Pulp and paper companies to see drop in profits

Pulp and paper companies to see drop in profits

JAKARTA (JP): Analysts predict that the continuous drop in prices since October will cause Indonesian pulp and paper companies to suffer profit declines this year.

Pulp prices on the international market have declined since peaking at US$1,000 per ton for Northern Bleached Softwood Kraft (NBSK), the benchmark for the pulp pricing, last October to the current quoted price of $875.

"NBSK prices are expected to be adjusted to $650 to $700 per ton soon in line with the decline in softwood prices in the South Korean market to $600 to $650 per ton," an analyst of a foreign brokerage firm said.

There is a price difference of up to $250 between NBSK and hardwood pulp, the main product of Indonesian companies.

Pulp prices were recorded at about $310 per ton in October 1993 before increasing to $610 in April 1994.

The analyst, who preferred anonymity, told The Jakarta Post that the latest research by his company forecasts further weakness in pulp and paper prices within the next 18 to 24 months. Hence, the sector's net earnings are expected to plummet by 56 percent this year.

Another analyst, Ray Timothy from PT Lippo Securities, told the Post that most of the Indonesian pulp and paper manufacturers might have enjoyed a fantastic 139 percent growth in earnings last year, but will no longer enjoy such high profits this year.

"We have just updated our estimates and concluded that the average earning per share of the sector will grow by only 5 percent and that the shares of those companies will be traded at an average price earning ratio of 6.8 times," Ray said.

The major concerns, according the analysts, are the declining prices of pulp and paper, as well as a significant increase in pulp and paper supplies.

Ray estimated the prices of industrial paper to decrease from $570 per ton last year to $525 later this year and to fall further to $510 next year.

In contrast, the prices of cultural paper might increase from $1,040 per ton to $1,080.

He predicted hardwood pulp prices to drop to $500-550 per ton this year.

"Therefore, out of the six pulp and paper companies listed on the Jakarta Stock Exchange (JSX), we are optimistic only about Tjiwi Kimia because the company also produces cultural paper," Ray said.

"An oversupply of industrial paper can be expected later this year when Indah Kiat's major expansion is completed and the prices are expected to weaken because Indah Kiat will likely cut its prices to gain a greater market share," the analyst said.

Indonesia's pulp and paper production last year was estimated at 2.5 million tons and 3.2 million tons respectively, as compared to the total installed capacity of 2.8 million tons for pulp and four million tons for paper.

Competition

Ray said that on the international market, Indonesian pulp has to compete with mechanical pulp from Canadian and American producers.

He noted that the pulp producers in those two countries added to their capacities last year.

"Some of them have even tried to merge with other companies and upgraded their machines for the capacity expansion," Ray added.

The Indonesian pulp and paper industry is dominated by the Sinar Mas Group, which is controlled by Eka Tjipta Widjaja, and the Raja Garuda Mas Group, which is majority owned by Sukanto Tanoto.

Another group is Surabaya Agung (owned by the Sulystio family) with its two listed companies, PT Surabaya Agung Pulp and Paper and PT Fajar Surya Wisesa.

Sinar Mas Group, the owner of Tjiwi Kimia and Indah Kiat, has a total capacity of 1.2 million tons of pulp and 1.7 million tons of paper, while Raja Garuda Mas' PT Inti Indorayon has a capacity to produce 990,000 tons of pulp and 60,000 tons of rayon fiber.

Last year Indah Kiat's production accounted for 23 percent of Indonesia's total pulp output and Indorayon for 14 percent.

Analysts also noted that given the bad market conditions, it might also be difficult for the companies in this sector to raise funds.

Indah Kiat has decided to raise additional capital of Rp 512 billion by issuing five rights shares for 20 old shares this year to finance its pulp production capacity expansion.

For the first nine months of last year, Indah Kiat reported a net profit of Rp 369 billion, Tjiwi Kimia Rp 141 billion, Indorayon Rp 123 billion, Fajar Surya Wisesa Rp 36 billion, Surabaya Agung Rp 26 billion and Suparma Rp 14 billion. (08)