The spread of manufacturing to China's inland provinces draws investments by world-class containerboard players
September 2007
By Robert Ryan
China has become the world's factory. This assertion sounds like an overstatement, and it ignores such advanced industries as aircraft, cars, electronics, industrial machinery and military hardware where other nations still dominate, as well as downplaying the role of other emerging manufacturing nations. But when it comes to a wide range of mass produced manufactured consumer goods and an increasing diversity of value-added products, China is king.
China's role as a key producer of the world's manufactures plus its prolonged period of strong economic growth -- in the 7 to 10% range in the past decade, way ahead of the weighted average global growth of 2 to 4% -- have been the main drivers behind healthy growth in containerboard demand. Since 2000, demand for the grade in China has risen by an average 2.7 million tonnes/yr.
This manufacturing-led surge in Chinese containerboard demand looks set to continue. RISI economist Alex He predicts that Asia will add about another 12 million tonnes to containerboard consumption in 2007 to 2009, of which China will account for over 9 million tonnes (he was speaking at the Asian Pulp and Paper Outlook Conference held in Shanghai in June).
The RISI forecasts for China amount to another sharp increase in containerboard consumption. But at least one leading papermaking executive is even more optimistic: Nine Dragons' CEO, Liu Ming Chung, says these forecasts, "Maybe a bit conservative ... we are confident that the actual figures are going to be higher."
China's leading containerboard producers are not only targeting this new demand growth; they also expect to grab market share from small, inefficient competitors. Governmental measures designed to curb pollution will also force out some smaller players that fail to comply with environmental standards. "We foresee that many small containerboard producers will close down and market consolidation will happen at a much faster pace than before," says Liu.
Supercharged economy
These high numbers for economic growth and containerboard forecasts are impressive. And there are some extraordinary aspects to the story of China's supercharged economy, its ongoing manufacturing boom and consequent endless appetite for packaging, and the key packaging players that are serving this surge in containerboard demand.
The first extraordinary point to note is that China's labor-intensive manufacturing boom is being fed by a human tide of peasants flocking to the cities for work. Many more will follow suit: only about one third of all Chinese -- or 400 million people -- currently live in towns and cities. This should reach one billion by 2050, writes China scholar James Kynge in his book China Shakes the World -- the rise of a hungry nation. So, other things being equal, the nation's manufacturing boom could continue for decades to come.
Another important trend to note is that manufacturing investment, which has chiefly been concentrated in the eastern coastal provinces and the south of China, is spreading to the inland. Central government spending on infrastructure, including on the building of 30,000 km of excellent freeways, has greatly helped this. Consider Chongqing, an expanding metropolis on the Yangtse River in inland China that is best known as a temporary capital during World War II, and the jumping off point for tour boats plying the Yangtse.
Chongqing is growing like topsy, helped by the giant Three Gorges dam project that is giving the sprawling city not only the hydro-electricity it needs to drive the further spread of manufacturing, but also -- by 2009 -- the access to the sea by oceangoing ships that this inland port needs to boost its role in foreign trade. In short, the opening up of China's less developed interior to new investment has the potential to sustain the spread of China's manufacturing boom indefinitely.
Let's turn to the major players in China's containerboard sector, which is supplying the packaging needs of the nation's manufacturing boom. Some of them are extraordinary as well.
Nine Dragons is China's leading producer in this sector. This Hong Kong Stock Exchange-listed company has mills serving two of China's key manufacturing bases: its original mill in Dongguan, which supplies the packaging needs of Guangdong and neighboring provinces in southern China, and the Taicang mill serving customers in China's largest city, Shanghai, in Zhejiang and Jiangsu provinces in eastern China, and beyond.
Expansion has been taking place at a frenzied pace at Nine Dragons since it took its first steps into papermaking in the late 1990s. The fast track growth has continued this year, beginning in January when PM 16 and PM 17 started up ahead of schedule at Taicang. The move boosted the mill's capacity by a combined 700,000 tonnes/yr of corrugating medium. An upgrade of PM 8 increased Taicang's capacity of the grade by another 50,000 tonnes/yr when it resumed production in June.
Nine Dragons will start up two more paper machines at Dongguan this year: PM 12 and PM 13 will boost kraftliner output by a combined 800,000 tonnes/yr. These startups will leave Nine Dragons with a total containerboard capacity of 4.4 million tonnes/yr by the end of this year (plus 950,000 tonnes/yr of boxboard capacity on two paper machines; the newer of the two is PM 11, a coated duplex board machine that came on stream in January).
"Our total annual production capacity is now 5.35 million tonnes, including linerboard, corrugating medium and coated duplex board," says the firm's CEO.
The dizzying pace of investment at Nine Dragons will carry on into next year. Liu says that the company will start up the following six new paper machines "before mid-2008" -- with a combined capacity of 2.4 million tonnes/yr:
- PM 18; producing 350,000 tonnes/yr of lightweight, high performance corrugating medium
- PM 19; 450,000 tonnes/yr of linerboard
- PM 20; 450,000 tonnes/yr of linerboard
- PM 21; 350,000 tonnes/yr of lightweight high performance corrugating medium
- PM 22; 450,000 tonnes/yr of linerboard
- PM 23; 350,000 tonnes/yr of high performance corrugating medium.
These investments are music to the ears of paper machinery vendors. Clearly, in the "buy or build" debate -- over whether papermakers should buy up old mills from failing competitors or build new ones -- Nine Dragons favors the latter view. "Our current expansion plans are based on the construction of new paper machines, as this is more efficient in terms of cost and time," explains Liu.
Destination Chongqing
Perhaps it is no surprise that two of the six machines listed above will be installed at a greenfield Chongqing site, demonstrating that Nine Dragons sees the potential of this inland hub. Liu has previously described the new site as "Strategically located in central-western China where there has been substantial growth in the manufacturing industry supply chain and subsequent demand for containerboard."
Under phase I at Chongqing, which is scheduled for completion by mid-2008, Nine Dragons will start up a linerboard machine and a corrugating medium machine with a total capacity of 800,000 tonnes/yr. And there's much more to come. Additional paper machines will come on stream in 2009, while the timing for installing even more machines at this inland facility will depend on the prevailing market situation, says Liu. And he adds that the site can accommodate "at least 5 million tonnes" of papermaking capacity. To support this expansion, the company is investing heavily in infrastructure at Chongqing -- a power plant, a pier, water treatment works, a fleet of trucks, and a spur track and railway siding.
Next year will be a milestone for Nine Dragons, explains Liu: "By the end of 2008, our total annual capacity will be 7.75 million tonnes, including linerboard, corrugating medium and coated duplex board. This will make us the world's largest containerboard producer" (his figures include the boxboard machines, so containerboard capacity will amount to 6.8 million tonnes/yr). That's an exceptional rise for a company that has only been around for about a decade; Nine Dragons made its first roll of paper in 1998, on a reconditioned Over Meccanica machine.
But as every observer of this industry would realize, things can change, and the Nine Dragons CEO adds this caveat: The company will only move into top spot worldwide in containerboard, "Provided that there are no major merger and acquisition activities among the key paper manufacturers in the international market."
Apart from planning to repeat its coastal papermaking success in inland China, Nine Dragons will expand its unbleached kraft pulp capacity at Nine Dragons Xing An in Inner Mongolia. "We have plans for expansion up to an annual production capacity of 0.3 million tonnes," he says. And Nine Dragons is also evaluating further pulp growth. "We are looking at both unbleached and bleached pulp projects globally as investment targets," says Liu.
Lee & Man -- rival fire-breather
Another leading producer in Chinese containerboard is also listed on the Hong Kong Stock Exchange: Lee & Man. And like its peer producer described above, this company has also strategically located its mills to serve China's two most important manufacturing bases: it has two mills in Guangdong -- Huangyong and Hongmei -- and another mill at Changshu to serve greater Shanghai.
Lee & Man is also riding the crest of a major wave of expansions. The company started up PM 8 at its Changshu mill in February this year, adding 430,000 tonnes/yr of kraftliner capacity. Then it brought PM 9 on stream at Hongmei in June, giving capacity of the grade another 400,000-tonne/yr boost.
Lee & Man is pushing on at a breakneck pace with more containerboard projects in China. It will bring on stream another three paper machines between the closing months of this year and the first quarter of next year, which will add a combined 960,000 tonnes/yr of containerboard capacity.
Good morning Vietnam
But there's a surprising turn in Lee & Man's investment plans. The company is diversifying its investments away from China. In the middle of 2008, Lee & Man will start up PM 15 at Hau Giang, which is 200 km from Ho Chi Minh City, Vietnam. This 7.25 m-wide Metso machine will produce 400,000 tonnes/yr of kraftliner. This Vietnam move is a marked contrast from Nine Dragons charge into central China.
It will be the largest packaging investment in Vietnam, and the largest papermaking project in the South-East Asian nation since the establishment of the Bai Bang mill with Swedish aid in the 1970s.
Lee & Man's Vietnam venture is an interesting move, especially given that some Sinophiles and economists fear that China's economic boom could falter. For instance, RISI economist Brendan Lowney cautions that China's over reliance on exports and unbalanced growth could see the nation dip into a downturn in the medium to longer term. Other threats to China's boom include the likelihood that its low cost labor advantage will eventually shift to other parts of the world. If these predictions are true, then it makes sense for companies like Lee & Man to be ready by diversifying investments in other nations.
On the other hand, the China story has a long way to go yet. Liu Ming Ching concedes the point that labor-intensive industries may gradually move to other nations. But he says domestic consumption will play an increasingly important role in China. Finally, he says that Nine Dragons is a company of international stature, and it will explore investment opportunities globally.
Secrets of success
Let's consider Nine Dragons and Lee & Man and their wave of investments in China. What is the secret to the successful growth of these two companies?
There are several reasons. Firstly, both producers have a comparatively low cost of capital (Hong Kong Interbank Offered Rate (HIBOR) plus about 0.4 to 0.45 percentage points). By contrast, most Chinese companies have to pay 6.6% or more to borrow funds.
In addition, both companies have access to supplies of competitively priced, high quality recovered fiber (including AOCC). The shortage of affordable supplies of this fiber resource poses a hurdle for competitors and prospective new entrants to overcome. Nine Dragons in particular benefits from fiber supplied by its sister company, the wastepaper collector America Chung Nam. ACN is based in California -- a convenient location for harvesting old corrugated containers from the urban forest of sprawling North American cities.
Another factor that explains the companies' successful growth is the scale of their operations. They certainly have competitors. But the high cost of setting up operations on a similar scale discourages new entrants.
Nine Dragons adds another twist to the economy of scale issue. The company says that it has adopted an "innovative dual-machine layout, which allows for a significant increase in production capacity and overall efficiency. As a result, the Group is progressively benefiting from economies of scale."
Grand strategy
Anyone alarmed by the impact of the US sub-prime lending failures on world share markets and mature economies should be comforted by the positive role that growth in emerging nations like China and Vietnam plays in the world economy. The two Hong Kong listed companies described here are well placed to take advantage of this growth.
Nine Dragons will have only just begun to realize its China plans when it attains world's top containerboard producer status next year. As Liu outlines, the company is already thinking well ahead, with a view to more than doubling this record capacity. By 2009, Nine Dragons will have bought enough land, "To accommodate a total annual capacity of at least 18 million tonnes across ... four bases". That's a grand strategy for a vast nation. And rest assured that its rivals, like its fellow fire-breathing producer Lee & Man, are also making big plans.
