The newsprint shortage

The newsprint shortage

The increase in the prices of wood pulp and paper actually
started early last year after five years of down cycle. But
industrial users in Indonesia were not awakened to the real
magnitude of the trend until early this year. The problem has
become a nationwide issue, especially since the print media,
severely hurt by the steep rise in the price of newsprint, have
consistently brought up the issue in their front page headlines.

However, the debate thus initiated has so far not touched
upon the root of the problem because the causes of the price
increase have not been assessed against the backdrop of
international trends.

The blunt fact, we think, is that the paper industry is now
riding on an up cycle after its severe recession from 1989 up to
the end of 1993 when the prices of wood pulp -- the main raw
material for all kinds of paper -- decreased by more than 50
percent.

The green campaign obviously has also been responsible for the
sharp price increase. The global campaign to protect the forests
and the green rules imposed by many governments on the pulp
production process have discouraged new investors from the pulp
and paper industry. The requirement of a totally chlorine free
bleaching process, or an effluent free pulp making process, has
sharply increased the capital costs in the industry.

International analysts estimate that while the international
market demand has been increasing by 1 percent to 2 percent per
year over the last six years, the world's capacity has remained
virtually stagnant. That did not cause any supply problem until
the end of 1993 because the industry still had spare capacity to
accommodate the growth in utilization.

But the supply-demand equation began to experience
disequilibrium early last year after the cumulative growth in the
demand used up all the spare capacity in 1994, thereby forcing
mills to operate at full capacity. At this point, the market
forces dictate that the prices have to increase. The pulp prices
which fell to as low as US$350 at the end of 1993 have now risen
to $750 a ton and most analysts foresee a steady increase to
reach as high as $900 next year.

Obviously, the steep rise in pulp prices has also been
increasing the demand for substitute materials -- waste paper.
During the down cycle period, waste paper was virtually free as
the users had to pay only the collection and transportation
costs. Now waste paper sells for as high as $150 per ton.

Since the two domestic newsprint producers -- PT Aspex Paper
in Bogor, West Java, and PT Kertas Leces in East Java-- rely
mostly (more than 80 percent) on imported waste paper, their
production costs have naturally increased as well. Set against
this market trend, the request of the Newspaper Publishers
Association to the two producers to maintain the prices of their
newsprint does not seem feasible, irrespective of however lofty
the mission of the print media may be. The two companies would go
bankrupt if they were forced to sell below their production
costs.

We are, however, encouraged to learn that the government plans
to simplify the procedures for waste paper imports in the near
future. The current procedures are quite arduous as the clearance
has to involve officials of the industry and trade ministries and
the Attorney General's Office. Industry analysts estimate that
the import deregulation will decrease the costs of waste paper at
least by 15 percent.

But that measure is only short term in nature. It is only an
element of crisis management which will not bring about a long-
term solution. The government should investigate the entry
barriers to the newsprint industry and should act immediately to
take the necessary reform measures. The fact is that no new
investors have been interested in the newsprint industry since
the mid-1980s even though the market demand has steadily
increased and the country boasts itself as the owner of the
world's second largest rain forest resources.

Also, the general public should be educated to accept the
higher prices of paper, including newsprint, because companies
have to spend more on complying with environmental rules and pulp
production will have to rely mainly on timber estates. That,
however, should not mean that our production costs cannot be
lower than those in other countries. In fact, they should be much
cheaper in view of our competitive advantages in the pulp
industry.