Pulp and paper firms plan mergers

Mustaqim Adamrah, The Jakarta Post, Jakarta | Tue, 01/20/2009 2:44 PM  

A plunge in global prices and weakening demand have forced local pulp and paper companies to cut output and plan for mergers. 

Indonesian Pulp and Paper Association chairman M. Mansyur said Monday that global demand had plunged to its lowest point ever, forcing local manufacturers to run at an average 44 percent of capacity. 

He said the industry’s installed capacity now stood at 8 million tons a year for pulp and 12 million tons for paper.  

In 2007, the industry was operating at an average output of 80 to 90 percent of capacity, according to Industry Minister Fahmi Idris. 

Mansyur said the global economic downturn had not only affected local manufacturers, but also those overseas, with manufacturers in Europe and North America having to shut down as demand for their products dried up. 

A drop in selling prices also discouraged manufacturers from producing and selling their products over fears of mounting losses rather than profits, he added. 

According to the association, for example, the prices of short-fiber pulp has dropped to around US$450 to $500 a ton from $1,000 a ton in mid 2008. 

“Paper prices have also declined to around $700 to $800 a ton,” said Mansyur, adding that paper prices peaked at between $1,000 and $1,150 a ton during last year’s fourth quarter. 

Citing the current situation, Mansyur said local manufacturers were beefing up efforts to weather the storm, including looking at mergers with rival companies. “National pulp and paper manufacturers have to consolidate to adapt to weakening global demand,” he said. 

“They are considering mergers now otherwise they will (have to) shut down,” he added. 

In response to low output, pulp and paper manufacturer PT Riau Andalan Pulp and Paper (Riaupulp), a subsidiary of Sukanto Tanoto’s Raja Garuda Mas Group, has already discharged 1,000 workers and temporarily laid off another 1,000 out of a total of 4,000.

Aside from lower demand, the company has also been facing a shortage of raw material since the last two years. 

Riaupulp director Rudi Fajar said earlier the company had taken a number of efficiency measures to offset a drop in production and rising production costs. 

He said the raw material shortage had resulted in a decline in Riaupulp production, from 6,000 to 7,000 tons of pulp to 3,000 tons per day. 

Indonesia hosts the world’s largest pulp and paper companies under the umbrella of Sinar Mas Group, owned by tycoon Eka Tjipta Widjaja. 

Sinar Mas’s PT Indah Kiat has a total annual production capacity of 3.8 million tons of pulp, paper and packaging. Its other subsidiary PT Tjiwi Kimia produces around 1.5 million tons of paper, packaging and stationery. 

PT Pindo Deli, another Sinar Mas subsidiary, can produce 1.1 million tons of output, while PT Lontar Papyrus produces 750,000 tons. 

Sinar Mas Group executive director Gandhi Sulistianto currently believes the industry might need some rationalization. 

However, when asked about possibilities of a merger affecting Sinar Mas subsidiaries, Gandhi said there was nothing to announce yet. 

During their heyday, Riaupulp and Indah Kiat together produced 4.2 million tons of pulp per year, or 63 percent of the 6.7 million tons produced annually at national level. 

Every year, the industry earns about US$5 billion in export revenues. 

Indah Kiat corporate secretary Yan Partawijaya said in late November the company had cut production by 10 to 20 percent in line with what he said was the company’s annual overhaul program. The company normally produces 2.7 million tons of paper per year. 

Pulp and paper companies have been widely blamed by environmental non-government organizations for contributing to the acceleration of forest destruction. 

With its massive installed capacity, the industry can only procure about 50 percent of its required raw materials, according to Indonesian Forest Watch (IFW). 

The IFW believes that most of companies are taking timber from outside their concessions, including production forests, to offset their supply shortages and maintain their levels of production. 

According to the Ministry of the Environment, the deforestation rate between 1987 and 1997 was

recorded at 1.8 million hectares per year including the period  up to and during the 1998 economic  crisis. 

Subsequently from 1998-2000, it rose sharply to 2.8 million hectares per year because of severe forest fires, before falling back to an average of 1.8 million hectares per year between 2000 and 2006, reflecting that forest resources were already being depleted.