PIRA

Both Nestle and Coca-Cola record sales of more than U.S. $1 billion in the Chinese packaged food market. That market is estimated to be worth in the region of U. S. $39 billion (30 billion [euro]).

But this does not scrape the surface of value growth in a country of more than a billion people, of whom 885 million are between the ages of 15 and 64, and where gross domestic product is rising by some 9 percent per year.

This rosy picture contrasts with the economic status of China's citizenry. The average annual disposable income is $545. U.S. citizens earn $37,000 on average.

This disparity could result in social problems, despite the fact that figure is projected to rise to $5,000 within 13 years. And, of course, it puts high-value Western products out of financial reach for the average consumer.

Nonetheless, this is not discouraging major packaging users from entering the market. Just as night follows day, this means a corresponding interest from the world's major paper and board producers that want to continue serving their customers under the 'think global, act local' slogan.

However it is the indigenous industry that is leading the way in servicing the multi-national entrants to this growing market.

The initial expansion of the paper and board industries was focused on South Korea, Indonesia and Thailand, but that has come to a halt since the Asian financial crisis. The exception is Indonesia, which has attracted investment based on its forest resources. (China has limited forestry.)

The Chinese market for paper and board packaging has grown at an extraordinary pace. Writing in the Pira International report, "Eastern Sunrise: Asian Paper and Board Industries in the Global Market," Graham Moore, strategic consultancy manager, paper and board, states, "China's demand for paper and board is expected to grow on average by 6 to 6.5 percent per year during this decade."

Most of this growth is within the corrugated sector where the expansion of mills resulted in a capacity increase of 3.75 megatonnes [megatonnes: 1Mt=1000kt=1,000,000 tonnes] per year between 1997-2003.

Currently, modern Chinese industry, built since 1996, has mill capacities in excess of 50,000 metric tons per year. This is set to increase further with board capacity projected to increase by 5 Mt by 2006, with boxboard capacity alone adding 3.9 Mt. Board capacity investments include:

* APP Ningbo: 700,000 tons per year

* Chenming Paper Shandong: 300,000 tons per year

* Lee & Man Jiangsu: 300,000 tons per year

* Yougtai Paper Zheijiang: 200,000 tons per year

The most notable players in the board markets with current capacities include:

* Dongguan Nine Dragons Capacity: 913 kt

* Dongguan Lee & Mann Capacity: 568 kt

* Ningbo Zhonghua Paper Capacity: 472 kt

* Shanying Paper Capacity: 367 kt

* Zhongshan United Hongxing Capacity: 263 kt

* Jingxing Paper Capacity: 248 kt

Dongguan Nine Dragons is owned by U.S.-based America Chung Nam in California, which is the largest exporter of recovered paper in the United States. It is also the largest manufacturer of corrugated and containerboard in China with some 99 percent of production sold within China.

The company started planning containerboard production in 1996 with the first line, supplied by Metso Paper, coming on-line in 1998. Since then, it has added three more Metso Paper lines, with a fourth at a new site in Shanghai scheduled to come on-line shortly. It serves Southern China's strong and growing demand for quality packaging materials both for domestic and export markets in end use sectors such as electronics, food and beverages.

Lee & Man Paper specializes in linerboard and corrugated medium and is one of the largest producers of containerboard in China. Its subsidiary companies include containerboard manufacturers Dongguan Lee & Man and Jiangsu Lee & Man. Strategically placed in the Pearl River Delta, the group's capacity is some 650,000 megatonnes per year.

The group is expanding production of high-grade linerboard and corrugated medium to capture that part of the Chinese market currently being met by imports.

The Import Market

The Chinese paper and board market relies heavily on imports of recovered paper. With overall growth of 8.3 megatonnes per year of paper and 5 megatonnes per year of wood pulp from 1995 through 2003, the local market has been unable to meet demand. (See Fig. 5)

[FIGURE 5 OMITTED]

Imports of recovered paper are:

* USA--60 percent

* Europe--(mainly Germany and the U.K.) 20 percent

* Japan and Australia--20 percent

Although fibre demand may affect companies in Europe and elsewhere, this does not constitute a major threat to European and North American producers in the short to medium term. Demand is primarily from local consumption rather than exports.

"The real threat is in the transit packaging sector where the shift in production and export markets will pose a threat to European and North American producers, particularly as the competing products have good enough quality for European and North American end users," Moore says. "With the continuing and growing shift of manufacturing to China, transit packaging is being sourced from local Chinese producers, as evidenced by the many investment announcements by Chinese producers."

There is, of course, real potential in the Chinese market, but Western concerns looking to enter the region should cast a wary eye on such stumbling blocks as sudden changes in legislation and ignorance of the business culture.

A number of well-known names are active in the region, including packaging-related entrants such as International Paper and SCA.

Stora Enso and UPM have invested in the fine paper market. Stora Enso also manufactures cores sold to industries such as plastics and paper through its joint venture with Shandong Huatai Paper.

SCA Packaging Asia, for example, has 26 manufacturing operations across China, Singapore, Malaysia and China employing approximately 4,000 people in 26 factories. In a bid to further focus its international packaging network in Asia, SCA Packaging Asia has recently purchased the interest of Weyerhaeuser in the SCA Weyerhaeuser joint venture in China.

Servicing clients in the food and beverage, electronic and household durable industries operations include corrugated facilities in Shanghai and Wuhan.

"It is a logical step which will help SCA realize synergies in this growing region," says David Hwang, president of SCA Packaging Asia.

International Paper has three operations in China: International Paper (Chengdu) Packaging Co. Ltd.--containers, International Paper (Shanghai) Co, Ltd.--beverage packaging, and the consumer packaging arm Shorewood Packaging Guangzhou Co., Ltd.

There is plenty of potential in China's paperboard packaging market, but according to Pira International, this will develop in the home market. It is unlikely that China will become a significant exporter.

However, with per capita consumption averaging only 32 kg per capita in the country as a whole and 100 kg in developed regions such as Shanghai, it will take time for China to rival the status of Western industrialized countries.

KEY

BCTMP:

bleached chemithermomechanical pulp

BEKP:

bleached eucalyptus kraft pulp

BHKP:

bleached hardwood

kraft pulp

BSKP:

bleached softwood

kraft pulp

UKP:

unbleached kraft pulp

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