Manufacturers seek equivalent price hike from user industries to stay afloat
BY Susil Bandaranayake
In a critical setback to corrugated carton manufacturers, prices of paper have risen by 40 per cent over the past 7 months due to short supply, following unexpected closure of production units. Trade sources say that the paper prices are likely to have risen the highest in any time.
The main raw material in carton manufacturing industry is the paper. This represents almost 70 percent of the cost of a corrugated carton. The piercing rise in the cost of this critical raw material has put a question mark on the financial viability of corrugated carton manufacturing units, as there is no substitute for paper. This is why they have sought a proportionate hike in the prices of the packing material from consumer industries. Unless the carton users (customers), including large fast moving consumer goods companies grant a minimum 25 percent price increase quickly, entities in this industry will face a grave situation perhaps closure shortly.
Corrugated paper supply – global scenario
Towards the end of 2016, the Chinese government enacted a resolution to comply with minimum environmental protection needed to be maintained in order to control the air pollution in China. This restriction impacted too many industries consequently closing 300 paper manufacturing companies. This resulted in increasing the demand for paper from Europe & American subcontinent. As a result, the main paper manufacturers in China; M/s. Nine Dragon & M/s. Lee & Man stopped exporting paper from China. The dammed for European and US paper suddenly increased reversing the slow demand situation for paper.
The turmoil in the pulp and paper industry has badly effected in corrugated cartons manufacturing companies all over the world
Accordingly the paper prices escalated speedily from February 2017. On top of this, another major catastrophe transpired by the fire at major paper manufacturing company in USA and a pulp making company in Brazil. This situation worsened the market condition further escalating the paper prices and creating a shortage in the market.
Extent and impact of price upsurge
The turmoil in the pulp and paper industry has badly effected in corrugated cartons manufacturing companies all over the world. Since February 2017, Kraft Liner prices have gone up by 56 percent from US$ 460 to US$ 720 by September, 2017.
Test Liner prices jumped up to US$ 530 from US$ 380. This is a 40 percent upsurge. Fluting prices in the international market went up to US$ 500 from US$ 360 by September. This is a 40 percent jump. According to the information available, this situation will not be resolved in short run. 50 percent of the companies closed in China will permanently closed down and it would take at least more than one year the rest of the companies to back in operation. However by end of 2018, a paper manufacturing plant with one million metric tons output is supposed to commence the operation in China. Until such time, the market situation very much unlikely to be improved.
Above and beyond, from 2015, the exchange rate depreciated over 17% & it has burden on the carton cost heavily. However this cost has not been transferred to the customers due to the effort of the industry players to reduce the cost & due to slight decreased in paper price.
This industry cannot further survive under the current situation & has started making huge losses. This situation will be further worsening during next few months. The paper price escalation has not come to an end & it is yet in upward trend.
Corrugated carton manufacturing
industry – local context
There are almost 25 corrugated carton manufacturers in Sri Lanka. But most of them are producing less than 100 MT per month and they are mainly single facers. Once a flute is made in the single facer, they manually complete the rest of the work. Hence generally their monthly output will not exceed 100mtns. This category is servicing 30 percent corrugated carton demand in the country. Seven players cater to the 70 percent of the demand of cartons in Sri Lanka. In consequence, oligopolistic market condition prevails in the industry. The steep competition among the industry players has resulted in low margins in the industry & the net profit margin is moving around 5 percent. Hence it is difficult to absorb the market volatility within existing margins.
Due to oligopolistic competition, the industry has been failed to adjust the prices with their customers
The demand of many industries has been negatively affected during last two years and the corrugation industry directly feels these bad market realities. Due to oligopolistic competition, the industry has been failed to adjust the prices with their customers. These conditions may trigger repeating the situation which the industry experienced a few years ago where the market leaders of the industry; M/s. MSH Packaging and M/s. Nisol had to discontinue their operations due to heavy losses, if this situation prevails further unsorted.
Call authorities for the rescue
We request all concerned government authorities to rescue the carton manufacturing industry. At this juncture, it is vital the support of the government to relieve the burden on the industry by cutting down the Levis charged on paper industry. At present 5 percent “cess” on White & Brown Kraft Liner and 8 percent “cess” on Test Liner & Medium has been imposed. On top of that 7.5 percent PAL and 3 percent of NBT is paid. The attention of the government should be drawn to remove this burden on the industry. However the “cess” is meant to support the industry. Hence the government may extend a grant to converters on temporary basis to relieve them from huge losses they occur.
Another solution would be to restart the manufacturing of paper at Valachchenai and Embilipitiya paper mills using the local waste paper and paddy straw to lessen the pressure of the local industry on paper imports. Packaging is part and parcel of export industry in the country. If the total extra cost is transferred to the exporters of the country, their competitiveness might be diminished making another burden on the export earning of the country.