UPM-Kymmene strengthens its foothold in China
UPM-Kymmene is a strong believer in the future of the Changshu fine paper mill in China, which it now fully owns. But is there sufficient growth forecast for uncoated woodfree grades for the company to realize the mill's expansion potential?
by Robert Ryan
When UPM-Kymmene acquired Asia Pacific Resources International's (APRIL) share of the Changshu fine paper mill in August 2000, the company became the proud owner of a modern, world scale operation. The Finnish producer formerly held only a minority share in the company. With the move, the leading European papermaker also strengthened its long term competitive position in China and the rest of east Asia, by gaining control over a production base with the massive potential to expand and serve growing markets in the region.
UPM-Kymmene used to hold a 49% share in the APRIL Fine Paper joint venture company that owned the Changshu mill before the purchase deal with Singapore-based APRIL. The Finnish company bought APRIL's 49% stake in the mill, as well as the 2% held by its former partner's majority shareholder in August 2000, for $150 million. The buyout came nearly one year after the September 1999 collapse of the two groups' plan to create a global fine paper alliance. The proposed alliance was originally announced in 1997 and envisaged a 30% share swap between the two groups' fine paper operations. The deal had hinged on APRIL starting up three new PMs in Asia, but the company was unable to fulfile this plan, largely due to the Asian financial crisis.
The Changshu mill has a capacity of 350,000 tonnes/yr of uncoated woodfree paper. The mill uses bleached hardwood kraft pulp (BHKP), which is supplied by APRIL from the recently expanded Kerinci pulp mill in Sumatra, Indonesia. UPM-Kymmene also signed a pulp supply agreement with its former joint venture partner as part of the acquisition deal last August. Under the agreement, APRIL will supply Changshu with 200,000 tonnes/yr of BHKP over six and a half years, according to the managing director and general manager of the Changshu mill, Pertti Salminen.
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A very Finnish operation in the heart of east China: the Changshu mill is now fully owned and managed by UPM-Kymmene
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Marketing changes
"The ownership change did not affect the operations of the mill," says Salminen. Changshu was already being managed by UPM-Kymmene prior to the takeover deal. But there were major changes in sales and marketing following the takeover. Marketing arrangements which had previously earmarked a large share of the mill's output for export sale by APRIL were discontinued, and UPM-Kymmene became responsible for all domestic and export sales.
Branding witnessed another significant marketing change. The Changshu mill has introduced the new brandname "jetset" for sales of its copier paper in the domestic market. The mill had already built up a reasonably strong level of brand awareness in China for the new name by early November 2000, according to the marketing and sales director at UPM-Kymmene Paper Changshu, Peter Löfgren. "The mill is selling 50% of its output in the domestic market and exporting 50%," he says.
Meanwhile APRIL continues to buy limited quantities of uncoated woodfrees from the mill for its stationery converting plant, which is located 60 km from the Changshu mill in the city of Suzhou. The Singapore-based company gained full control of the Suzhou facility as part of the August 2000 deal. The converting plant was previously owned by part of the APRIL Fine Paper joint venture company. UPM-Kymmene gave up its share in the Suzhou facility as part of the mill sale agreement.
Good location
The mill is located in Changshu in the eastern province of Jiangsu, which borders on Shanghai, China's largest city. The site is within easy reach of Shanghai by modern motorway. The mill is also in a good location to serve the rest of China and export markets through the mill's own wharf and the port of Shanghai.
The Changshu mill location is ideal for serving relatively high income markets in the Shanghai-Jiangsu province area, as well as the wider, rapidly developing China region. The Shanghai municipality and Jiangsu province area accounts for one third of the mill's domestic sales.
Unlike much of the population in the inland areas of China, end-users in this wealthier coastal area enjoy higher living standards and financial means that usually dictate high quality printing/writing paper preferences and purchases. Prosperous Guandgong, the southern province bordering Hong Kong, is the second largest domestic market for the mill. Beijing is another major domestic sales outlet for the unit.
Meanwhile UPM-Kymmene Changshu is also taking advantage of healthy demand growth for coated woodfree grades in China, which has reached double-digit figures in recent years. The mill has begun producing some matt film coated paper for sale in the domestic market. While tonnages have been relatively small compared to the mill's total capacity, sales have been good and prospects look promising, Salminen says.
WTO opportunity
The prospect of lower tariffs in the near future has caused some concern among many of the local, state-owned mills in China. Tariffs will fall across the board following China's imminent entry into the World Trade Organization (WTO). The current average 15% rate on paper products will fall to just 5%.
But Salminen is not alarmed by the prospect of heightened competition. On the contrary, he believes that the move to free up trade will boost the service sector in China, and therefore generate higher demand.
The Changshu mill is one of only three "genuinely nationwide" players operating in the fine paper business in China, adds Salminen. The other two serious national players in this grade are Asia Pulp & Paper (APP), which produces over one million tonnes/yr of printing/writing paper at its Dagang mill, and Stora Enso Suzhou Paper, the coated paper producer based in Suzhou. These three printing/writing producers are all located in Jiangsu province.
The remaining local producers, most of which operate small to medium-sized state-owned mills, cater mostly to the customers in their immediate area or province. These state-owned mills fear a post-WTO entry import surge, while the handful of leading national players can match imports in terms of quality and production cost, as well as beating them in terms of market knowledge and access.
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UPM-Kymmene's uncoated woodfree paper Changshu mill is located in the heart of the booming economy of east China
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Market size reality check
Importers and would-be investors need to be careful when assessing market prospects in China, even in the post-WTO entry world. As Löfgren points out, figures for the country's paper production and consumption can be misleading. While printing/writing paper consumption in China is about eight million tonnes/yr, a large share of the printing/writing paper produced and consumed in China is made up of low quality nonwood-based grades. The local market for high quality wood-based printing/writing paper is perhaps one million tonnes, with a further 1.5 million tonnes for coated grades, he concludes.
While incomes are rising and government intervention in the economy is gradually declining, economic factors and government policy priorities still play an important role in the Chinese market. For example, the large educational market in China remains out of reach for the handful of high quality producers like the Changshu mill. Government price ceilings on printing/writing paper used by educational publishers mean that this market sector is in effect restricted to producers of low-priced nonwood grades, explains Löfgren.
The small size of the market for wood-based printing/writing paper in Sichuan province is another example of the importance of economic factors in assessing market prospects in China. UPM-Kymmene originally set up a sales office and warehouse in Chengdu, Sichuan province, to serve the province's 116 million plus population. However, the company closed these facilities after finding that local sales for its relatively high cost, high quality paper were too small to justify keeping the units open. The poorer inland areas still have a long way to go before they can match the incomes and quality preferences of coastal China.
Modern paper machine
The Changshu mill features an 8.7 m wide paper machine supplied by Valmet. The modern PM, which came on stream in 1999, has a design speed of 1,500 m/min and was running at 1,251 m/min in November 2000.
Apart from the paper machine, Valmet has also installed the softwood and hardwood fiber lines, as well as the stock preparation system. Ahlstrom Pumps supplied the stock and process pumps. Process automation controls were installed by ABB.
The PM has a SymFlo D dilution control headbox, which has been designed to give uniform basis weight at high speed. Stock is fed from the headbox onto a SpeedFormer forming section.
The web then proceeds to the SymPress II B press section, which features a shoe press to achieve a high level of dryness at high speed. The shoe press is located in the third press position.
Following removal of most of the water from the web, the paper proceeds to the SymRun dryer section, which is configured in a single-tier arrangement. The line features a SymSizer size press before the afterdryer. The sheet can be coated with 9-10 g/m2 or just sized at this point, using the film transfer process. The mill has started producing small tonnages of matt-coated paper using the Symsizer.
After drying, the paper web then passes through an OptiSoft calender. The calender is comprised of SymRoll CD deflection rolls heated to 200°C, which deliver a high standard of smoothness and printability. An OptiReel, which produces reels of up to 3.5 m in diameter, completes the line.
The finishing area features three Jagenberg rewinders. An automated roll wrapping machine wraps finished rolls. Around 10-20% of the site's production is sold in reels to customers, while the balance of the mill's output is converted.
The mill has its own on-site converting area. The section has three folio sheeters installed by Jagenberg, each with the capacity to convert 200 tonnes/day of paper. The area also has four cut-size sheet lines supplied by E C H Will and Bielomatik, for producing copy paper.
A, B and K size paper are the most popular sized sheets sold in the domestic market in China. Most of the A4 copy paper produced for the domestic market has a 70 g/m2 basis weight, as price sensitive domestic consumers prefer it to higher priced, heavier grammages. The mill also produces 75 g/m2 copy paper for the Korean market and 80 g/m2 copy paper for export to Europe.
Water and power
The Changshu mill is located next to the Yangtze river, which is both a source of raw water and a convenient transport link. Coal for the boilers, as well as pulp, is brought to the mill by river. At the end of the production line, the Yangtze also serves as a transport link to carry some of the mill's finished paper tonnage.
The mill draws all of its raw water requirements from the river, which is then treated at the onsite water treatment plant. The plant can treat up to 38,000 m3/day of river water.
Effluent water is subject to mechanical, chemical and biological processing before it is discharged into the river. The discharged water meets the national and Jiangsu province effluent regulations, setting a high standard for less environmentally friendly local producers to emulate.
On top of that, the mill produces all of its own power and steam. The power plant features two 241 tonne/hr boilers and two 50 Mw steam turbine generators.
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The 350,000 tonne/yr Changshu mill was a joint venture between APRIL and UPM-Kymmene until the Finnish producer took over in August 2000
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Young, highly qualified workforce
There are a total of 630 employees at the Changshu mill, as well as additional sales staff working for the company at the mill and other sales offices in China. This mill employee figure excludes the workforce in the converting area, which is mainly employed on a contract basis, giving the mill flexibility in varying converting operations in response to market conditions. A relatively small expatriate workforce, comprised of nine senior managers from UPM-Kymmene, continues to work at the mill.
One of the advantages of having a young workforce at the greenfield operation - the average age of the workers is just 27 years - is that it has not been exposed to the low productivity and outdated technology which characterize many older, state-owned enterprises in China. "Staffing levels at the mill are similar to European standards," Salminen says.
As a modern operation owned and run by a leading foreign company, Changshu is an attractive workplace for locals. As a result, the mill has been able to select a highly educated workforce, and most of the machine operators have university or college qualifications.
UPM-Kymmene has provided extensive training for operators, including classroom sessions, and on-the-job training on site and in European operations.
Future prospects
The outlook is bright for the Changhsu mill with strong demand growth expected for uncoated woodfree grades in China. UPM-Kymmene's management is confident that demand for the grade will continue to achieve around 8%/yr growth in the future - or about the same level as GDP growth. This is a relatively cautious approach to the promising local market, given that paper and board demand in China has generally outstripped GDP growth in recent years.
The mill has plenty of room to expand to serve future demand growth, though. The unit is located on a 200 ha site, which is just begging for later expansion phases. "There is plenty of infrastructure for a second PM," notes Salminen. On top of that, the mill's power and water supply facilities have been designed with expansion in mind. But industry watchers will have to be patient to see if Changhsu's owners have an expansion blueprint in mind.
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