Wayne Schuetzebergis marketing manager for American Chung Nam

Impacts from new Chinese containerboard capacity

With almost 36 million tons of consumption of paper and board, China ranked as the world’s second largest consumer in 1999. Container-board production in 1999 was estimated at 8.3 million tons–a 4% growth over the previous year. Much attention is now focused on new capacity scheduled between 2000 and 2002, which will total almost 1.5 million tons.

Representing over 50% of the new capacity in this period, the Nine Dragons Paper Industries containerboard mill, located in the Guangdong region of China, garners much attention. Mr. Ming Chung Liu, vice president of American Chung Nam and deputy chairman/general manager for the Nine Dragons mill, responded to key questions regarding the containerboard industry in China.

When asked what effect the new capacity may have in China, especially for U.S. producers, Mr. Liu said there would be some impact on U.S. kraft linerboard producers, but not as large as one might think for two reasons. First, some converters and end-customers in China need the high virgin content U.S. kraft linerboard–no matter what the price. Second, he mentions that U.S. kraft linerboard producers can export to China with special import licenses at tariffs lower than the normal 7 to 8%–some 3 to 4%. He notes that the market barriers are relatively low and that the U.S. kraft linerboard market will continue to be competitive in the new market. As to the impact new capacity from China may have on Asian markets, he believes there will be little effect, since the vast majority of containerboard will stay in the Chinese market.

As regards the next two or three years, Mr. Liu sees little change to the export position enjoyed by U.S. producers due to a loyal customer base for kraft linerboard. He stresses the importance of a trade balance between China and North America. Trade flows and the resulting costs of transportation from the U.S. are such that it may cost around seven to ten times as much to ship from Asia to North America versus North America to Asia. Until this changes drastically, he sees the need for U.S. containerboard in the Chinese market.

KEY SOURCING ISSUES. The raw material of choice for the majority of new containerboard mills is recovered fiber, which traditionally comes from North America, Europe, and Asia. However, more emphasis is now focused on developing domestic sources. Some analysts place China’s recovery rate at around 25%, compared to rates above 60% in the U.S.

How can these mills source their recovered fiber requirements? Mr. Liu recognizes the importance of establishing global supply networks, noting that many Asian containerboard mills have established their own local procurement offices within countries with excess supply. North America and Europe are key sources of recovered paper for China and this will continue.

Focused on developing local collections, Mr. Liu believes a collection target of 50 to 70% of his mill’s requirements is possible within local markets in the next few years. Having the technology to utilize recovered paper sources from around the world, the idea of managing a global recovered fiber network is crucial towards developing an optimum cost structure for producing containerboard. He notes that Chinese box makers have enjoyed competitively priced U.S. kraft linerboard imports for many years and that key expectations remain: the price of domestic containerboard must be similar to other straw-based or local recovered paper-based materials yet compete with U.S. equivalents on quality. These expectations demand total commitment to the procurement process. Also, establishing long-term relationships with suppliers on a local basis is the hallmark of developing sustainable procurement that is vital to his mill’s success.

MORE CAPACITY AT NINE DRAGONS. As Nine Dragons currently finalizes the implementation of its No. 2 paper machine, Mr. Liu shared further plans for development and expansion. In 2001, improvements to the No. 1 machine will increase the capacity by 50,000 mton to reach 250,000 mtpy of kraft linerboard. Now undergoing final negotiations, a third machine producing 400,000 mtpy of high-performance medium should be completed at the end of 2001. Once all projects are complete, the total production capacity at Nine Dragons will exceed 1 million mtpy.

Finally, there are plans within two to three years to build ten box plants around China. Some will be joint ventures, while others will be 100%-owned by Nine Dragons. Looking ahead even further, Nine Dragons Paper Industries has already purchased land for a new paper mill near Shanghai, with plans to start construction when market timing is right.