___________________________
	Industry Update - Paper

Industry Update: Paper- Large Mills

The Indian paper industry is highly fragmented with around 380 mills with a total installed capacity of around 39.5 lakh tonne. The current industry production is around 28 lakh tonne. The industry is classified according to the size of mill- large and small and raw material used- wood based, agro based and waste paper based. Mills which have capacities exceeding 33,000 tonnes are termed as large mills while the rest comes under the small mills category. At present there are around 45 large mills and together they contribute to around 52% of total paper production. The large mills are generally wood based mills and have either captive plantation or have long term understanding with suppliers for sourcing their wood requirements. This insulates them from short term price fluctuations and helps them keep their inventory cost to minimum. Around 50% of total production is dependent on imported wood pulp hence the industry is exposed to international price variations. The main product segments are paper, paper boards and newsprint. The large mills concentrate on volume segments like paper and newsprint while small mills cover the speciality paper segment.

The paper industry is a cyclical industry with alternative periods of boom-bust-boom. The industry which was reeling under recession in the early nineties due to increase in production costs recovered with boom in consumerism from mid 1994. However this recovery is likely to prove short lived. Currently the industry is saddled with excess capacity additions to the tune of around 2 lakh tonnes. The government's decision to reduce inventory period from 18 months to 6 months during 1995-96 has resulted in lower offtake from govt. The easing of prices in the international markets has further compounded the problems. Paper prices which increased by around 13% during April to December 95 has started falling between Jan-Mar 1996. International prices too have slumped by around 20% during the same period. With the prices expected to remain in its current level or even fall further the short term outlook for the industry looks bleak. The Paper Large Industry Index (PLI Index) vis-a-vis the Sensex clearly mirrors this. During July 95 to Jan 96 the Sensex fell from 3595 pts to touch a low of 2820 pts while the PLI Index fell from 125.8 to 70. Though the Sensex rebounded back and is currently at 3725 pts the PLI Index has not shown any signs of recovery and is now around 65.8. Hence it is advisable to sell now, wait for the paper cycle to bottom out and buy when early signs of recovery appears.