China: beyond the boom.

Can China's paper industry sustain its breakneck growth in paper production and consumption? Can it live up to the ever present hype? The short answers to these questions are yes, and yes, apparently. At some point China's torrid growth rate will inevitably slow, but for now the country appears

TORRID GROWTH

Recent economic news out of China indicate that economic growth has continued at a steady pace, despite the Chinese government's attempt to slow it down. China's economic expansion accelerated to 9.5% during the second quarter of 2005 due to strong manufacturing output and soaring exports. China's economy is continuing to beat expectations, and the second quarter outpaced the 9.4% expansion the first quarter. Economists cite a relatively low inflation rate and a low probability of a sharp drop in the growth rate as reasons why China's economy will likely continue to charge ahead.

Also, China has made an effort to defuse a growing controversy over its currency, the yuan (also called the RMB). On July 21, the People's Bank of China revalued the yuan to make the Chinese currency effectively 2.1% stronger against the American dollar. That move partially satisfied critics who say the yuan has long been significantly undervalued, making Chinese goods cheaper abroad and providing the Chinese with an unfair trading advantage. According to economic analysts, the move, while modest, has important symbolic significance and will help integrate China more fully into global markets and ease tensions with its trading partners--particularly the European Union and the United States.

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PAPER INDUSTRY

The Chinese paper industry, like many other industries in China, is taking advantage of and contributing to the country's robust economic growth. Last year was a typically strong year. In 2004, total paper and paperboard production reached 49.5 million metric tons, 6.5 million metric tons (15.1%) higher than in 2003. Total Chinese paper and paperboard consumption reached 54.4 million metric tons, 6.3 million metric tons (13.2%) more than 2003. Production and consumption growth rates in 2004 were 13.8% and 10.9% respectively.

In 2004, paper mills in China has sales of RMB 200.9 billion (US$ 24.3 billion), 21% more than in the previous year, according to a report from Research and Markets, a Dublin, Ireland-based market research company. Before-tax profit was RMB 18.5 billion (US$ 2.2 billion), 15% greater than in 2004. Net profit totaled RMB 10 billion (US$ 1.2 billion), 17% up on the previous year.

While much papermaking capacity is still in the hands of government-owned companies, foreign companies and private companies have been playing a larger role in the Chinese paper industry, according to Research and Markets. In 2004, foreign invested companies contributed 28.6% to industry sales revenue and accounted for 40% of industry net profit, while collective and private companies accounted for 46.6% of sales revenue and 35.8% of net revenue.

In 2004, art paper consumption soared to 2.74 million metric tons, 20.7% over 2003. Rapid consumption growth helped moderate the pressures from capacity buildup in 2005, said the report. Offset book paper consumption and production growth remained stable, with consumption and production reaching 5.75 million metric tons and 5.5 million metric tons respectively in 2004.

Tissue paper consumption grew at a rate of 10.1%, outpacing Chinese GDP growth, said the report. Corrugating medium consumption reached 9.21 million metric tons, an increase of 14.8%, 1.11 million metric tons more than production. The gap between consumption and production was only for high strength grades, while low and medium grade corrugating medium consumption was equal to production. Imports filled the gap. Linerboard and white paper board were up 20% in consumption and production. In these two grades, consumption exceeded production by 1.26 million metric tons and 1.02 million respectively, said the report.

Due to China's commitment to its World Trade Organization obligations, the country's paper and paperboard tariffs continued to track lower in 2004, according to Research and Markets. Art paper, kraft, linerboard, and duplex board tariffs dropped from 7% to 5%. Corrugating medium tariffs were reduced from 11.7% to 8.3%. Despite the lower tariffs, China's paper industry continued to gain ground on imports due to major increases in papermaking capacity. China's imports of paper and paperboard dropped to 6.14 million metric tons, 3.3% lower than previous years.

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Recovered paper continued to be the mainstay of China's fiber basket in 2004, amounting to 52% of total pulp consumption--up from 49% in 2003, according to the report. Wood pulp's share increased to 22% from 21% in 2003, while nonwood pulp's share dropped sharply, to 26% from 30%. In 2004, China's imported 7.32 million metric tons of wood pulp and 12.3 million metric tons of recovered paper, representing increases of 21% and 31% respectively.

SUN PAPER RISING

Sun Paper, based in Yanzhou City, China, is a good example of rapid growth and apparently bright prospects for the Chinese paper industry. In 22 years, Sun Paper (formally known as Shandong Sun Paper Industry Corp.) has grown from producing 400 metric tons/yr to 1 million metric tons/yr--with plans to double that total to 2 million within five years. At the end of the expansion, Sun Paper will have installed five new Metso paper machines in five years. Two of its most recent Metso machines, PM 18 and PM 19, had excellent startup curves. PM 19, a fine paper machine that started up in August 2004, went through a ten-day startup to deliver qualified paper.

Sun Paper began as small paper workshop employing 30 people. It has become a national company focused on papermaking, chemical production, export products, power generation, and timber plantations. Sun Paper is the largest privately-owned Chinese paper company and the largest producer of premium coated packaging board in China. Today, the company employs more than 7000 people, has assets of RMB 2.98 billion, and annual production capacity of 1 million metric tons.

Sun Paper produces 150 grades in three primary areas: premium coated packaging paperboard, industrial based board, and office paper. These products are sold domestically and to ten countries in North America, Europe, Africa, and Southeast Asia.

The company has recently upgraded its environmental performance, investing RMB 600 million in air and water treatment facilities. The company is the middle of a two-year, 300 million RMB investment program in intensive water treatment through sand and high density film filtering, with the treated effluent used to irrigate farm and timber lands.

Sun Paper expects production to reach 1 million mtpy with sales of RMB 5 billion in 2005. By 2008, the company expects to double in size, with production growing to 2 million metric tons/yr and sales to RMB 10 billion. The company expects to become one of the 500 leading manufacturers in China and one of the top 100 papermakers in the world by 2010, with 2.6 million metric tons/yr in production and RMB 15 billion in sales by 2010.

FOCUS ON FORESTRY

With a severe shortage of fiber raw material in China, Sun Paper is rapidly developing poplar plantations. Under the direction of Zhu Zhidi, member of the China Engineering Scientific Academy and professor for the Beijing Forestry University, Sun Paper has developed 10,000 hectares of plantation forests and will expand that to 66,667 hectares by 2010. The triptoid white poplar used in the company's plantations was developed through 15 years of bioengineering and genetic research at the Beijing Forestry University.

CHINESE FORTUNE

The level of development in China is truly astonishing. It is one thing to read about it and another to experience the country's high adrenaline transformation, as I was able to do last year. The United States hasn't seen this pace of development since the post-war boom years of the 1950s, when America was opening new factories every week.

A quote from Sun Paper's corporate brochure best sums up the confidence of Chinese papermakers in the future: "This is the sun rising era. The dashing and spirited Sun Paper People are sounding the bell of the new era with their hard work and talent in the course of writing new and gorgeous chapters."

ABOUT THE AUTHOR

Alan Rooks is Editorial Director for Solutions. Contact Alan at +1 847 998-8093 or by email at arooks@tappi.org.

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ALAN ROOKS, EDITORIAL DIRECTOR

WHAT YOU WILL LEARN:

* The current economic climate in China.

* The Chinese paper industry's performance in 2004.

* Profiles of Sun Paper and Chenming Paper.

ADDITIONAL RESOURCES:

* "A glimpse of the future in China: Two new APP mills," by Nie Xiaorong, Solutions!, April 2005. To access this article, type the following Product Code in the search field on www.tappi.org: 05APRSO21, or call TAPPI Member Connection at 1 800 332-8686 (US); 1 800 446-9431 (Canada); +1 770 446 1400 (International).

* "China on a hot streak with larger scale, new mills," by Hannu Oinonen and Nie Xiaorong, Solutions!, March 2004. Product Code: 04MARSO24.

* "Zhongzhu Group and Yueyang Group: Building for the future," Solutions!, July 2004. Product Code: 04JULSO39.

RELATED ARTICLE: SHANDONG CHENMING COMBINES THE OLD AND NEW

Shandong Chenming Holding Ltd., in Shouguang, China, illustrates many of the trends in the Chinese paper industry, which continues to operate hundreds of older paper machines producing low quality paper while also building new, highly advanced paper machines. Several old paper machines at the four-mill complex produce low quality paper for domestic consumption, while two new machines produce most of the plant's output for high end domestic and export market. Mill 2's PM1 is a Metso LWC machine recently updated with a shoe press, and it runs faster than many machines in Europe and the United States--1265 m/min at the dry end. Mill 4 (which houses PM3, a new board machine, and a 250,000 metric tons/yr alkaline peroxide pulp mill) was under construction in September 2004.

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Most of the company's production is consumed domestically, but some LWC is sold to markets in Japan, the United States, Asia, Europe and India. Chenming is a public company listed on the Chinese stock market, but a large percentage of the company is owned by the government.

Mill 2's PM 1 produces high quality LWC from 70% BCTMP and 30% BKP. About 70% of the machine's output is consumed domestically, and 30% is exported. The 5.2 meter wide machine uses a hybrid former and a shoe press, and machine speed is 1265 mpm at the dry end. There are about 150 people per shift on PM 1. The mill has a reputation as a highly disciplined operation, and many of the workers live in dormitories on mill grounds.

Chenming is now sourcing more of its equipment from operations based in China. For example, most of the parts for PM1 were imported from Finland, but with the more recent PM 2, most of the parts were manufactured in China.