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CAPITAL SPENDING
Financing difficulties may prompt Asian developers to seek more international partners for future expansions
BY Karl P. JENSEN, Associate Editor,Pulp & Paper Project Report
Asian Turmoil Prompts Some Expansion Delays
The currency woes of Thailand, Malaysia, Indonesia, and most recently, South Korea have rippled across regional and world financial markets, causing sharp declines and heightened uncertainties. How have these fluctuations affected the ongoing surge in pulp and paper capacity growth in Asia?
In an attempt to address that question, Pulp & Paper Project Report has compiled a list of known major projects scheduled or announced to begin production in 1998 and beyond in China, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, and Vietnam. The tables list all known major greenfield mills, paper machine installations, and pulp mill expansions, including proposed projects. A major project was defined as an installation with a capacity of 50,000 mtpy and greater, excluding tissue. All known tissue machine installations were included in the summation. Listed pulp projects include market pulp expansions, as well as expansions for internal company paper production.
Tables of Asian capacity additions
The status given for projects was assigned based on recent confirmations from the respective companies and/or major equipment vendors. A definition of each status is listed in the table footnotes. If no status is given, this indicates only that Project Report was unable to obtain a recent confirmation on the project status.
Major Projects Proceeding. Major projects underway by Asia Pulp and Paper Co. (APP) and Asia Pacific Resources International Holdings Ltd. (APRIL) are all fully financed and on schedule, as previously announced. Combined, the ongoing projects of just these two companies represents over $5.2 billion in spending through 1999, all for projects in Indonesia, China, and Malaysia.
APP expects capital spending to total $2.3 billion in 1997 and increase to $2.8 billion in 1998 as the bulk of the company's 1999 (Phase III) projects get paid for. This follows expenditures of $2.0 billion in 1996. Projected spending by APP in 1999 currently totals only $500 million. In November, APP successfully raised $692 million through two offerings which will be used to finance ongoing projects in Malaysia and China. The funding replaces local bank debt financing originally planned for these facilities.
APP is installing six paper machines that will have a capacity of over 2.3 million mtpy of uncoated and coated free-sheet, one PM with a capacity of 250,000 mtpy of carbonless paper, and four PMs with a capacity of 240,000 mtpy of tissue and an additional 1 million mtpy of bleached kraft pulp (BKP) capacity.
APRIL expects to spend over $1.1 billion in capital expenditures in 1997 with an additional $385 million slated for 1998. This follows expenditures of $146 million in 1996. APRIL issued a rights offering in October that raised $512 million to fund its ongoing projects. The company is also receiving $350 million from the Tanoto family, the majority shareholder of APRIL.
The company is installing three paper machines that will have a total capacity of 950,000 mtpy and additional BKP capacity of 500,000 mtpy. The Riaupulp BKP expansion has been pushed back slightly from an original 1998 startup to first-quarter 1999.
By the year 2000, APRIL plans to have 2 million mtpy of pulp capacity, over 1 million mtpy of paper capacity, 180,000 mtpy of dissolving pulp capacity, and 125,000 mtpy of viscose fiber capacity.
APRIL is also scheduled to install two PMs in Changshu, China, in a joint venture with KNP Leykam, Gratkorn, Austria, following the startup of that company's 470,000 mtpy coated free-sheet PM. However, this joint venture has been postponed for further review until early 1998. APRIL and UPM-Kymmene are forming a strategic fine paper alliance, while SAPPI has agreed to purchase KNP Leykam.
Advance Agro's plans to increase BKP production capacity in Prachinburi, Thailand, are progressing. The addition of 250,000 mtpy of BKP capacity is scheduled to be completed in 1998 as planned. In November, the company raised $111 million by selling high-yield junk bonds on Wall Street, becoming the first company from Thailand to do so. These proceeds are slated for the additional 700,000 mtpy BKP expansion.
Some Delays Reported. Project Report was able to confirm that some projects have been delayed slightly, though not all are due to currency problems. In addition to the Riapulp BKP slight expansion delay mentioned previously, the BKP expansion by Kiani Kertas in Indonesia has been pushed back to the year 2000, due to the excessive startup difficulties that the mill has experienced this year. The company now officially reports that it began production in October 1997, delayed from May. The company is currently not running its oxygen delignification stage, which is affecting pulp production.
The new 150,000 mtpy containerboard PM being installed by United Pulp & Paper in the Philippines is now slated to start in third-quarter 1998, delayed slightly from its original first-quarter start date.
Three projects in India were also confirmed as being delayed at least one year while one project has been delayed indefinitely. The net result is that there are currently no major projects slated to begin production in India before second-quarter 1999.
Uncertainties Abound. Among projects that have been identified as uncertain, the biggest is the $1.2 billion, 750,000 mtpy BKP project of Sarawak Pulp and Paper in Malaysia. The Malaysian prime minister slammed the brakes on the $5 billion Bakun hydroelectric dam project in September, and in late November, canceled Ekran Bhd's concession to build and run the dam. Timber cleared for the dam construction is slated to be the initial wood supply for the Sarawak project.
As discussed previously, the APRIL/KNP Leykam joint venture will be reviewed in early 1998. Also in China, the Nanping Paper Mill newsprint expansion must still be approved by the Indian government before contracts can be signed. The recent collapse of the Won has cast uncertainty on many of the projects slated for Korea.
Cancellations Announced. Not surprisingly, some projects have been officially canceled and have generally been attributed to the high cost of capital involved. Four that could be confirmed canceled are Siam Pulp & Paper (Indonesia), United Mayr-Melnhof Packaging (Singapore), Seshasayee Paper & Boards Ltd. (India), and a proposed coated free-sheet PM by Cheng Loong (Taiwan).
Wall Street Insights. In conversations with analysts from four major Wall Street firms, there was a general feeling that while future expansions will continue in Asia, some may be undertaken by other pulp and paper companies instead of the ones currently listed. However, as long as gross domestic product (GDP) growth remains positive, pulp and paper capacity expansion is expected to continue, albeit at a slower rate than in the past several years.
GDP growth estimates have been scaled back
for 1998 for many Asian countries by most analysts. However, most forecasts are still expecting GDP growth of 2% to 5% in 1998, which is down from the 6% to 9% growth previously forecast. A major concern is that future economic growth will be restrained to the point that overcapacity may become a problem, which could lead to a flood of low-cost paper and pulp onto the world markets causing downward price pressures.
As late as November 3, the World Bank believed that the worst of the Asian crisis was over and that no other countries in the region would need large aid packages. Less than one week later, the Korean won was plummeting. Instability in South Korea, the world's eleventh-largest economy could hurt both Japan and Taiwan, and ripple effects could cause further decreases in smaller Asian markets as well.
In late November, Japan's fourth-largest securities firm announced that it was going out of business, leaving $23.6 billion in debt while leaders were assembling a bailout package of $88 billion for Korea from the International Monetary Fund (IMF), following a combined $48 billion rescue package for Thailand, the Philippines, and Indonesia. The next few months will be critical in determining the severity of the situation.
One analyst also speculated that Asian companies may seek more international partners, including, perhaps, some North American pulp and paper companies, to participate in future projects. The obvious benefits would include more solid U.S. funding and technical expertise.
Vendors React. Project Report also spoke with executives of several major equipment vendors that have been quite active in the many Asian expansion projects. There is obvious short-term concern as a general slowdown in project activity is expected.
One executive expected that projects not currently underway could be delayed by 2 to 3 years due to financial difficulties and shrinking GDP growth. But, he continued, the basic parameters exist for future growth and he expects that it will happen.
Another said that despite a short-term dip in project activity, the company still has a significant portion of sales in 1998 from Asian contracts.
KARL P. JENSEN is associate editor, Pulp & Paper Project Report, published by Miller Freeman, Inc., San Francisco, Calif., and assistant editor, Pulp & Paper magazine.
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