In 2005, China's paper consumption reached 50 million tons, making it the world's second-largest consumer after the U.S. Its domestic paper output, however, was 10 million tons short. By 2010, its demand is set to hit 70 million tons, while production is expected to hover around the 64 million mark. Playing catch-up seems set for the long haul.

At present, the country's import of pulp and wastepaper, which has grown 25% annually based on the 2004 figure of 20 million tons, is driving the rapid expansion of South American mills (known as New World pulp producers). Locking in fiber supply is its top priority, as evidenced by the numerous forestry deals inked by the Chinese government across the globe. Chinese mills have even forayed into foreign markets in a bid to overcome local fiber shortage: the acquisition of California-based Stockton Pacific's pulp facility by Lee & Man Paper in January 2005 is one example.

Meanwhile, the three Finnish players—UPM, Stora Enso and Metso Paper—continue to dominate the Chinese pulp-and-paper industry. UPM's Changshu mill is now China's largest producer of uncoated fine paper (annual production 800,000 tons, 25% being coated grades). Its recent decision to establish an R&D center near the mill is hardly surprising, given its status as the largest investor in the Chinese papermaking industry: more than $1.1 billion in three production facilities with the fourth in the works. Rival Stora Enso—whose Suzhou mill churns out 240,000 tons of coated fine paper per annum—recently signed a $100 million joint venture with Shandong Huatai Paper to produce supercalendared magazine-grade paper. Now, it's busy securing fiber supply by expanding its 60,000 hectares of timber in southern China.

For equipment supplier Metso, China was its fourth-largest customer in 2005, with net sales of $310 million. Business is so good that a second service center in Guangdong has been set up. In February 2006, Metso acquired local manufacturer Shanghai-Chenming Paper Machinery for $45.5 million; it already has joint venture Valmet-Xian, which specializes in midsize paper and board machines. Saleswise, its largest disclosed order in 2006 was a $133 million printing paper line (with an annual capacity exceeding 400,000 tons) for Guangzhou Paper in southern China; start-up is scheduled for end 2007.

Players of non-Scandinavian pedigree are not idling either. American company International Paper, for instance, has joined up with Shandong Sun Paper to produce coated boards. In the meantime, APP (Asia Pulp & Paper)—still restructuring its $14 billion debt, with its Singapore property recently auctioned off by the government there—has spent $1.8 billion on its Gold East Dagang facility, purportedly the world's largest fine-paper mill, with an annual capacity of 700,000 tons. Down south, its Jinhai mill on Hainan Island produces 3,400 tons of pulp per day (mostly from eucalyptus and acacia wood), while its Ningbo mill produces boards mostly for the domestic packaging industry. Last December, its purchase of Saskatchewan-based Meadow Lake Pulp mill (where it was the biggest client) for $38 million was announced. With these investments, APP is set to become the sixth-largest paper and paperboard company in the world.

Domestic players are also busy carving out their own places in the industry. In May 2005, Chenming Paper's joint venture mill with Sappi, International Finance Corp. and Korea-based Shimoorim shifted its focus to lightweight coated (LWC) products, a relatively new segment with fast-growing demand. Last month, Metso delivered a $113 million LWC papermaking line—capable of producing 1,000 tons of printing and writing paper grades daily—to Henan Puyang Longfeng Paper. Newsprint is also the focus of attention with lots of capacity expansion in recent months. (Bear in mind that the Olympic Games is not just for the athletes.) Guangzhou Paper, for instance, has added a new production line, effectively making it the third-largest newsprint producer in China, while Huatai Paper is busy building a new mill in Guangdong (its start-up is scheduled to meet demands from the 2008 Games). PanAsia Paper—now Asia's largest newsprint producer with two mills in China, two in Korea and one in Thailand—is expanding fast, with its short-term plans tied to (what else?) the Games. Much of the $600 million it got from Norske Skog (for a 50% stake) back in 2005 has been used to expand its Hebei mill capacity. As for state-owned Yueyang Forest & Paper, its bid to be China's largest papermaker means new machinery and training brought in from Finland. It is also planting more than 100,000 hectares of forest to counter future fiber shortage.

For sure, cash-rich foreign companies are set to lead the industry, while local mills—about 6,000 of them, each with a maximum production of 20,000 tons per year—will have to close down, merge or seek investment to survive. Meanwhile, environmental issues are looming ever larger. The Chinese government recently announced the closure of dozens of polluting papermaking factories near Dongting Lake (China's second-largest freshwater lake). Preliminary survey shows that only two out of the 100-plus factories meet waste disposal requirements. For the moment, the government is pushing local mills to use wood pulp instead of straw pulp as the main raw material, a two-pronged step that increases yield and reduces pollutants.

Questions about the sustainability of a modern Chinese pulp-and-paper industry remain at the back of everybody's mind. Are the country's energy and water sectors capable of supporting the mills in the long term, given their current unstable supply? How about its heavy dependence on imported pulp? Some solutions are in the making. The Yangtze River's Three Gorges Dam hydroelectric project—the world's largest, by the way—and the construction of 13 other dams will go some way in rectifying the energy problem. China is said to have more hydropower capacity than any nation on earth, but even with 22,000 dams, it has tapped only 20% of its potential. (In comparison, the U.S. has fewer than 7,000 dams but taps about 80%.) As for the dependence on pulp from neighboring countries, where forests are already disappearing fast, replanting is one countermeasure. China is set to expand its forest cover from 18% to 23% over the next 10 to 15 years, in part to fulfill its WTO environmental obligation. Thus far, its forestry development initiative has gobbled up $26.5 billion and replanted five million hectares of fast-growth, high-yield forests of mostly eucalyptus and poplar. Such massive replanting will no doubt help meet its future fiber demand. But for now, it's like watching grass grow: it's a long wait to harvest season.

For printing companies in Shenzhen and Hong Kong, a modernized Chinese pulp-and-paper industry basically mean less dependence on dearer imported paper (due to rising freight cost), more local grades, faster delivery, cheaper stock and steadier supply. At present, the best of China—mills and paper alike—rivals the best in the world. So, if a Norscan (North America and Scandinavia) supplier cannot compete with China in terms of pricing, it is in a shaky position. And while investing heavily in China is always a risky business, savvy Norscan players know that they are risking even more if they are not in there.

Elsewhere in Asia, Indonesia is aiming to become the world's third-largest pulp producer within the next three years; it currently ranks ninth with 1.9 million tons. India is also intensifying its pulp-and-paper activities: disclosed 2006 Metso sales to the country amounted to about $98 million. Ballapur—India's largest manufacturer and exporter with 115,000 tons of coated and uncoated papers per year—will boost its capacity by 100,000 tons. At the same time, two other producers are eyeing the fast-growing market for writing and printing grades: Whitefield Paper is building a new mill (completion due in 2008), while rival West Coast Paper has ordered a $32.5 million fiber line from Metso. Even Vietnam is pouring $6 billion into its pulp-and-paper industry between now and 2020; 90% of the monies will go into building more mills. New investor Lee & Man has already placed a $52 million order with Metso for its new mill located 200 km south of Ho Chi Minh City.

With such massive investments going on, industry reports have placed Asia as the world's largest paper and paperboard manufacturing region, ahead of Europe and North America. Not surprising, of course, given that mergers, rightsizing and closures (read: shrinking market share and production) seem to typify the Norscan pulp-and-paper industry of late. Closures of two Neenah Paper mills and the idling of two others (UPM's Miramichi in New Brunswick, Canada, and Domtar's in Maine) are recent examples. And how can anyone miss the merger between Domtar and U.S. lumber giant Weyerhaeuser's fine paper division? Or the pending Abitibi-Bowater merger? At present, despite such drastic measures, these companies are not out of the woods yet, so to speak. In fact, the future of North American pulp production is looking absolutely dismal. Massive pine beetle infestation, which is set to jeopardize long-term softwood supply from Western Canada, is about the last thing the industry needs.

In comparison, South American pulp mills are gearing up for the big time. There are plenty of large-scale pulp projects going on in Brazil (mostly in the states of Bahia and Jacareí), Uruguay (in Fray Bentos and Colonia), Chile and Argentina. Its production, estimated to hit 10 million tons by 2010, will be heading mostly to China (no surprise there) and the balance to Europe. Russia, holding almost half of the world's softwood resources, is also tapping into its pulp supply potential. The same goes for Eastern European countries such as the Czech Republic, Slovakia and Poland.

Meanwhile, antidumping allegations are flying. The U.S. Commerce Department recently imposed additional preliminary duties of up to 99.65% on imports of glossy paper from China (such imports have jumped 166% between 2005 and 2006 to a high of $224 million). This has also been extended to imports from South Korea (now facing duties of up to 30.86% on its glossy paper exports) and Indonesia (10.85%). Is this truly an antidumping measure or just American mills running for (quick) cover?

Nothing can stop the stampeding pulp-and-paper industry in China (or elsewhere in Asia). Demand (i.e., paper consumption) is king. A recent Pöyry Forest Industry report puts the growth of paper and board consumption, especially in China, India and Indonesia, at 6% to 12% per annum, a rate unmatched anywhere else. Consumption of fiber, including recovered paper, is estimated to grow from the current 370 million tons to 500 million tons by 2020. Currently, about 60% of global wastepaper is being consumed by China (which means that lower supply and higher prices for recovered pulp is almost a certainty in the near future.) So forget the gold rush. Pulp-and-paper rush, anyone?