Chinese paper companies have accelerated overseas investment, targeting foreign waste paper and forest resources

While Chinese companies are aggressively investing abroad, foreign competitors are also expanding aggressively, seizing resources and markets. In January 2019, Japan's Marubeni Corporation announced that it would build a new 350,000 tons/year box board corrugated paper project in Bati - Vtau Province, Vietnam, and put into production in the second half of the fiscal year 2020. GS Paperboard & Packaging (GSPP), controlled by Japan's Prince Paper, has built a new 1,445 tons per day box board corrugated machine in Malaysia, which will be put into production in 2021, thereby increasing local production capacity from 300,000 tons per year to more than 750,000 tons.

In April 2019, the Philippines' United Pulp and Paper (UPPC) was reported to be investing 8.5 billion Philippine pesos (about $165 million) in a new corrugated paper machine with an annual capacity of 220,000 tons, which will be put into production in November 2020. In Indonesia, a subsidiary of PT Fajar Surya Wisesa Tbk, a major local paper company, will switch to corrugated paper production, with an estimated annual capacity of 230,000 tons.

With the post-COVID-19 economic recovery, global demand for paper and paper products has rebounded rapidly, and overseas investment by Chinese paper companies is expected to only increase under the pressure of competition at home and abroad.

At this stage, the overseas investment destinations of Chinese paper enterprises are mainly in the United States, Northern Europe and Southeast Asia. Although the primary purpose of foreign investment is to obtain paper raw materials, the investment projects in the United States, Europe and Southeast Asia still show a relatively sharp regional difference.

Why invest in Europe and America?

First of all, North America and Northern Europe have the most urgently needed waste paper and wood pulp resources in our paper industry. The United States is the main source of imported waste paper in China, more than 70% of its waste paper is sold to China, the annual import volume has accounted for more than 45% of China's total waste paper imports, and more than 50% in 2020. The United States and Northern Europe are rich in forest resources and are also important sources of coniferous wood pulp in China. In 2019, bleached coniferous wood pulp from the United States accounted for the second place in China's total imports of wood pulp, and wood pulp from Finland accounted for the third place. Nine Dragons Paper's Old Town project in the United States uses local waste box board paper as the main raw material to produce 200 tons of waste pulp per day. In 2016, Sun Paper had planned to invest in the construction of a bio-refining project with an annual capacity of 700,000 tons in Arkansas, the United States, one of the important factors for the location of the site is that the local has rich southern pine forest resources, the quality of the tree species and the price of wood chips is very advantageous, which can effectively reduce the production cost of the project.

Secondly, paper companies in the United States and Northern Europe have more advanced production technology and operation models, which can improve the production efficiency of the project, or help Chinese enterprises to enter the international high-end market. In the announcement of the acquisition of Nordic Paper, Mountain Eagle International said that the target company mainly focuses on the high-end market in Europe and North America, and the production configuration of pulp and paper integration and the self-supply of fiber raw materials can give full protection in terms of quality and output, and has obvious cost advantages in operation. The company also mentioned in the announcement of the acquisition of Verso Wickliffe that the deal will "facilitate the company to land a production base in North America and directly open the North American wrapping paper market."

Third, although the labor costs in the United States and Northern Europe are higher, the costs of raw materials, electricity, water, capital and other aspects are lower than those in the Asia-Pacific region, helping to reduce production costs. According to the estimation of Huachuang Securities in 2019, the production cost of paper raw materials in North America/Asia-Pacific/Europe is 230/285/284 US dollars/ton, respectively, considering that raw material cost is the most important component of paper cost and the operation efficiency of US and European enterprises is higher, local production can still obtain a large cost advantage. Mature capital markets in Europe and the United States and long-term low interest rates are also conducive to reducing investment costs.

Finally, circumventing trade sanctions is also an important objective. In recent years, the United States and the European Union have imposed anti-dumping and countervailing measures on coated paper and other paper products originating in China, and China has also responded in due course. With the intensification of the US-China trade conflict, the United States and China have imposed tariffs on each other's pulp and paper products industry products since 2019, involving wood pulp, waste pulp, finished paper and so on. Locally produced and sold in the US and Europe can effectively avoid punitive tariffs.