By Allen Liao
Chinese cigarette paper manufacturers, facing pressure from all sides as well as the lingering impacts of recession stemming from the global financial crisis, are striving for development by adopting various means, mainly including the reduction of costs and intensification of efforts to enter international markets.
Presently, cigarette paper manufacturers in China are under heavy operational pressures. Tobacco manufacturers are becoming increasingly enthusiastic about developing products with high added value and advanced technological components. Along with exacerbated competition beteen manufacturers, prices of cigarette paper have been in a downtrend for years. Meanwhile, cigarette paper manufacturers have always been plagued by high costs of production. As a result of steady growth of the annual production capacity of manufacturers, the supply of cigarette paper in domestic markets has been in excess of demand for many years.
While the pressures on them are persistent, cigarette paper manufacturers have not been able to turn the tide because of the lingering impacts of the recent recession.
Accordingly, Chinese cigarette paper manufacturers are actively adopting various means to explore ways of seeking future development. Internally, they are managing to reduce production costs by saving energy and consuming fewer raw materials, and are making efforts to increase competitiveness by upgrading technology. Externally, they are striving to gain greater advantage through merger, acquisition and corporate reorganization, and to penetrate more international markets by increasing exports.
In June 2007, the state council – the cabinet – promulgated the Program for Comprehensive Work of Energy Conservation and Emission Reduction, which expressly provides for phasing out straw pulp production devices each with an annual production capacity of 34,000 tons or lower, and also chemical pulping lines with an annual production capacity of 17,000 tons. As a result of the implementation of this policy, large numbers of small- and medium-sized papermakers with a low production capacity that were generating serious pollution had to withdraw from the marketplace or were ordered to shut down. Taking advantage of this, many large enterprises acted swiftly to fill the vacuum left by the withdrawal. Meanwhile, redivision of markets and better utilization of high-quality resources have contributed to sharply driving up net profits earned by the whole papermaking industry. Experts have predicted that the industry will revive fully in 2010.
Minfeng Special Paper Co., Ltd. ( Minfeng Special Paper) in east China’s Zhejiang province is one of the beneficiaries of the aforesaid policy. Minfeng Special Paper has launched efforts for energy conservation and reduction of raw materials consumption within the enterprise, in order to lower the pressures on the environment and on its costs. Minfeng Special Paper has adopted specific measures for energy conservation and emission reduction, including optimizing energy structures, improving energy consumption measurement and grading.
Efforts directed towards energy conservation and reducing raw materials consumption have resulted in cost reductions. As a result, Minfeng Special Paper has been able to earn business income consistnetly over the past few years, though market demand for paper products has generally kept declining. In 2009, Minfeng Special Paper earned RMB1.17 billion (US$171.55 million) in operating revenue, a decrease of 2.19% year-on-year, while operation profit reached RMB149 million, up 796.06%.
In early 2009, Zhejiang Botebei Paper Co., Ltd. (Botebei) became a subsidiary wholly owned by Minfeng Special Paper. Since then, Botebei has strengthened efforts to solve hard technical problems, upgrade its production equipment and improve its management, contributing to raising efficiency and reversing years of losses. In 2009, Botebei earned RMB27.85 million in profits.
According to sources with the papermaking industry, the annual demand of the tobacco manufacturers in China for cigarette paper stands at some 100,000 tons, but the annual cigarette paper production capacity of the paper making industry has already reached some 200,000 tons. Clearly, only the fittest can survive. Therefore all operators are busy introducing high and new technologies to enhance competitiveness.
Minfeng Special Paper has invested RMB1.5 billion establishing a high and new technology park and it has imported advanced cigarette paper production lines, including the 3150 model and the 9952 model. Presently, Minfeng Special Paper has an annual cigarette paper production capacity of 28,000 tons. After technical transformation of its No. 20 unit, its annual cigarette paper production capacity will rise to a total of 31,000 tons.
Mudanjiang Hengfeng Paper Co., Ltd. in northeast China’s Heilongjiang province – one of China’s leading cigarette paper companies, has also kept increasing the content of technology in its production. Over the past few years, Hengfeng has imported four wrapping paper production lines that are the most advanced in the world. Besides, it has independently designed and installed a continuous bleaching flax pulping line, guaranteeing the quality of products. Presently, Hengfeng boasts 13 machine-finish paper production lines and one flax pulping line, producing 80,000 tons of machine-finish paper and 3,000 tons of flax pulp annually. Hengfeng is China’s first high and new technology papermaking enterprise recognized by the Chinese Ministry of Science and Technology and China Academy of Sciences.
Moreover, Hengfeng was to invest RMB376 million in the 2009-2010 period building an airless spraying aluminum paper production line with an annual production capacity of 15,000 tons. When its construction is completed, this production line is expected to generate RMB206.55 million in sales income annually, including RMB53.12 million in annual profits. The construction of this production line will contribute to increasing Hengfeng’s business and will consolidate its status as one of the five leading producers of support materials for cigarette production in China.
In 2009, Hengfeng earned RMB1.131 billion in operating revenue, an increase of 4.04% year-on-year, and its operating profits reached RMB105, up 67.21%.
Merger and reorganization
Jinfeng Paper Co., Ltd. in southwest China’s Sichuan province – another big cigarette paper manufacturer – is busy undergoing corporate reorganization because of debt problems, and is striving to regain lost market share.
In 2000, Jinfeng was planning to have itself listed on the stock market to raise funds for building a third-phase project intended to produce high porosity plug wrap paper and tipping paper. Because of various problems, it was unable to seek financing by listing on the stock market and instead had to borrow from commercial banks. Since 2001, Jinfeng has seen its profits decline year-on-year. In 2007, it registered a loss. In August, 2008, Jinfeng’s chain of funds basically broke. To date, Jinfeng owes RMB550 million yuan.
In efforts to solve its problems Jinfeng is looking for strategic cooperation partners. It was reported that Jinfeng once contacted both Hengfeng and Minfeng but failed to reach any agreement on cooperation with either.
General manager Ye Shangyan of Jinfeng is not pessimistic, however, saying: "Jinfeng still boasts RMB1.1 billion in total assets, with the net assets not less than RMB900 million."
Jinfeng has imported advanced production lines for making cigarette paper and support paper for cigarette production from Allimand of France and Voith of Germany, as well as equipment and production technology from Germany, UK and Switzerland. It is capable of producing various specifications of cigarette paper, high porosity plug wrap paper, tipping paper, etc, which are extensively supplied to both domestic and international markets.
As tobacco is a government monopoly in China, there are powerful barriers restricting access to the cigarette paper market. Any cigarette paper manufacturer has to obtain a Tobacco Monopoly License issued by the State Tobacco Monopoly Administration (STMA) before making and supplying cigarette paper products. As a result, the market is highly stable. Because of this, the corporate reorganization of Jinfeng has caught the attention of some other enterprises.
In February, 2010, Jiulong Pulp (Leshan) Co., Ltd. in southwest China’s Sichuan Province – the largest cardboard products manufacturer in China – sent a delegation to visit Jinfeng, and expressed a strong interest in possible cooperation with it. Today, Jiulong Pulp is actively developing new points of business and profit growth and is seeking cooperation with other enterprises with advanced production equipment and technologies, and broad marketing prospects.
For Jinfeng, this could offer the chance for an upswing.
In July 2005, China National Tobacco Corporation (CNTC) and Schweitzer-Mauduit International Inc. – a leading global cigarette paper manufacturer – officially signed an agreement on cooperation to incorporate the joint-venture China Tobacco Mauduit (Jiangmen) Paper Co., Ltd. Since its entry into operation in July, 2008, China Tobacco Mauduit (Jiangmen) Paper has seen both its annual output and sales volume growing year-on-year. Its products have not only been extensively applied in the production of medium- and high-grade cigarettes in China, but have also substituted for some cigarette paper imports.
In the face of transnational giants’ entry into the domestic marketplace, how to embark on a path of sustainable and stable development amid increasingly intense competition has become an imperative issue facing cigarette paper manufacturers.
In reality, Hengfeng is the largest Chinese cigarette paper manufacturer with one-fourth of the domestic market. As there is relatively little room for taking greater market shares domestically, developing international markets is an inevitable choice for Hengfeng.
In 2008, Hengfeng successfully passed quality certification by Philip Morris International, and conducted technological exchanges and business talks with British American Tobacco, Imperial Tobacco and other well-known transnational tobacco giants. Over recent years, Hengfeng has conducted investigation and research into tobacco industries and cigarette paper industries around the world and it has established its own foreign trade office. These efforts have paved the way for Henfeng products to enter international markets.
As the Chinese economy is recovering and turning for the better, domestic cigarette paper manufacturers are developing greater use of high and new technologies and more intensive use of funds. As they are increasingly enlarging production capacity and become increasingly well-funded, they will one day inevitably square off with their powerful foreign rivals in international markets.