China - the great wall of money

China - the great wall of money

Expect to see well-funded Chinese companies chasing opportunities to secure fibre resources globally. These companies are motivated by the Chinese Central Government’s aspiration to increase domestic and offshore fibre security as part of its plans to grow the pulp and paper industry sector. Chinese offshore investments present opportunities, and potentially challenges, for existing industry players in target regions. Companies with fibre assets may have opportunities to sell, joint venture or to develop other forms of collaboration with the Chinese companies.

In March 2012, Pöyry participated in a China Pulp and Paper Industry Symposium in Jinan, Shandong Province organized by China Paper, a leading industry magazine. Of significance at this year’s event was the review of the Central Government’s latest five-year plan for the pulp and paper industry. This plan started in 2011, and includes the following key aspects:

- Measured and sustainable growth in manufacturing capacity
- Continued focus on fibre availability
- Encouraging plantation development locally as well as offshore investment in forest resources (and production facilities -pulpmills)
- Improving local recovered paper collection.

The Chinese Central Government sets the policy directions for the pulp and paper industry. However, as distinct from Western models, under China’s planned economy, the government implements the policy through approval of projects. Consequently, pulp and paper companies operating in China develop their strategies to comply with these policy directives. The implementation of the policies is then enhanced by given access to finance for qualifying projects.

Despite the planning, some Chinese paper and paperboard companies are facing lower margins due to over-investments in new capacities across a range of paper grades. Consolidation has been slow, but is needed to introduce more capacity discipline to reduce the supply overhang. The Chinese Government is already actively promoting consolidation by setting up state-owned pulp and paper conglomerates.

Despite these issues in some grades, the five year plan calls for further growth. It comes as no surprise that a broad range of pulp and paper companies have indicated their intention to continue to expand. In recent discussions with these companies, Pöyry found that investments in overseas resources and production facilities were high on their lists of possible projects.

Regions of particular interest include Africa, South America and Indo-China. Investment opportunities being considered are also quite varied. Besides the globally-announced and marketed investment opportunities, the Chinese also have access to opportunities that arise as an offshoot of the Chinese Government’s active support of a broad range of aid-related projects in the developing world. Other opportunities occur as part of some Chinese companies’ involvement in infrastructure and mining businesses.

There appear to be many investment options. Although the actual amount of Chinese investment in overseas forest resources remains modest to date, this will change. We expect more near-term interest in investment opportunities because of the factors discussed above; availability of finance, the impetus for growth from the Chinese Government’s policies, and the emergence of consolidated state-owned pulp and paper enterprises.

Source: Rudolf van Rensburg, Pöyry

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