For pulp-and-paper industry players, money does grow on trees—especially if the roots are on Chinese soil.

It seems fitting that 2,000 years after pioneering the art of papermaking and spreading the technique to the rest of the world, the Middle Kingdom is once again playing host to much pulp-and-paper activity. So what's the attraction?

Consider the following: China's domestic paper and paperboard consumption is expanding by three million tons per annum. And despite a 250% output growth in its paper-and-board production activity over the last six years—thanks to a blitzkrieg of expansion and innovation to upgrade to international standards—the country's turbocharged manufacturing-based economy is building a voracious appetite for all things paper far exceeding current supply. In addition, unprecedented growth in its magazine/newspaper sector—China prints 82 million copies of newspapers per day versus only 55 million in the U.S.—is driving domestic demand higher. China is also the largest recipient of World Bank loans for the forestry sector—more than $600 million since 1980—and the money is mostly funneled into plantations and reforestation initiatives.

Feeding the Buying Frenzy

Now the second largest importer (after the U.S.) of industrial timber, pulp and paper, China is the Holy Grail of the industry. More than 90% of the world's new papermaking capacity is now being built in the country. A case in point: within a 200-kilometer radius of Shanghai, all three big players—Stora Enso Suzhou Paper, UPM Changshu and APP (Asia Pulp & Paper) Gold East Jiangsu—are expanding like there's no tomorrow. In February 2004, when Stora Enso Suzhou announced its $83-million modernization plan to triple its capacity to 240,000 tons, its rivals both announced similar investments. In total, 50 new paper-and-board machines have been installed since 1997, and no company is laughing harder all the way to the bank than Metso Paper.

In 2003, Metso sold some $660 million worth of machinery to China, and its 2003 annual report listed the country as its largest single market, relegating the U.S. to #2 for the first time in its entire sales history. Last year, Metso and its Chinese joint venture company, Valmet-Xian, sold a complete paper-finishing line and two board-making lines, chalking up a cool $120 million receipts. Players of non-Finnish extraction—such as Nippon Paper and Mitsubishi Heavy Industries—are also jumping onto the pulp-and-paper bandwagon.

For Beijing, overhauling its nonwood (straw, reed, bagasse) pulp production segment—which emits many pollutants, has a much lower yield per hectare and produces paper of inferior quality—ranks high on its to-do list. Closure of more than 2,000 traditional mills with capacity below 17,000 tons per annum is also in the works. Such large-scale mill closures amid a bubbling domestic demand for packaging and all things paper has exacerbated its supply shortage.

Betting on two long-term objectives—reducing costly pulp imports and exploring its export potential—Beijing inked partnerships with various countries and threw open its pulp-and-paper industry to the world. Companies such as Weyerhaeuser and Stora Enso were roped in to help with forest management and silviculture, while a trade agreement was signed with New Zealand to meet its domestic pulp demand. Additional foreign investments are sought for an ambitious six-year forestry program worth more than $24 billion—the largest investment in the history of papermaking.

A Regional View

"Prior to 1997, there were no major mills in China capable of delivering international standards," says Dennis Lee, deputy chairman and CEO of Samson Paper. "But the last few years saw massive investments and operational improvements. Now their quality is comparable to that of Norscan mills, especially in the woodfree coated/uncoated and lightweight categories. This continuous improvement in China mills has also prompted us to shift our inventory philosophy toward buying local and supplying local."

As Hong Kong's largest paper merchant, with more than 30% of the market share and one of the top three in mainland China, Samson Paper is a fount of information on the Chinese pulp-and-paper industry. Its own double-digit growth can be traced back to 1997, when Hong Kong print manufacturers moved across the border and expanded their operations. This relocation gave an impetus for local mills to upgrade and innovate, and for foreign players to come on board. Lee points out that the present paper business "is much tougher because of market dynamics and intense competition. Print manufacturers now want a more varied selection of grades and quality. This is basically a trickle-down effect from the publishing industry, which demands higher value-added products and substitution of grades to save on costs."

So what's crucial to the paper-merchanting business? "One word: speed-to-market," Lee says. Presently, Samson promises delivery within eight hours upon receiving the order. Its well-chosen eight distribution points in China—in Guangzhou, Shenzhen, Foshan, Yantian, Beijing, Tianjin, Shanghai and Chongqing—further reduce distribution time. "We do have to forego the eight-hour promise in places like Beijing where city regulations prohibit truck delivery during the day. Elsewhere, we're working on trimming the time down to four hours."

Vertical integration and expansion saw the company acquire Singapore-listed United Pulp and Paper in 2002, giving it manufacturing facilities in Singapore and Malaysia. On the average, Samson indents 50,000 tons per month, with about 20%— 25% from Japan and Korea, 70% from China and 10% from Norscan mills. Says Lee, "We inventory different grades so that our customers have whatever they need."

A Global Perspective

Price prediction has always been a hit-and-miss exercise. But for associate principal Ilkka Kuusisto of Jaakko Poyry Consulting—a provider of consulting services in the pulp-and-paper industry—it's all in a day's work. Says Shanghai-based Kuusisto, "Fiber prices will continue to climb. With South America, Australia and Southeast Asia adding a lot of capacity, pulp prices will ease up. On the other hand, the large increase in papermaking capacity in China will exert a downward pressure on paper pricing."

As for shortage or oversupply, he says, "In China, newsprint has been in short supply , and many coated magazine paper producers have been making newsprint instead. An oversupply is evident in coated freesheet. But the market is growing rapidly and can absorb this oversupply. Given no or limited expansion or market disruptions, another two to three years of increased coated freesheet exports is expected."

Recycled paper is used more in newsprint production in Asia than is the case in Europe and North America. "All over Asia, chemical wood pulp is the main ingredient for making paper for magazines and books. This is largely due to a combination of factors: higher pulp supply and so more competitive pricing, preference for clean, white and bright paper, as well as lesser concern for environmentally friendly solutions in this part of the world."

And what's going on with APP's expansion on the mainland despite being weighed down by a $1.4-billion debt? He says, "China expansion to date has been done in a quite reasonable fashion. It does, however, have new plans which may indeed be overly ambitious for long-term success. So far, Beijing has been able to curtail rampant expansion in the industry."

While it is apparent to all that Norscan suppliers such as UPM and Stora Enso are rapidly expanding their mainland operations, Kuusisto points out that the hot money actually flows from the Chinese banks. "Most probably, exports from China will grow over the next one to three years but, after that, it may remain at some lowish level. The country doesn't have the required fiber supply to be a globally competitive fine paper exporter in a short period of time," comments Kuusisto on China's latent ambition to be a paper exporter in the next decade.