JANUARY 2017
The New Normal? – Chinese Paper
Companies’ Overseas Expansion Strategy
By Neo Wu, Senior Consultant, Fisher International
While paper making was invented in China, it was western countries that built it into a
major industry and made it the ubiquitous commodity it is today. But China is poised to
reclaim its central role in the paper industry on a global stage…and then some.
Over the past thirty years, China’s paper
capacity grew from less than 3 million tons in
1990 to over 100 million tons in 2015, making
China the largest paper producing country in
the world. Figure 1 shows the total paper
production by country and, without doubt,
China’s lead is significant with a market share
that exceeds a quarter of the total worldwide
output.
However, as Figure 2 shows, with the “cooling
down” of the Chinese economy, capital
investments in new capacities within the
Chinese paper industry are becoming less
exuberant. Industry leaders like Nine Dragons,
Lee & Man and APP China are investing heavily
in efficiency improvement, rather than adding
new capacity, while service providers such as
Valmet, Voith and Siemens are rolling out key
service concepts such as Industry 4.0, Industry
Automation, Digital solutions, etc., targeting the
quest for operating excellence in China.
2
Looking outward, and in keeping with government initiatives such as “One Belt, One
Road,” Chinese funds and trillions in foreign reserves are slated for aggressive foreign
investment. With the Chinese government encouraging Chinese companies to expand
aggressively overseas, identifying the optimal investment destinations is the key
decision to be made in the initial stages. So, how should paper companies think about
such potential investments?
Figure 3 shows paper production and the number of mills in each global region
covering Packaging, Printing & Writing, Newsprint, Tissue & Towel as well as Specialties
(we exclude market pulp from consideration since pulp itself requires sufficient raw
material fiber supply, and pulp producers must stay close to their fiber resources to be
competitive). With fewer than 400 operating mills in North America contributing
approximately 90 million tons in paper and paperboard production, it’s easy to
conclude that the industry’s scale in North America is more optimal than Asia Pacific
and even Europe.
Chinese Paper Companies’ Overseas Expansion Strategy
3
In addition to the industry’s maturity in the US, from a macroeconomic perspective, the
US dollar is getting stronger against all currencies and expected to get even stronger in
the coming years. At the same time, the European refugee crisis and threats of
terrorism, all force risk-averse investors to find more stable investment destinations.
North America, due to its geographic location and stable political environment, as well
as its desirable social and regulatory systems, already attracts significant Chinese
investment, including in its paper industry. In the past three years, we have seen large
announcements concerning Chinese paper industry capital moving into the United
States, such as Tranlin Paper’s Virginia project and Sun Paper’s Arkansas project.
By all appearances, Chinese
capital is gravitating to North
America and with good reason. A
general overview of North
America’s paper industry reveals
the thinking behind this activity.
Figure 4 provides an overview of
the North American paper
industry capacity with it’s close to
110 million tons of market pulp,
paper and paperboard produced
by Canada and the United States,
while Figure 5 shows North
American assets are relatively
older than other regions.
Nevertheless, from a general
operations perspective, Figure 6 shows that North America is lower cost than either
Asia Pacific or Europe, and the most significant difference comes from the lower fiber
costs.
Chinese Paper Companies’ Overseas Expansion Strategy
End Notes
While China’s paper industry has grown to be very large, it is still relatively new
compared to those in other regions of the world. Any further investment in China will
now be focused on improving efficiency. However, after the past 40 years of “reform
and opening” achievements, China has a lot of capital to invest and is looking for good
places to land those investments. The North American paper industry has lower fiber
costs and good scale advantage. Although its assets are old and need investments, it is,
nevertheless, highly reasonable that China would shop in North America for decent
investment opportunities. Additionally, the growing value of the US dollar against
Chinese currency exerts further pressure on Chinese capital investors more willing to
allocate USD assets.
Overseas expansion has become the hot word for Chinese paper companies in recent
years and we expect to see more and more projects in the near future. This article
mentions a few projects in North America but North America is not necessarily the only
destination for Chinese capital. Indeed, we anticipate aggressive movement from
Chinese investors on a worldwide scale.
Neo Wu can be reached at [email protected]
Fisher International, Inc.
50 Water Street
Norwalk, CT 06854 USA
+1 203 854 5390
www.fisheri.com