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.