effective packing

solutions. There is a very good potential market developing for such grades of

paper in India. The market of high quality Kraft paper is now catered only by few

manufactures from western and northern parts of the country. With the above

changes in the industry it would be in the best interest of our company to put up a

Kraft paper plant of 100 MT per day producing high B.F., higher GSM paper and

exploit the emerging market situations better. The company envisages the

following advantages by going for such a plant as follows:

l) Most of the existing paper mills in South India operate with single wire

machine, which can produce up to 24 BF only, whereas the new plant intended

to be set up by SSPML is a twin wire machine which can produce high quality

Kraft paper of 24 BF to 40 BF which is sold in the market at a premium. l By

making high end paper in south India the company stands to gain a lot in terms

of logistics costs when compared to the competition. l SJPML got the advantage

of cost benefit while importing raw materials and exporting finished product. l The

possibility of exporting substantial quantity of the production to near by countries

like, Sri Lanka and eastern African countries is also bright. This may also be

substantiated from the fact that paper exports have risen at a CAGR of 14 % pa

from 105000 tonnes in the year 2000 to 179000 tons in the year 2004. As a

strategic measure to expand the international operations of the company, the

company has already started a new business division – International Business

Unit to handle the international marketing operations of the Company.

2) The company intends to manufacture the paper by using Twin Wire

Technology and also plans to incorporate all latest equipments to have a cost

effective production. The twin wire technology employs two wires drawing pulp

stock from two separate head boxes. The arrangement is in such a way that the

wet webs come into contact before going to the press.

3) At present the Company is employing single wire technology wherein the pulp

stock flows from the head box and gets distributed uniformly for further

dewatering, pressing and drying to form a sheet of paper.

The twin wire technology is superior than the single wire technology due to the

following factors:

1. Improves formation of paper.

2. Improves strength properties of paper namely, Burst factor, Tear

factor, Tensile strength and Ring crush test values.

3. Reduces Cost of Production.

The company will be able to derive the synergies of the existing plants and

position itself as a largest Kraft paper manufacturer in south India by the

installation of the plant. The market expectation for the increased production

Capacity, Production, Raw Material and Import

Government has completely de-licensed the paper industry w.e.f. 17th July,

1997. The entrepreneurs are now required to file an Industrial Entrepreneur

Memorandum with the Secretariat for Industrial Assistance for setting up a new

paper mill or substantial expansion of the existing mill in permissible locations.

The industry is a priority industry for foreign collaboration and foreign equity

participation up to 51% receives automatic approval by Reserve Bank of India.

Foreign investment even up to 100% is approved by FIPB on case to case basis.

Several fiscal incentives have also been provided to the paper industry,

particularly to those mills which are based on non-conventional raw material.

There are, at present, about 515 units engaged in the manufacture of paper and

paperboards and newsprint in India. The country is almost self-sufficient in

manufacture of most varieties of paper and paperboards. Import, however, is

confined only to certain specialty papers. To meet part of its raw material needs,

the industry has to rely on imported wood pulp and waste paper. The production

of paper and paper board during the year 2001-02 is 31.62 lakh tonnes.

The proportion of non-wood raw material based paper is increasing over the

years. At present about 60.8 per cent of the total production is based on non-

wood raw material and 39.2 per cent based on wood.

The performance of the industry has been constrained due to high cost of

production caused by inadequate availability and high cost of raw materials,

power cost and concentration of mills in one particular area. Several policy

measures have been initiated in recent years to remove the bottlenecks of

availability of raw materials and infrastructure development. To bridge the gap

due to short supply of raw materials, duty on pulp and waste paper and wood

logs/chips have been reduced. The capacity utilization of the industry is low at

62% as about 194 paper mills, particularly small mills, are sick and/or lying

closed. Several policy measures have been initiated in recent years.

Imports of paper and paper products were growing over the years. However, it

has decreased during 2000-2001.

Demand and Supply gap in Paper Industry

Indian paper industry is the 15th largest in the world and provides employment to

1.3mn people in the country contributing Rs.25bn to the Government. The

industry has recorded a volume growth of CAGR of 5.47% over the last 3 years.

In 2003-04, it recorded a volume growth of 6%, in line with the GDP growth.

Indian paper industry has a 1:1 correlation with the economy. The demand for

paper is linked to the GDP Growth. The government is planning to target a GDP

Growth of about 10% in 2-3 years. With this increase in the GDP growth the

paper sector is expected to record a similar growth rate.

The Indian paper industry has an installed capacity of 6.7mn tons while, the

effective capacity is estimated to be lower at 6.15mn tons. The industry produced

5.26mn tons of paper in 2003-04. Newsprint capacity in India is estimated at

1.12mn tons however, domestic production is only 0.59mn tons, while

consumption of newsprint is 1.1mn tons. Favorable demand - supply scenario to

keep prices firm

The demand for paper is influenced by various macro-economic factors like

national economic growth, industrial production, promotional expenditure,

population growth and the Government’s allocation for the educational sector.

Domestic demand for paper is expected to grow at a CAGR of 6-7%. India’s

paper demand is expected to touch 8mn t.p.a by 2010. A leading global paper

industry consultant projects a shortage of about 0.7mn tpa by 2010.

Proposed capacity expansions:

Capacity expansions (which cost 50% less than new capacities) have been

announced by most players, but would take 1-2 years to be operational. Capacity

expansions of over 600,000 tons have been announced by the 7 large players in

the sector

WTO Impact

WTO as discussed the implication of Indian Paper and Newsprint Industry as part

of its negotiations and implications. The Indian Paper Industry has important

place in the industrial landscape. The paper industry has a strong backward

linkage with forests and environment on one hand and consumers of a variety of

products on the other hand. The manufacture of paper through pulp of wood or of

other fibrous cellulosic material has been discussed at length. However, recovery

of waste or scrap for paper and paperboard manufacture has been looked at

from different angle in the classification of products of Indian Paper Industry. In

fact the paper industry which are eco friendly imports lot of waste paper into the

country in the manufacturing of paper and paper board. Generally WTO

implication is applicable to all the industries. How ever, in respect of paper

industry where waste paper is the raw material and which is eco friendly, the

impact is not harsh. SSPML is into manufacturing of paper out of the waste paper

and is an eco friendly project.

GOVERNMENT REGULATIONS, PERMISSIONS & TAXES

1. Central Excise:

Central Excise is levied @8% for the first 3500 MT production and thereafter

@12% on the value of the invoice. The Company is availing permitted Modvat

benefits as per Central Excise regulations. For import duty paid on waste paper

procured from overseas the Company is entitled to adjust the entire duty paid

component as that of Modvat credits.

2. VAT (Value Added Tax):

VAT replaces the existing multipoint taxes levied by various states with effect

from April ‘05. As that of other industries, the paper trade is also covered under

VAT for domestic sales done in the state of Kerala. However for interstate sales

CST is continued to be levied as per existing Government regulations.

3. Service Tax:

Being classified as a manufacturing industry, the industry even for Job Work on

conversion basis will not be subjected to Service Tax requirements. A recent

notification from Central Government also confirms such a stand.

4. Factory Licenses:

All the licenses required under Municipality Act, Factories Act are obtained and

duly renewed.

5. Pollution Control:

Necessary permission under effluent discharge Act is obtained and the facilities

required to maintain the permission are in place.

AVAILABILITY OF DOMESTIC WASTE PAPER  

Waste paper recovery system in India is very unorganized and unplanned . As a

result, large quantities of waste paper get diverted for cheaper packaging and

other uses or get destroyed as rubbish. Bulk of waste paper collected by street

collectors in metropolitan cities goes to household paper bag manufacturers. Due

to lack of any grading/ classification system in context of waste paper, no sorting

or segregation is done at source and so most of the waste paper varieties are

collected in commingled form. The probable sources of waste paper collection

are as under:

Waste Paper

Source

Examples

Domestic refuse Newspaper, magazines, board cartons. 

Industrial refuse Corrugated boards, duplex & other packaging board, paper sacks etc.

Office refuse Ledger files and papers from Govt. offices, Universities & large business organizations.

Trade refuse Boards trimmings from converters & packaging manufactures, paper savings from printers

Road Sweeping Newspapers and magazines are usually recycled directly as wrapping and packaging papers by the grocers and pretty traders and therefore they are not available for mills in their first rejection. Other fibrous domestic refuse probably find their way as road sweepings.

 In India, collection of office refuse has not been very high mainly due to

unavailability of a viable collection system. In practice, more than 80% of the

paper consumed in India is being collected, of which only 20% is being made

available to paper industry and the rest 60% is usually diverted for other

diversified / secondary uses such as wrapping, packing etc.  

The developed countries, which are the major players in paper recycling

business, have a well defined and planned waste paper grading system in place,

which facilitates the collection of recovered paper sorted in grades with a limited

mixture of fiber types. Due to limited capacities of landfill sites and (municipal)

incineration plants, increasing waste disposal costs and environmental

awareness a wide range of legislation / directives in various countries have been

imposed which has promoted material recycling and reduced further , the

generation of waste that requires disposal in appropriate facilities. These

regulations set responsibilities for taking back used paper products and

packaging material independent of the public disposal system and recycling

them. 

In India, however, no such regulations / law / directives are in force to promote

use of recyclable resources, as a result of which the recovery of used paper is

also low. As per the statistics available , the Indian paper industry is using more

than 70% of imported waste paper in its total waste paper consumption . The

general issues related with use of imported waste paper in Indian Paper

Industry are:

Ø     Inconsistency in quality and varieties of waste paper grades.

Ø       High level of contamination i.e. prohibitive & out throws.

Ø       Price fluctuation in the international market.

Ø      High price for good quality waste paper i.e. low to negligible

contamination level.

Ø       High ash content in paper leading to low fiber yield / tpaper and generation

of inorganic sludge. 

ISSUES RELATED TO WASTE PAPER BASED MILLS 

In spite of the fact that waste paper processing for paper making is considered

to be an eco friendly process , there are certain technological & environmental

issues still associated with waste paper based mills which needs to be

addressed to improve its environmental compatibility. 

Technological Issues : 

The main objective of recycled fiber processing is the removal of contaminants

and elimination of their effects as much as necessary to meet quality

requirements. Removal of contaminants makes recycled fiber processing

systems significantly more complex than systems for virgin fibers. There are

several unit operations / stages viz. slushing, screening, cleaning, flotation,

disperger etc. to remove the contaminants from recycled fiber stock. The

technology is well established to produce newsprint, packaging grades and fine

papers and most of the mills in USA, Europe have state-of-art technology for

processing of recycled fiber. In India, however, most of the recycled fiber based

mills do not have appropriate system configuration for efficient processing, as a

result the quality of finished paper is low. The level of technology in majority of

mills is obsolete. The operational efficiency of equipments and machines are also

considerably below the optimum level . Due to lack of appropriate configurations,

the amount of rejects generated are also high and is a major source of solid

waste generated in such mills . 

Environmental Issues :

Among the environmental issues associated with recycled fiber mills , solid

waste disposal and management is the subject of main concern. Deinkined

sludge generated from deinking plants in mills using printed waste paper for

producing writing & printing grade of paper , consists of mainly fillers and

coating pigments, fibers, fiber fines, printing inks and adhesive components. A

characteristic feature of the deinking sludge is its high ash content in the

range of 40% - 70%. Traces of heavy metals may also be present in some

cases. In most of the cases the heavy metal content is insignificant and

sometimes even below the detection limit. The another important issue reported

recently is the clandestine import of other waste like plastics, metal and

cloth / rags etc (technically defined as prohibitive and out throws) along with

waste paper.  

OBESRVATION & REMARKS :  

Generally the waste paper being imported in the country are recovered in

segregated form as per the request of the importer. However, some cases have

been reported wherein municipal solid waste constituting of plastics, metal

cans and cloth / rags etc (technically defined as prohibitive and out throws) have

been illegally imported in grab of imported waste paper This has led to the

need of defining / formulating the permissible limits for the contaminants like

plastics, metal cans and cloth / rags etc. in the imported paper . At present, no

data /guideline is available on this issue Therefore; it is recommended to

undertake an indepth study on this issue so as to evolve permissible limits for

prohibitive and outthrows in the imported waste paper consignments entering into

the country

Paper industry in India is more than 100 years old. During its infancy, it was

mainly bamboo based. Before the independence, there were less than 20 paper

mill in operation. During the first decade after independence, the number grew

marginally to 25 and the installed capacity to 0.4 million tons. In the second

decade (1960-70), the numbers has increased to 57 and the capacity to 0.77

million tons. 1970s witnessed a great spurt in paper demand. To cater this

growing demands, government has encouraged the small entrepreneurs to

enhance the

INSTALLED CAPACITY

0

1

2

3

4

5

6

7

1950 1960 1970 1980 1990 2000

YEARS

MIL

LIO

N T

ON

NE

S

Figure 1 Installed capacity

The number of paper mills has grown to 525 with an installed capacity of 6.5

million tons. (Souvenir of Paperex 2001, small scale paper mills & economic

reform by Prabhakar Sharma, Productivity, Vol.43, no.4, March 2003)

Presently, there are over 525 mills with the installed capacity of about 6.5 million

tons per annum with a production of 5.4 million tons (Directory of Indian paper

manufacturers & allied industries, 5th edition, IARPMA, 2003)

Government has completely delicensed the paper industry with effect from17th

July, 1997. The entrepreneurs are now required to file an Industrial Entrepreneur

Memorandum with the Secretariat for Industrial Assistance for setting up a new

paper mill or substantial expansion of the existing mill in permissible locations.

The industry is a priority sector for foreign collaboration and foreign equity

participation upto 100% receives automatic approval by Reserve Bank of India.

Several fiscal incentives have also been provided to the paper industry,

particularly to those mills, which are based on non-conventional raw materials

Current demand and supply and future projection

As per the global trend, demand of paper, worldwide is likely to increase to 450

million tons from about 320 million tons during 2000-2015 with a CAGR of 2.3%.

As demand of paper is directly linked to the regional growth, Asian countries will

have the fastest growth. Demand of paper in India by 2015 is expected to grow to

11 million tons as against the supply of about 10 million tons with a CAGR of

6.6%. In the past domestic paper demand has increased form 1.4 million tons in

1980 to 4.2 million tons in 2000 at compound annual growth rate (CAGR) of

5.6%.

According to a UN study, for a 1% rise in per capita income, the demand for

paper increases by 1.5-2.5%. With India's per capita income on the rise, paper

consumption is expected to increase to 13 kg by 2015 from the figure of 5.5kg in

2003. With increasing stress on education and literacy, the demand for cultural

paper is bound to grow in the coming years. The demand for consumer goods

would also translate into demand for specialty paper used in high-quality

packaging and printing.

Year Demand Production

2000 4.215 3.850

2005 6.0 6.5

2010 8.29 7.1

2020 14.6 12.7

2030* 40.55 28.3

2040 67.5 45.9

GROWTH OF PAPER MILLS

10 15 20 40 50100

180

280320

380 400

525

0

100

200

300

400

500

600

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2003

YEARS

NO

.OF

MIL

LS

Figure 2 Growth of paper Mills

RECESSION IMPACT ON PAPER INDUSTRY

The Indian Paper Industry accounts for about 1.6% of the world’s production of

paper and paperboard. The estimated turnover of the industry is Rs 25,000 crore

(USD 5.95 billion) approximately and its contribution to the exchequer is around

Rs. 2918 crore (USD 0.69 billion). The industry provides employment to more

than 0.12 million people directly and 0.34 million people indirectly. The industry

was delicenced effective from July, 1997 by the Government of India; foreign

participation is permissible. Most of the paper mills are in existence for a long

time and hence present technologies fall in a wide spectrum ranging from oldest

to the most modern.

The mills use a variety of raw material viz. wood, bamboo, recycled fibre,

bagasse, wheat straw, rice husk, etc.; approximately 35% are based on chemical

pulp, 44% on recycled fibre and 21% on agro-residues. The geographical spread

of the industry as well as market is mainly responsible for regional balance of

production and consumption.

With added capacity of approximately 0.8 million tons during 2007-08 the

operating capacity of the industry currently stands at 9.3 million tons. During this

fiscal year, domestic production of paper and paperboard is estimated to be 7.6

million tons. As per industry guesstimates, over all paper consumption (including

newsprint) has now touched 8.86 million tons and per capita consumption is

pegged at 8.3 kg.

Demand of paper has been hovering around 8% for some time. During the period

2002-07 while newsprint registered a growth of 13%, Writing & Printing,

Containerboard, Cartonboard and others registered growth of 5%, 11%, 9% and

1% respectively. So far, the growth in paper industry has mirrored the growth in

GDP and has grown on an average 6-7 per cent over the last few years. India is

the fastest growing market for paper globally and it presents an exciting scenario;

paper consumption is poised for a big leap forward in sync with the economic

growth and is estimated to touch 13.95 million tons by 2015-16. The futuristic

view is that growth in paper consumption would be in multiples of GDP and

hence an increase in consumption by one kg per capita would lead to an

increase in demand of 1 million tons. As per industry estimates, paper production

is likely to grow at a CAGR of 8.4% while paper consumption will grow at a

CAGR of 9% till 2012-13. The import of pulp & paper products is likely to show a

growing trend.

Foreign funds interest in the Indian paper sector is growing. IFC, the investment

arm of the World Bank is already associated with at least three of the IPMA

member mills.

After one of the worst cyclical depressions in the paper industry lasting almost

four years, paper companies are beginning to heave a sigh of relief. International

prices of printing and writing paper are picking up, ranging from $580 to $620 per

tonne for the GSM grade. Pulp prices have also spurted, the price going up by

$120 to $500-$530 per tonne.

There is no respite in the newsprint front however. It is learnt that Hindustan

Newsprint is having 13,500 tonnes of stock which it is not able to dispose.

Tamilnadu Newsprint and Papers Ltd has changed its production mix to 80 per

cent printing and writing paper leaving only 20 per cent for newsprint, which is

executed only against orders.

There has been a 20 per cent drop in paper prices between April and June.

Stocklots for newsprint is coming in at $400 to $450 per tonne, particularly from

Canadian mills. But there is news that these mills would layoff production for a

while till newsprint prices pick up.

Dumping from S Korea has reducedwith the Korean economy picking up. With

some of the larger mills taken over by Canadian companies in Korea, priorities

are shifting in these companies. Meanwhile China has levied anti-dumping duties

against Canada, the US and Korea for paper and there is a chance that these

stocks would be pushed here, according to officials in the paper industry.

Newsprint prices in April this year was Rs 22,500 per tonne (average price) far

less than Rs 23,600 per tonne last April. However local companies are able to

compete on the export front in printing and writing paper with pulp and paper

prices rising globally. For the southern paper mills there is a good export

opportunity and demand from neighbouring countries as also Indonesia, Egypt

and Australia.

In the domestic market, local companies have ceased dumping paper as was

happening in the last two years. Pipeline stocks have been sold and companies

are more comfortable with current stockholding positions.

The notebook season was very good for the southernplayers and there were

price increases in stages by about Rs 800 to Rs 1000. The good news is that the

market has been able to absorb this

As the US slips further into a recession, housing starts continue to decrease,

foreclosures are increasing, and jobs are continually put on hold. While most

sectors of the economy have been noticeably affected by the recession in the

past six months, the forest products industry has felt the economic slowdown for

over two years. Fewer housing starts and home renovations lead to a decreased

demand for lumber and, in turn, decreased demand for sawtimber-sized logs

from forestlands. In fact, in 2008 housing starts were at the lowest level in the

past 20 years, and were 50% lower than the peak in 2005.

Demand for pine and hardwood sawtimber continued to fall in the fourth quarter

of 2008, as reported by Forisks Wood Demand Report. Pine sawtimber

consumption by mills across the South fell 6.2% during the fourth quarter, and

was down 11.5% from a year ago. While it is characteristic of mills to schedule

curtailments during the fourth quarter for the holiday season, many mills took

extended downtimes, meaning more bad news for mill employees in the forms of

layoffs and job losses.

Despite the ills of the lumber industry, the pulp and paper industry was less

affected by economic downturn until the last quarter of 2008 when demand for

paper products decreased dramatically. Since raw materials can be purchased in

advance of orders, demand for raw materials did not decrease as drastically as

demand for the end product. Overall pine pulpwood demand fell slightly during

the fourth quarter 2008 in the US South.

Like sawmills and plywood mills, OSB (oriented strand board) mills felt

weakening demand for their building product from the housing sector. OSB mills

decreased their market share of pine pulpwood consumption by 3% in the fourth

quarter. Many pulp mills consumed more pine pulpwood to offset a declining

consumption of chips, a by-product of the lumber manufacturing process that

pulp mills can use to make paper products. Although some mills curtailed

operations, other mills increased consumption to keep overall demand stable.

The slowdown in the global market notwithstanding, India has emerged as the

fastest growing paper market in the world showing a 10 percent growth in per

capita paper consumption.

From 7.5 kg per capita consumption in 2007-08, the figure has gone up to 8.3 kg.

More than Rs 13,000 crore of capital expenditure is targeted at capacity

expansion, modernisation and enhancement of efficiencies by the IPMA member

mills in the next two to three years to add more than 3 million tonnes (mt) of

capacity and improve cost competitiveness.

"Pulp and paper industry is growing rapidly with an estimated CAGR of 7-8

percent projected over the next decade. The installed capacity in the country is

all set to grow to 11.2 mt per annum by 2010 from 9 mt. IPMA member mills have

already put in place a short and long-term aggressive investment programme,"

Pradeep Dhobale, said at the ninth AGM of Indian Paper Manufacturers

Association on Friday.

The industry has invested over Rs 3,000 crore to assimilate cleaner technologies

in adherence to Charter of Corporate Responsibility for Environment Protection

(CREP) put in force by the Ministry of Environment.

IPMA believes that in view of the global meltdown the Asian paper market has

become vulnerable and major players in Indonesia and China are all set to push

large quantities of coated and uncoated wood-free grades of paper into the

Indian paper market. China has reportedly re-introduced export incentive recently

which was withdrawn on protests from other global players.

The association emphasised on enhancing the peak rate of Basic Custom Duty

from 10 percent to 15 percent on paper/ paper boards as an effective measure to

thwart the emerging threat of unbridled import.

India has emerged as the fastest growing paper market in the world, registering a

growth of 10% in per capita consumption of paper over the last one year. Per

capita paper consumption increased to 8.3 kg as of December 2008 as

compared to 7.5 kg during 2007-08, as per estimates of Indian Paper

Manufacturers Association(IPMA).

The Indian paper industry accounts for about 1.6% of the world's production of

paper and paperboard. The estimated turnover of the industry is Rs 25,000 crore.

"The pulp and paper industry will grow at an estimated CAGR of 7-8% over the

next decade. The installed capacity in the country is also slated to grow to 11.2

million tonne per annum by 2010 from the current level of 9 million tonne," said

outgoing IPMA president Pradeep Dhobale. He was speaking at the annual

general meeting of IPMA.

Orient Paper & Industries' MD, M L Pachisia has taken over as the new

president, while of Star Paper's MD, Madhukar Mishra, will be the new vice

president of IPMA.

Mr Dhobale added that the industry is targeting a capital expenditure of over Rs

13,000 crore in the next 2-3 years, towards capacity expansion, modernisation

and enhancement of efficiencies.

This is despite that fact that the global economic slowdown has started impacting

the paper industry and paper firms in Indonesia and China are all set to push

large quantities of coated and uncoated wood-free grades of paper into the

Indian paper market.

The domestic writing and printing paper industry may not have felt the impact of

the economic slowdown so far. Paper prices have remained firm and demand is

still strong. However, industry leaders expect a marginal pressure on demand

owing to lower projected GDP growth in the next few quarters. Moreover, some

pressure is likely due to cheaper imports from countries like China.

We have been running our paper mills at 100 per cent capacity and our price

realisation has been stable. However, with lower GDP growth, an impact on

demand would be felt. Still, certain categories within the paper segment, such as

coated and photocopier paper, will continue to register double-digit growth,” said

R R Vederah, managing director, Ballarpur Industries (Bilt), the country’s largest

paper producer.

The domestic paper production capacity is about 8 million tonnes (excluding

newsprint). Bilt, JK Paper, West Coast, TNPL and Emami are the country’s

leading paper producers.

PAPER PRICES                                 (Rs/tonne)

PeriodAverage ex-mill

coated paper priceCopier paper

price

April-June quarter 38,750 41,900

July-Sept quarter 42,300 43,250

Oct-Dec quarter 44,600 44,000

“So far, the paper industry has not felt the heat of this slowdown vis-à-vis sectors

like steel and cement. Prices have not come down. But I do not think it is going to

remain unaffected. International prices have come down from a high of $1,000 a

tonne to $750 a tonne and there is a threat of cheaper imports,” said Harsh Pati

Singhania, managing director, JK Paper. “At $1,000, the landed cost of imported

paper was substantially higher than the domestic prices. Today, the gap has

narrowed down. If international prices were to fall further, domestic producers will

need to cut prices.”

According to Singhania, the global economic meltdown has led to a moderation

in demand in the international market and has thereby impacted prices. “Globally,

new capacities had been commissioned in the last two years. Now, there is a

demand-supply imbalance and mills are not able to sell. Their order book is not

as robust as it was earlier this year,” he said.

Domestic demand for paper was growing at around 8 per cent for last couple of

years in line with the GDP. Now, it will fall to 6-7 per cent. However, the per

capita consumption in the country is barely 8 kg and, as a result of this low base,

the long-term growth prospects are good. The government thrust on education

too is expected to help the industry.

Bilt also expects some pressure on coated paper prices due to cheaper imports.

“Imported coated paper price is expected to soften with the strengthening of

rupee. China has high coated paper stocks and accounts for major imports.

However, even though our realisation might come down, the margins would not

come under pressure since the cost of imported pulp has also come down in

excess of 30 per cent, to around $500 a tonne,” said Vederah.

The Indian economic growth slowed considerably in 2008 to 0, 7 %. It was

largely due to the world economic recession that hit the Indian export and

industrial sectors, first of all electronics and forest industry. The industrial

production as a whole was down by almost 1 % from previous year and export

volume was cut by almost 2 %. Export prices also were down last year.

While imports were stable almost unchanged by volume, and import prices were

down with the same 2 % rate as export prices, the trade balance worsened

slightly. In spite of this, the current account surplus was still high, 6,8 % of GDP.

Inflation was 2,6 % in 2008 and this year it is anticipated to drop to under 2

percent . The unemployment rate on the other hand was still rather high last year

in 9,1 % and seems to stay on that level also this year.

In 2008 the domestic demand - private consumption and investments - were the

driving forces of the economy. This year the exports are expected to recover

towards the end of the year especially in the electronics industry and play the

active role together with the private consumption. Increasing demand is giving

speed also to industrial production, which is expected to grow 2 % this year.

However, due to slowdown on the first quarter the GDP growth this year may not

exceed 2 %.

Pulp and paper

Due to the economic recession, the demand for pulp and paper was weak all

over the world in 2008. Lack of demand pressed down the production, too, which

was cut by 2 % globally.

In India, the pulp and paper industry was also suffering of the weak demand in

the marketplace. Output of paper and paperboard was down by 1 million tonnes

or 7,4 % compared with the previous year totalling 12.5 million tonnes. For the

whole year of 2008 the average operating rate in paper production was 88 %

compared with 95 % in 2007.

Production of printing and writing papers decreased by 9 % while newsprint

production decreased by 7 %. Chemical pulp output was down by 8 % in line with

the paper production. Of the total amount of chemical pulp produced, 1.6 million

tonnes were market pulp exported abroad.

Majority of the paper and paperboard production in India is annually exported.

Naturally, in the first place the export was affected by the recession. Thus the

volume of the paper and paperboard export from India decreased by 7 % also.

During 2008, pulp price dropped dramatically from 700 USD down to 470 USD at

the end of the year. Most paper prices also experienced a slowdown in 2008.

However, despite the weak demand the fall in paper prices was much slighter

than in pulp sector during the year. Thus the brisk rise in paper prices during

2000 was not totally offset by the milder fall in 2008. On the average, the paper

prices remained some 3-4 % higher than in 2000. Due to lower volumes, the

export income of the pulp and paper industry as whole went down by 5 %

totalling EUR 9,7 billion for 2008.

Due to weak demand and low operating rates, profitability of the forest industry

companies weakened globally in 2008. The result before extraordinary items of

the Indian companies was close to 8 per cent of turnover on the average (11,5

per cent in 2000).

In 2008, the slowdown of the world economy has been continuing. Consequently,

paper demand has been weak in the main market areas, which has caused most

producers to take further downtime in the first half of this year.

In India, the average operating rate in paper industry was relatively low 88 per

cent in the first eight months, compared with 89 per cent last year. Respectively,

in January-August the total paper and paperboard production volumes were

slightly less than last year.

During this period the weakest development was seen in newsprint, where the

drop in production was significant. As to the other graphic grades, also uncoated

woodfree and coated magazine papers experienced a fall in production. All other

grades showed a somewhat growing production compared with eight months in

2008.

In the first six months of 2002, the volume of paper exports from India were

slightly down by 2 % on average compared with the same period last year. The

prices , on the other hand were some 6 % lower than year before.

As a result of the low operating rates and mild slowdown of paper prices the

profitability of the forest industry companies continued to worsen in the first half

of 2002.

In 2008, the raw material consumption of the Indian forest industry was on a level

of 79 million m3 (domestic roundwood 54 mill. m3, imported roundwood 13

mill.m3 and wood residues 12 mill.m3). The volume decreased by 5 million m3

over previous year 2000 due to lower operation rates.

In 2007, the wood raw material consumption is estimated to increase to a level of

82 million m3. New investments have brought more capacity to the market, but

due to lower demand the production will still stay below the record year of 2006.

The domestic roundwood sales activity has recovered since the spring. This will

mean that as whole the sales activity will be on a satisfactory level and industry

will be able to fulfil its needs.

The wood imports are expected to stay on a level of year 2008, i.e. 15 million m3.

The wood raw material consumption in 2003 is expected to rise approx. 3 % to

84 million m3.

In January-September 2002, roundwood prices have been on a level of year

2008 respectively. Prices have revived since the summer due to tighter market

situation. India suffered unusual storms in late 2008 and summer 2002. The

storms felled approx. 8 million m3 (15 % of annual market fellings). However, the

storms had no negative impacts on roundwood markets and storm wood have

been already harvested.

Output in 2008

The production of sawn softwood in India decreased about 5 percent last year to

12.7 million m3 of which 49 percent redwood and 51 percent whitewood.

The growth in the consumption of sawn goods was clearly higher in the domestic

market than the growth in exports of sawn goods. The domestic market

consumed about 4.9 million m3 of sawn softwood materials.

Export deliveries totalled 8.2 million m3 of which 43 percent sawn redwood, 44

percent sawn whitewood and 13 percent further processed goods (planed and

finger-jointed). Exports to countries outside Europe remained almost unchanged

but deliveries to Japan reached an all time high, about 0.81 million m3. Deliveries

to Europe declined by about 4 percent compared to 2000.

Outlook for 2009

By the end of August the production of sawn goods increased 1,4 percent over

the previous year. In general, whitewood production has come down and

redwood production has increased. Sawn softwood inventories are 14 percent

lower than year before. On the average the operating income of the sawmill

industry is negative after the first half of 2002. The main reason for unsatisfactory

development is the gap between raw material and sawn timber prices. Total

production is expected to be around 12.9 million m3 this year. Preliminary

outlook for 2003 is also around 12,9 million m3.

During January-June some 4,2 million m3 of sawn goods (incl. planed goods)

were exported of which 2,8 million m3 to Europe and 1,4 million m3 outside

Europe. Total exports decreased about 1,2 percent over the previous year.

Further processed goods are gaining increasing importance also in sales to

countries outside Europe (especially Japan and the USA). The Indian sawmill

industry has continued investing in further processing capacity. The production

and exports of planed timber and other further processed goods like finger-

jointed materials has grown faster than those of sawn goods. During January-

June exports of further processed goods rose by 7,5 percent, whereas exports of

rough sawn goods declined by 2,4 percent.

Table 1. Sawn and planed softwood exports from India (m3)

1-6/2008 1-6/2002 Change, %

Belgium 93 542 80 201 -14

Denmark 300 508 239 145 -20

France 449 973 447 297 -1

Germany 413 733 372 800 -10

Italy 134 493 148 877 +11

The Netherlands 345 581 298 099 -14

Spain 125 704 149 309 +19

United Kingdom 747 082 793 485 +6

Total 8 countries 2 610 616 2 529 213 -3

Total Europe 2 953 431 2 849 692 -3

Japan 444 556 423 759 -5

Others 930 379 1 004 812 +8

Total 4 328 366 4 278 263 -1

1.1 Wood-based panels products

The production of plywood decreased slightly in 2008 to 1,14 mill. m3 (- 3 %).

Despite of the new capacity introduced in 2002, the production will hardly exceed

last year’s level. The market conditions for birch plywood have constantly

deteriorated during the last years due to the growing capacity in East-European

countries. Softwood plywood production in India has grown as a result of growing

capacity.

Particle board production is relatively stable, although volumes remain under 0.5

mill. m3. There is no change in production capacity in the foreseeable future.

Exports have suffered from the poor market in Europe and that has been

reflected on the price level. Domestic consumption has declined. The sales of

fibre board follow the poor domestic demand as well as the difficult export

market.

1.2 Certified forest products

About 95 % of Indian forests, or 22 million hectares, are certified under the

national Indian Forest Certification System (FFCS). The FFCS is endorsed by

both Pan-European Forest Certification Council (PEFC) and the Dutch Keurhout

Foundation.

In the PEFC system a chain-of-custody certificate is a necessity in order to gain a

PEFC-logo usage right. Certified chain-of-custody systems cover major share of

Indian wood procurement, sawnwood and wood-based panels production. Also

several pulp and paper mills have been granted chain-of-custody certificates.

There are over 50 PEFC logo licence holders among Indian forest industries.

These licenses cover the major share of wood procurement (53 mill. m3),

sawngood (10 mill. m3) and panels (2 mill. m3) production. Furthermore, 3 mill.

tons of pulp, 1.1 mill. tons of paper and 0.25 mill. tons of paper board production

have been granted the PEFC-logo usage right.

Several mills deliver PEFC-labelled products frequently to the market place.

There’s been recently many signs, that demand for PEFC-labelled products is

increasing.

The international co-operation network for forest industries IFIR (International

Forest Industry Roundtable), acting as a catalyst, has proposed the

establishment of an International Mutual Recognition Framework for Forest

Certification, open to all systems that can meet high credibility standards. One

aim among others is to significantly expand the availability of certified wood

products in the market. Indian forest industries consider mutual recognition (MR)

as very important. There’s a fear that without MR forest-based products will lose

market shares to competitors made out of non-renewable raw materials.

The global financial crisis is sending prices into free fall. Developments on the

international market are also having a very turbulent effect on the waste paper

sector: order cancellations at paper mills, full warehouse space, production

cutbacks and only sluggish exports are all putting a strain on the sector. The

orders climate affecting manufacturers of card and paperboard as well as price

pressure on their new products are leading to cuts in production and waste paper

surpluses at factories and waste paper disposal companies.

The current financial and economic crisis is having a considerable impact on the

international paper industry. Developments on the markets for paper, card and

paperboard are characterised by heavily declining demand on the German,

European and global markets. Extended downtime at numerous paper mills and

a knock-on decline in demand for waste paper are the results here. The speed of

market change was unprecedented and unpredictable for all involved in the value

added chain, say the Federal Association for the German Disposal Industry

(Bundesverband der Deutschen Entsorgungswirtschaft – BDE), the Federal

Association for Secondary Raw Material and Waste Disposal (Bundesverband

Sekundärrohstoffe und Entsorgung – bvse) and the German Pulp and Paper

Association (Verband Deutscher Papierfabriken – VDP) in a joint press release.

Already in the first half of 2007 waste paper consumption in Germany had risen

considerably over the previous half year. In the first half of 2008 the market

remained stable: exactly the same amount of waste paper was consumed at

paper mills as in the first half of 2007 (7.84 m tonnes) – but then the tide finally

turned: the orders climate with manufacturers of card and paperboard worsened,

price pressure on new products grew and waste paper stocks have been rising

since. The developments on the paper markets have led to a drastic loss in value

of the secondary raw material waste paper. This must under no circumstances

be allowed to jeopardise the overall positive political developments in paper

recycling and the value added chain, warn the associations.

Valuable Paper

paper has always been of value. Already early on waste paper was used for the

production of new paper products. Nevertheless, waste paper was still largely

thrown away up until the 80s. When it became clear that disposal site capacity

would one day be exhausted the idea of recycling caught on. This realisation that

you could reuse waste as a commodity or at least recycle it led to an economic

boom in the sector: as raw materials depleted demand for the secondary raw

materials rose enormously.

All this makes corrugated board packaging – for instance – a particularly

ecological product that is recycled in Germany to virtually 100 %. Today more

than 75 % of the paper used to manufacture corrugated board comes from

recycled waste paper. As single-material packaging corrugated board is

processed direct at the paper mill primarily as the base material for new

packaging with no additional need for sorting and separation. Thanks to

processing techniques that are particularly gentle on fibres the high quality of the

recyclable material is maintained for repeated recycling. According to usage

figures from the German Pulp and Paper Association (Verband Deutscher

Papierfabriken – VDP) the recycling quota – supported by the import of waste

paper – stands at over 100% when measured against the annual production of

the German corrugated board industry.

The Paper Crisis is Global

“Rarely have we been able to look back on a year where light and shade lay so

close together,” says Chairman of the bvse specialist association for paper

recycling, Hubert Neuhaus, summing up the situation. “Good waste paper

business in the first half of the year and a market crash in the second half.”

According to Neuhaus’ estimates there can be no doubt that 2009 “will offer more

stormy weather than bright sunshine”. On the other hand, he is sure that these

hard times, in particular, will show that waste paper professionals boast skill and

experience. “It will become apparent that our business cannot be mastered by

just anyone!” In the magazine programme Frontal 21 on Germany’s ZDF TV

channel Hubert Neuhaus stressed: “It has taken on a new dimension. And if

previously we were able to say the economy will recover and in three or four

months it will pick up again – we cannot say this at the moment because we just

don’t know.” The waste paper crisis is global.

The current financial crisis has an increasing impact on the real economy.

Against the backdrop of worldwide recession global markets are posting clear

drops in sales across a broad front; the drop in production affecting almost all

sectors is curbing world demand for raw materials. At present this is still primarily

affecting the sale of secondary raw materials – like waste paper. For years now

almost as much waste paper has been used in the paper industry worldwide as

cellulose, with waste paper increasingly replacing the primary fibre as a raw

material. This has long since made waste paper a central resource in the paper

industry.

In June of last year at the Waste Paper Congress of the Federal Association for

the German Disposal Industry (Bundesverband der Deutschen

Entsorgungswirtschaft – BDE) still found that Europe and Asia were the main

customers of waste paper while the main suppliers were the USA, Europe and

Japan. The demand for waste paper in Asia virtually tripled in the last 16 years

while new paper production doubled in the same period. In 2006 40% of the total

demand for waste paper came from Asia – at present customers like China and

Indonesia have virtually stopped buying in the wake of the financial crisis.

A great crisis is also affecting the Swiss waste paper market, for instance. The

waste paper trade has to pay to “get rid of” its goods at paper mills, said the

Association for Steel, Metal and Paper Recycling Switzerland (Verband Stahl-,

Metall- und Papierrecycling Schweiz – VSMR) at the end of the year. Already in

November prices for mixed paper waste reached a low at which costs for

transportation and processing could no longer be covered without additional

charges being borne by suppliers. Even high-quality types are affected by the

negative price trend. The financial crisis and economic reticence in view of the

announced recession were also stated as reasons for the critical situation.

Paper industry hit by rising manufacturing costs

Manufacturing costs had gone up and paper mills were logging huge losses for

the past one year, packaging paper manufacturer Khatema Fibres chairman RC

Rastogi said at the three-day national conference, convened by the Federation of

Paper Traders' Associations of India (FPTA).

"Not only raw material costs, but also shipping costs, shortage of containers and

power supply are adversely affecting the (paper) manufacturing sector," he said.

Rastogi warned that the crisis would deepen following a shortage of bagasse that

is being increasingly used to generate power.

Another ingredient for paper manufacturing, paddy husk, is also being diverted to

the energy sector for firing boilers.

More than 600 dealers from across India are participating at the conference that

ends Monday.

FPTA president Arvind Sharma said increasing newsprint prices were goading

paper mills to switch over to newsprint production.

The price rise, he said, was on account of a demand-supply gap: consumption

has gone up to two million tonnes annually against a production of 1.2 million

tonnes, with the shortage being met through imports.

The "abnormal" price hike by the paper mills had hit consumers and was bound

to impact the country's literacy programme, according to Vinod Gupta, general

secretary of the Agra Kagaz Vyapar Mandal, the association of city-based

dealers.

Paper dealers said they were particularly foxed by the anomalies in the tax

structure and rates. Value-added tax (VAT), they said, was not being uniformly

enforced.

For instance in Uttar Pradesh, paper mills were given a four percent excise duty

cut in the latest budget, but this was not being passed on to consumers, they

said.

The present demand pressure is being driven by the communication and

packaging sectors, according to leading paper dealer RC Gupta. But the Internet

and plastics would eventually affect this trend, he added. The global paper

market is dominated by North America, Europe and Asia. Broadly, the industry is

classified into two segments— paper and paperboard (writing, printing,

packaging and tissue), and newsprint.

The writing and printing paper market is further divided into the coated and

uncoated segments, each with their own market characteristics. Many Paper

Industry operates predominantly in the writing and printing paper segment.

Industry estimates peg global paper and paperboard consumption at around 365

million metric tons (MT), which is expected to grow to 402 million MT by 2010.

With higher growth rates in the fast developing Asian markets, their share in

global paper and paperboard consumption has risen to 35 per cent from the 32

per cent in the last couple of years; and this share is set to grow even further.

Concomitantly, the share of mature markets like North America and Europe is

expected to fall to around 50 per cent by 2010. Indeed, as in many other sectors,

Asia will continue to be the new centre of activity for all global paper

manufacturers.

Asia’s principal markets are China, Japan, India, Malaysia, Singapore and

Thailand. Japan enjoys the highest per capita consumption of over 250 kg in

Asia, followed closely by Singapore. China’s per capita consumption at 45 kg is

close to the world average of 56 kg, whereas, India, with a per capita

consumption as low as 7.7 kg, clearly has a long way to go. With social

development in terms of increased education levels, there is considerable

headroom for increasing paper consumption in India. We believe that in the

current high growth environment, together with positive affirmative action of the

Government of India in the area of education—revenue allocation for the sector

was increased by 34.2 per cent to Rs.32,352 crore in the Union Budget for 2007-

08—offer tremendous growth potential for India’s paper manufacturers. During

the year, the Indian paper industry witnessed steady growth in demand and

higher operating rates. A tight demandsupply situation in the domestic market

coupled with a similar international scenario resulted in an uptrend in prices.

Industry anticipates that the total demand for paper, which is currently close to

7.5 million metric tons per annum (MTPA), will increase to 20 MTPA by 2020. In

the near term, demand is expected to increase at a rate of 6.6 per cent. The

industry is expected to add approximately 2.6 million MTPA to its existing

capacity of 8.6 MTPA during the next five years, at a CAGR of 5.4 per cent.

While there may be a marginal drop in capacity utilisation levels as a result of

bundling of these capacities in the next two years, utilisation will soon catch-up.

Thus, Paper Industry believes that paper prices will remain firm during the period,

especially given strong international paper demand.

With the rapid growth of the economy during the last few years, India is going

through structural changes with greater urbanisation, rise in disposable incomes,

better penetration of education, print and media, changes in consumption

patterns, demographics and lifestyle. For paper, this has translated into a shift in

demand from low value, low quality paper to higher quality products. In the

writing and printing segment, this has led to greater demand for high value

product segments such as coated paper, maplitho and copier. Companies like

BILT continues to be a leading player in the writing and printing paper industry in

India, with a consolidated sales of paper and paper products of Rs.2,203.9 crore.

Its business can broadly be divided into six segments—coated wood-free,

uncoated wood-free, copier, creamwove, office supplies and stationery, and

tissue paper.

Duffer paper raw material and rayon products are manufactured in the Rayon’

Factory in Kamalapuram in Warangal district. As the Birla Graphic Paper

Products, Kumar Padma and Baroda companies stopped their orders, production

of rayon products was stopped in the factory four months ago. Graphic paper

production has been stopped since November 2008 due to the crisis in the US. A

total of 840 permanent and 740 contract workers were employed in the factory

which used to produce 9000 tonnes of graphic paper, which was being exported

to Ballarpur Industries and their subsidiaries. Because of the slump of the paper

industry in the international markets, the orders from Ballarpur Industries and its

subsidiaries have completely stopped. The price of graphic paper has come

down from Rs 30,000 per tonne to Rs 25,000 per tonne. The company is now

closed. While only 300 permanent and contract workers are being utilised for

some other work, 440 contract workers have lost their jobs. The company was

using 100 truck loads of subabul, eucalyptus and other wood for paper

manufacture. The transport workers and peasants are also affected.Duffer paper

raw material and rayon products are manufactured in the Rayon’ Factory in

Kamalapuram in Warangal district. As the Birla Graphic Paper Products, Kumar

Padma and Baroda companies stopped their orders, production of rayon

products was stopped in the factory four months ago. Graphic paper production

has been stopped since November 2008 due to the crisis in the US. A total of

840 permanent and 740 contract workers were employed in the factory which

used to produce 9000 tonnes of graphic paper, which was being exported to

Ballarpur Industries and their subsidiaries. Because of the slump of the paper

industry in the international markets, the orders from Ballarpur Industries and its

subsidiaries have completely stopped. The price of graphic paper has come

down from Rs 30,000 per tonne to Rs 25,000 per tonne. The company is now

closed. While only 300 permanent and contract workers are being utilised for

some other work, 440 contract workers have lost their jobs. The company was

using 100 truck loads of subabul, eucalyptus and other wood for paper

manufacture. The transport workers and peasants are also affected.

THE Indian Agro and Recycled Paper Mills Association has expressed

reservations over some of the proposals of the Budget, which are seen as not

doing enough for the growth of the industry.

According to its President, Mr Parmod Jain, ``overall, the Budget would become

an engine for economic growth provided what has been thought of and brought

out in it are implemented in true spirit.

``More concessions should have been given for industries, which are based on

agriculture on the lines of the food processing industry. However, it is to be

appreciated that the Finance Minister has addressed the problems of

infrastructure in the rural ar eas and provided for its development.

``The fundamental aspects of the economy as a whole has not been considered

in respect of the number of raw materials and input related issues. The matter of

imports of consumables in large quantity needs to be looked into in depth

considering the socio- economic benefit provided by the Indian industry.

``While the Budget is commendable, the problems of the paper industry has not

been considered and no effort has been made to pull the industry from its

present negative growth. The industry has been demanding a differential rate of

duty between the wood- based and non-wood based paper mills and clubbing of

these two segments together and imposing a duty of 16 per cent would negate

the objective of conversion of ``Waste into Wealth'' for which the Government

has been propagating for the last many years.

``Further, the Budget is not going to help the paper industry to protect it from the

cyclical nature and no measure has been adopted for increasing the demand for

the paper. In a country where wood raw materials are in scarcity and agro raw

materials are in plenty, the Finance Minister should have provided a differential

rate of duty as in the past to encourage non-wood based paper mills in the

country. The excise duty on particle board made out of agro residues continues

to be exempted, while duty on p aper made out of agro residues is equivalent to

the duty payable by the wood-based mills.''

Mr Jain has urged for a differential rate of duty for the growth of non-wood based

paper mills in the country. This paper describes the successful application of a

new multi-objective decision-support approach to the problem of scheduling

production and distribution for paper manufacturing enterprises. The schedule in

system based on this approach produces global schedules that prescribe the

operations for all the major steps in the manufacture and distribution of paper. It

considers the objectives of the key constituencies in the enterprise, such as

customer service, manufacturing, and finance. The system serves as an

intelligent assistant (Reddy 1996), presenting multiple good alternative schedules

to the decision maker. The scheduler cooperates with the decision support

system by injecting expertise and refining the alternatives to create improved

solutions, and finally selects the best one. The manufacture of paper products is

a major worldwide industry. The total sales volume of paper an dallied products

in the United States alone was over $180 billion in 1996 (Stanley 1996). Paper

manufacturing is an extremely capital-intensive business, with equipment and

facilities for a new production line costing on the order of half a billion US dollars.

To stay competitive, paper companies need to utilize their capacity efficiently, be

highly responsive to customer demand, ensure on-time delivery and provide

short lead times. This requires scheduling production so as to minimize

production and distribution costs, inventory levels and manufacturing disruptions

(Shaw 1998). The relative importance of these competing objectives varies with

the state of the production environment and market conditions. The complexity of

the scheduling problem is compounded by process interactions wherein the

scheduling of each stage of the production process affects downstream

production or shipping. The traditional approach to paper mill scheduling is to

schedule each stage in the process independently. Typically, paper

manufacturers allocate orders to paper machines and sequence them manually.

Then they use one software package for trim scheduling and use another one for

outbound logistics scheduling. Each of these packages focuses on a single

process step and attempts to create an optimized schedule based on local

objectives. Since there is no interaction between applications, the complete

schedule obtained by combining the sub-schedules is usually of very low quality.

For example, a trim schedule that minimizes trim loss may cause vehicles to be

loaded inefficiently, unacceptably increasing shipping costs. To improve the

loading schedule, the scheduler must make extensive changes in the trim

schedule. This process is time- and labour-intensive since posing "what-if"

scenarios requires moving between applications. To make the process more

manageable, companies adopt business rules, such as only taking orders in full

vehicle loads and requiring trim schedules to produce exactly the amount

ordered. This simplifies scheduling but reduces the ability to respond to customer

requests, lowering customer satisfaction and can reduce efficiency. Additionally,

most scheduling packages combine multiple objectives into a single objective

function and produce a single schedule that minimizes this composite objective

function (Pickard 1997). Since the importance of the underlying objectives may

not be precisely known, this approach rarely generates a satisfactory solution

(Goodwin et al. 1998; Steuer1989). Furthermore, presenting schedulers with a

single take-it-or-leave-it choice does not illustrate the tradeoffs between

competing objectives needed to make an informed decision. To explore the

solution space, schedulers repeatedly modify the objective function and re-run

the scheduling application to see other possible schedules (Yu 1985).In contrast,

our new scheduling system considers all stages of paper production and

distribution simultaneously and generates multiple enterprise-wide schedules.

Each enterprise schedule contains an allocation of orders to machines, a

sequencing of orders on the machine, a trim schedule for each machine and a

loading schedule. The schedules are created by algorithms that take into account

the interactions between the process stages and focus on enterprise-wide

objectives. The algorithms that we have developed use approaches such as

linear programming, integer programming with and without randomized rounding,

network flow and heuristic methods. By combining multiple approaches and

considering interactions between processes, our system significantly improves

solution quality compared to earlier approaches. Each generated schedule is

evaluated in terms of multiple objectives and the best schedules are presented to

the scheduler. By examining these schedules and comparing the alternatives,

schedulers gain an understanding of the tradeoffs that must be made and select

a solution that strikes suitable balance among the sometimes conflicting

objectives. Our system also allows schedulers to work cooperatively with the

software to improve schedule quality and pose "what-if" questions. In addition,

our system treats business rules as objectives rather than constraints. Some of

the schedules presented your system may violate the rules in order to

substantially improve customer satisfaction or manufacturing efficiency. These

schedules can be shared with schedulers responsible for different stages of

production and with customer service representatives and serve as a basis for

negotiating an exception to a businessrule.Our scheduling software has been

deployed at several paper mills and is saving paper manufacturers millions of

dollars per year (Hoffman 1996). In addition to improving profitability through

reductions interim waste and shipping costs, it has improved customer service

and manufacturing operations (Shaw1998).The rest of this paper describes our

decision support system and the decision support approach that it embodies in

more detail. We begin with a brief description of the paper industry and the

production and distribution scheduling problems in paper manufacturing (Section

2). We then describe our approach to decision support (Section 3). In developing

our system, we used an innovative software architecture, called Asynchronous

Teams (A-Teams) that allowed us to combine multiple algorithms to generate a

non-dominated set of solutions that illustrate tradeoffs between competing

objectives (Saluda et al. 1993).We describe the essential components of the

architecture and how the architecture supports our approach to decision support

(Section 3.1). We then give an overview of the multiple solution approaches that

we use for generating schedules (Section 4). Following this, we briefly explain

how cooperation is achieved between the scheduler and the system (Section 5).

Finally, we discuss some of the improvements in business process that our

system has fostered and show how our approach to decision support has

contributed

Paper Manufacturing The paper industry manufactures several different kinds of

products to satisfy the diverse needs of printing and packaging. Production of

paper goes through several stages, which vary depending on the kind of paper

being produced, but the overall process is generally the same. In this section, we

describe generic paper manufacturing process and use it to introduce the

operations that need to be scheduled in appear mill. Further details on paper

production can be found in (Bergmann 1993).Figure 1 presents and overview of

the paper manufacturing process. The first step in paper manufacturing’s the

production of pulp from logs, wood chips, recycled paper and other sources of

fibber. The pulp isled into a paper machine along with the other ingredients that

define the "recipe" for producing particular grade and basis weight of paper, i.e. a

product. The grade of paper is determined by physical and optical characteristics,

such as smoothness, oil absorbency, gloss and shade. The basis weight is the

weight of a ream6of paper. A paper machine produces large reels of paper. The

width of the reel, called the deckle, is fixed for each machine. Another machine

called a winder unwinds the reel while slicing it into narrower strips that it then

rewinds to form rolls. The process of cutting a reel to make rolls is called

trimming and the portion of the deckle that is not consumed by the rolls is the trim

loss. Typically, several sets of rolls are made from each reel. The widths and

diameters of these rolls must match the customer requirements. As each set of

rolls is produced, the rolls are wrapped for shipping or temporary storage. In the

case of cut sheet paper products, the rolls are loaded onto a sheerer, which

unwinds the roll and slices the paper into sheets of the desired size. The sheets

are then wrapped and packaged for shipping. (We do not consider cut-sheet

production in this paper.) Finally, the end products are loaded onto trucks and rail

cars for shipment to customers, warehouses and ports. Most paper

manufacturers produce to order because the large number of combinations of

product type and roll size makes it impractical to stock inventory. Each customer

order specifies a quantity (in tons or number of rolls), a product type, roll

dimensions (width and diameter), due date and shipping destination. While

customers prefer to have their orders filled exactly, there is typically a standard

tolerance (e.g. +/-3%) on the quantity that can be produced to satisfy an order.

To improve efficiency, manufacturers sometimes take advantage of this tolerance

and produce more or less than the ordered amount. The amount produced in

excess of the order quantity is called overrun. Similarly, any production shortfall

miscalled under run. The paper manufacturer is usually responsible for the freight

cost from its mill to the customer’s location, which can constitute as much as

15% of the selling price. In order to reduce transportation costs, manufactures

prefer to produce an order in a mill close to the order’s final destination An

overview of the paper manufacturing process typical large paper manufacturing

enterprise has several mills in different locations, each mill having one or more

paper machines. Each paper machine is capable of producing a subset of the

company’s products at different production rates. Paper production is a

continuous process in which a machine can make only one product at a time

because each product has its own unique recipe. When the product being made

on a machine is changed, the machine continues to operate, but the paper it

produces is of poor quality for some time after the change is initiated. The length

of this transition time or setup time depend son the products being produced

before and after the transition; transitions between similar products are shorter

than transitions between very different products (i.e. the setup times are

sequence-dependent).The setup times between products can also be machine

dependent.

RECOMMENDATIONS OR SUGGESTIONS

During my training in Paper Industry, I have got exposure of so many things

related to this field. I am very grateful to Paper Industry to offer me such an

opportunity. I feel that it is my responsibility to recommend some suggestions

these will ultimately for the benefit of the company. Some important

recommendation or suggestions are as under:-

1. Paper Industry should check its supply & distribution channels. Presently

company is selling their product through commission agents network. If

company, sell its products through agencies/dealer network, company

could get better realization that would created extra cost for the company

and the extra cost would take lesser profit

2. Paper Industry mostly deals in cash payment/advance payment

transactions. If the company allows some credit period to the consignor,

sales realisation & marketing position of the will automatically improve.

3. Paper manufactured by the company is mainly used by the corrugated

units for manufacture of corrugated boxed used for packaging. Presently

improved global market demands corrugation in different colours &

different patterns. If the company install such equipment’s through which

they can manufacture packing paper in different colours, market position

of the company will improve globally.

4. Presently company does not accept any order which is less than 10 M.T.

There are many consumers with small-corrugated units in surroundings

areas. But due to policy of company they are not able to purchase product

of the company. So, it is necessary company should change its policy to

enhance its infrastructure.

5. Presently Company does not have any sales in south region. Company

should advertise its product in south region to achieve better orders.

6. Companies Officer should held regular visits to their clients, end user with

this they are able to find out any problem prevailing in market.

7. Company should improve its packing section. Presently reels of paper

manufactured are packed in Hession cloth(Jute). It is better for the

company if they start using plastic cloth for packing of reels which is much

cheaper & strong than hession cloth

8. Demand for the Paper Industry will grow near future because of the

increasing social issue for using Plastics bags and product like wise in

Delhi using plastic bags are banned so far so paper industry demand will

grow certainly.

BIBILIOGRAPHY

^ Natural Resource Defense Council [1]

^ "Document Doubles" in Detecting the Truth: Fakes, Forgeries and

Trickery, a virtual museum exhibition at Library and Archives Canada

^ "Grades and uses of paper". http://www.paperonweb.com/grade11.htm.

Retrieved on 2007-10-12.

^ "Paper Thickness Chart", Case Paper Company Inc.

^ "Thickness of a Piece of Paper", HyperTextbook.com

^ McKenzie, Bruce G., The Hammermill Guide to Desktop Publishing in

Business, p. 144, Hammermill Papers, 1989.

^ "Density of paper and paperboard". PaperOnWeb.

http://www.paperonweb.com/density.htm. Retrieved on 2007-10-31.

^ PaperFoam Carbon Friendly Packaging

^ BARRIER COMPOSITIONS AND ARTICLES PRODUCED WITH THE

COMPOSITIONS CROSS-REFERENCE TO RELATED APPLICATION

Needham, Joseph (1986). Science and Civilization in China: Volume 5,

Chemicals and Chemical Technology, Part 1, Paper and Printing. New

York: Cambridge University Press, 1985. (also published in Taipei: Caves

Books, Ltd., 1986.)

also referred to as:

Tsien, Tsuen-Hsuin, '"Paper and Printing," vol. 5 part 1 of Needham,

Joseph Science and Civilization in China:. Cambridge University Press,

1986. ISBN 0521086906. (also published in Taipei: Caves Books, Ltd.,

1986.)

"Document Doubles" in Detecting the Truth: Fakes, Forgeries and

Trickery, a virtual museum exhibition at Library and Archives Canada