The Impact of China’s New Import Policy on the Domestic Paper Packaging Industry

Rabobank has recently published a report that investigates the impact of China’s new import policy on the domestic paper packaging industry and forecasts that the rising costs and old corrugated container (OCC) import supply gap in China will likely benefit containerboard producers in nearby countries such as India, Indonesia, Vietnam, and Thailand.

China’s policy measures are creating challenges for China’s paper packaging industry, including an import supply gap for various RCP grades. We estimate the gap of OCC this year to be between 3.2m tonnes and 8.2m tonnes. This gap has led to higher production costs across the corrugated paper supply chain.

This will trigger a structural change as these developments will partly accelerate consolidation of the domestic industry. It will also drive Chinese corrugated players to look for input from other sources; either via improving local sourcing of RCP, via imports of for example containerboard, or via foreign investments.

Improved local sourcing would be facilitated through investments in the recycling infrastructure made by Chinese authorities as well as private companies.

As prices are increasing throughout the paper chain, there will be impact on food and beverage manufacturers in China that, for instance, use a lot of corrugated packaging (brown boxes). If the shortage of OCC continues and OCC prices keep on growing, we expect that paper mills will seek to pass on as much of the increased costs as possible to converters and downstream industries by raising the price of containerboard, instead of absorbing all the costs themselves.

We also expect downstream industries, including food and beverage manufacturers, to further raise their selling prices of current products or launch higher gross margin products to maintain or improve their profitability in the next few months.

Actually, since early 2018, leading beer players including China Resources Beer, Yanjing Beer, and Tsingtao, have raised their prices on some products in response to the rising packaging and production costs. The average increase was around 5% to 10%. Coincidentally, food companies including Fujian Dali, Master Kong, Uni-President, Want Want, and Wolong have also lifted their selling prices by 3% to 10% due to the increasing price of paper-based materials.

In response to the local impact of the RCP import restrictions and higher paper (packaging) prices of paper and paper packaging, E-commerce retailers are implementing strategies for reducing packaging.

Alibaba plans to help one million “mom-and-pop” stores cut the amount of corrugated boxes they use for storage of goods and transportation by 2020. Additionally, e-commerce site Suning.com has planned to increase the number of recyclable boxes to 200,000 this year from 50,000 a year ago for the delivery of FMCG.

The RCP policy is part of China’s ambition to become more self-sufficient in raw materials like RCP as well as have a positive effect on the environment. In terms of investments that consumers will feel the impact of, the Chinese government is investing around USD 38bln to solve the domestic garbage problem. Consequently, local governments and municipalities have become engaged in establishing garbage classification and recycling systems, and they have also established various subsidy and penalty schemes to support these efforts.

Meanwhile, the Ministry of Industry and Information Technology (MIIT) aims to set up three to five demonstration recycling plants, each with capacities of above 300,000 tonnes, so they will play a crucial role in the Chinese regional RCP supply chain.

In addition, local governments are actively engaged in establishing recycling systems through garbage classification and local government subsidies.

Leading players are also actively investing in upstream recycling. For instance, Anhui Shanying Paper, one of the largest Chinese paper and pulp companies, invested in Cycle Link, which is involved in buying and selling recovered paper globally. In April 2018, Nine Dragons Paper announced it would establish the largest RCP trading platform in Tianjin.

We also expect paper packaging companies and downstream industries to jointly work on introducing programs to increase domestic collection rates in the coming years. Despite these initiatives, it will take time to develop a significantly larger domestic recycling infrastructure in order to increase China's level of self-sufficiency of, among others, OCC and RCP.

Chinese consumers will consequently be made more aware of environmental protection and be requested take up initiatives that support recycling and sorting old corrugated boxes, and will in turn benefit from the improvement of their residential environment.

To conclude, despite the short-term challenges facing the Chinese industry, the enforcement of the new policies will help accelerate the transformation of the domestic paper packaging industry in China and improve self-sufficiency in domestic RCP through investments in recycling; both from authorities and major players. As a result, China is moving in a more environmentally friendly direction.

More importantly, this will drive Chinese paper packaging companies to become much more internationally focused through acquisitions, partnerships and greenfield projects in the near future.

Author: Stacie Wan