2008 Paper: Environmental Protection, Talk about Environmental Protection
How will 6.5 million tons of papermaking capacity closure impact the industry?
During the "Eleventh Five-Year Plan" period, China aimed to shut down 6.5 million tons of outdated papermaking capacity. According to official documents from the National Development and Reform Commission and the State Environmental Protection Administration, a total of 550 million tons of backward production capacity was expected to be phased out by the end of 2008. The implementation of this policy began to gain momentum in 2007, and it is likely that the pace will continue in the coming years. By 2008, it's possible that the target of shutting down 6.5 million tons would be met ahead of schedule.
The majority of the closed capacity involved low-grade cultural paper, low-grade linerboard, and corrugated paper. Approximately 40% of the shutdowns were related to low-grade cultural paper, while 60% were for low-grade paperboard. In 2006, cultural paper production and consumption reached 12.2 million and 12.11 million tons respectively, with supply and demand roughly balanced. The main raw materials included straw pulp, mixed-leaf paper, and wood pulp. Linerboard and corrugated paper production and consumption in 2006 stood at 22.8 million and 24.43 million tons, respectively, primarily using straw pulp and waste pulp.
Impact on Containerboard: Supply and Demand Remain Stable
Despite the closure of 6.5 million tons, the containerboard sector still faces significant production pressure. New capacities added by companies like Xiaolong, Liwen, Jingxing, and Huaxing totaled around 4 million tons, which nearly matched the amount of outdated capacity being removed. As a result, the fundamental balance between supply and demand in the containerboard market is not greatly affected. However, the consolidation of the industry could lead to increased market concentration, enhancing downstream bargaining power. This is an area worth monitoring closely.
It’s important to note that containerboard has the smallest sales radius among paper products, making it prone to regional monopolies. Although the environmental shutdown has limited direct impact on supply and demand, it accelerates the elimination of small mills and restricts expansion. This could help dominant players consolidate their position. Overall, containerboard is likely to benefit from this policy shift. We expect a modest 5% annual price increase in 2008, with some regional monopolists seeing even higher gains.
Impact on Cultural Paper: Price Increases Are Here to Stay
Using 2006 output as a baseline, the closure of 2.6 million tons of low-grade cultural paper represents about 20% of total production. What’s particularly notable is that the shut-down capacity involves straw pulp-based paper, leading to a major shift in the low-grade segment. With 5.5 million tons of straw pulp capacity being closed, representing a 47% reduction, there will be a significant shortage in low-grade cultural paper.
With new straw pulp lines strictly controlled, and no approval for new projects, the only outcome is rising prices. This will push consumers toward higher-grade mixed and wood pulp papers. While existing capacity can partially compensate through efficiency improvements and technological upgrades, these efforts are limited. Therefore, we anticipate that the price of low-grade cultural paper will rise by 15% in the first half of 2008, with high-grade paper increasing by 10%.
Environmental Regulations Go Beyond 6.5 Million Tons
The closure of 6.5 million tons of outdated capacity is just one part of broader environmental regulations. In 2007, the State Environmental Protection Administration issued a revised “Pollution and Paper Industry Pollutant Discharge Standard (Consultation Draft)—GB3544,†replacing the old standard GB3544-2001. The new rules came into effect on January 1, 2008, with stricter requirements across all pollutant emissions.
For example, COD levels have doubled, and straw pulp no longer enjoys preferential treatment. Existing enterprises must now meet 150mg/L, while new ones must comply with 90mg/L. New pollutants such as phosphorus, nitrogen, ammonia nitrogen, and AOX have been introduced. For AOX, a 5,000-ton straw pulp plant would need to invest 1.5 billion yuan to meet standards—effectively a financial barrier.
Straw pulp companies face huge costs, with water treatment per ton rising from 0.6–1.2 RMB to 1.8–3.0 RMB, and overall treatment costs reaching up to 4.5 RMB per ton. This increases paper costs by 200–250 RMB per ton. Large-scale straw pulp mills, however, are better positioned due to their existing environmental infrastructure. Companies in Shandong and Henan already meet or exceed the new standards, giving them a competitive edge.
Looking ahead, the new regulations will intensify competition, pushing smaller mills out of the market. For wood pulp and commercial pulp companies, the environmental burden is relatively lighter, with minimal cost increases. However, for straw pulp firms, the long-term risks remain high, especially as local regulations in Shandong will become even stricter in 2010.
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