Japan has long been recognised as a global leader in industrial efficiency and competitiveness, with examples extending to electronics, automation and car manufacturing. By contrast, Japan’s pulp and paper industry is seemingly uncompetitive and outdated. It has been built on familiar principles applied in many of Japan’s primary industries, which only focuses on maximising local production and supply security. Under these principles, the pulp and paper industry prioritise the import of basic raw material (being woodchips) and targets the maximum value-add within Japan. This strategy presents risks, but also security, to both international suppliers of raw materials and to Japanese companies. This article will explore the fundamentals of the Japanese pulp and paper sector and what it means for global suppliers of hardwood chips.
The Self-Sufficiency Principle
Japanese pulp mills are fully integrated operations that control the value chain from raw products to finished products (Figure 1). They are typically large industrial installations with several pulp lines producing predominantly chemical pulp from both softwood and hardwood raw materials. Some produce mechanical pulp as well as recycled fibres.
Figure 1: Typical Pulp and Paper Mill Value Chain in Japan
All Japanese pulp mills have paper mills fully integrated to their operations, sharing utilities such as power, steam, water, and waste treatment. Most of the pulp produced is used to supply the paper mill, and likewise, most of the feedstock for the paper mill is sourced from the pulp mill; there are no independent, pure market pulp mills in Japan.
These fully integrated operations mean that the pulp mill and paper mill are essentially inter-dependent – one cannot operate without the other. If paper production stops, the pulp mill needs to shut down as well. Similarly, the paper mill cannot operate without the pulp mill. It is basically not possible for a Japanese paper mill to buy market pulp and to run the paper mill without the pulp mill.
As one of the most forested countries in the world, Japan has plentiful forest resources. However, much of this resource grows in mountainous areas which is not accessible and thus not commercially viable. Of the commercial areas, most of them comprise softwood species which are widely used for timber construction, furniture, and other uses. The remaining softwood residues are all used in pulp mills, which means about two-thirds of Japan’s softwood chips come from domestic forests. At the same time, Japan is hugely dependent on imported hardwood chips to feed its pulp and paper mills.
Figure 2 shows this dependency. Almost all of Japan’s hardwood chip consumption is imported, but only about one third of softwood chips. Japan is even more self-sufficient in pulp production. Less than 10% of hardwood pulp is imported and about 30% of softwood pulp. By comparison, China imports 66% of its hardwood kraft pulp and Korea a significant 74%. All three countries are not really competitive in domestic pulp production, but only Japan is so reliant on it. Japanese companies have invested in overseas market pulp mills and a significant part of these (small) pulp imports actually come from mills partially owned by Japanese paper or trading companies in North and South America, Europe and Asia-Pacific. The “vertically reliant integration” exhibited by the Japanese pulp and paper operations is underpinned by principles of self-sufficiency, however, as noted, this leads to market inefficiencies and risks.
Figure 2: Domestic vs Imported Supply of Fibre and Paper in Japan 2019
Source: Japan Paper Association, Trade statistics, Margules Groome estimates.
Notes:
- Domestic is local production – exports; Publishing and writing papers include newsprint and all uncoated and coated printing and writing papers; Packaging paper and board includes cartonboards, containerboards, sack and bag papers and other papers; Tissue includes both industrial and household .converted tissue products.
- Japan produced ~8.6 million ADt of pulp in 2019 of which ~5.9 million ADt was hardwood kraft pulp. Small volumes of hardwood chip are used for mechanical pulp production.
Japan is even more self-sufficient within the downstream paper and paperboard industry, from production to end use. The Japanese paper distribution system is complex, and service and delivery requirements are high. As with market pulp, imports are small (~6%) and limited to products that have fairly standard specifications on size and basis weight. These products are relatively easy to distribute in Japan (e.g. reamed sheets of copy paper, liquid packaging board for milk cartons, and converted tissue products). Almost everything else (~94%) is produced domestically. By contrast, European industrial powerhouse Germany produces only 47% of the paper consumed within its borders.
With ongoing geo-political tensions across Asia, rising global concerns around cyber security, and the Covid-19 pandemic, the importance of supply chain security has been put in the spotlight. As a result, it is possible that many countries will move towards higher self-sufficiency principles and a better control of their raw material supply across various industries. If viewed against this backdrop, then perhaps Japan is on the right track with its self-sufficient pulp and paper industry but noting that international competitiveness is not the focal point of Japan’s strategy.
Japan is uncompetitive in pulp production with the current production cost of hardwood kraft pulp at around USD 540-550/tonne. Delivered to China or Korea, the cost increases to around USD 580-590/tonne, however, the current “cost, insurance, and freight” (CIF) market price in Asia is around USD 440-460/tonne. It is clear that Japan cannot be cost-competitive in papermaking either, with pulp costs being evidently high. Only exceptions are specialty products where fibre represents a less significant portion of the total cost, and some recycled grades where Japan has a large domestic supply of recycled fibre available.
Japanese pulp mills and paper machines are also relatively small and old. The two biggest pulp and paper companies (Nippon Paper and Oji) produce nearly four million tonnes of chemical pulp in Japan – spread between some 10-15 pulp mills. By contrast, two large-scale mills in Brazil, Indonesia or China could produce the same volume. All large Japanese paper companies still operate several paper machines that have widths below five meters and speeds at less than 500m/min. Modern printing and writing paper machines have a width close to 10 meters and run at speeds over 1 000m/min. Despite this, Japanese companies have been able to maintain dominant domestic market share. This market behaviour is testimony to the vertically reliant integration from fibre source to finished product.
The Japanese Paper Market
With the industry being so self-sufficient and dependent on domestic consumption, it is interesting to analyse how the market has performed. Since reaching a peak consumption of 31.6 million tonnes in 2006, the overall consumption of paper and paperboard in Japan has been on the decline for the past 15 years. Current (2019) consumption is at 25 million tonnes, down by 20%.
Pulp made from hardwood chips is mainly used in uncoated printing and writing papers, in coated woodfree papers, and tissue papers and to some extent, virgin fibre based carton boards (cup stock, SBS, FBB). Figure 3 shows the consumption trend and likely future projection for these products in Japan. Tissue and virgin carton boards have been fairly stable while printing and writing papers are in continuous decline. This is likely to continue. However, most of the growth in tissue consumption has come from increased imports of converted tissue products with local supply being stagnant.
Figure 3: Consumption of Selected Papers and Boards in Japan
Source: Japan Paper Association, Trade statistics, Margules Groome estimates.
Note: Selected grades exclude wastepaper-based grades and mainly mechanical and softwood pulp containing grades such as newsprint, LWC/bitokoshi, containerboards, kraft papers and recycled carton boards.
As domestic paper production in Japan is closely tied with consumption of the products shown in Figure 3, one would forecast only marginal increases in production of tissue paper, a stable (or slightly decreasing) production of virgin carton boards, and a decline in production of printing and writing papers.
Between 2018-2019, Japanese paper companies closed or repurposed one million tonnes of hardwood pulp-based printing and writing paper capacity. Another 200,000 tonnes have been closed so far in 2020. This is a global phenomenon in all developed markets. Between 2018-2020, West European paper companies have closed more than two million tonnes of chemical pulp based pr/wr capacity and another half a million tonne is planned to be closed by end of next year. North America has closed 1.5 million tonnes.
While printing and writing paper consumption is declining, it is often said that tissue is growing and will be able to take up the slack. Between 2018 and 2020 Japan added about 100,000 tons (net) of tissue capacity. That is a 10:1 loss for tissue vs printing and writing papers. The balance is a bit better in Western Europe with 800,000 tons of tissue capacity added over the past three years, but still far short of the closures in other pulp-based grades. North America added only 50,000 tons of tissue capacity.
These are ongoing long-term trends. Exacerbating the situation is the Covid-19 pandemic and its immediate effects, as well as the medium-term impacts from a weaker global economy with an uncertain recovery. Cleanliness has become an increasingly important issue, positively affecting both tissue and hygiene paper use as well as food and pharmaceutical packaging. At the same time, office and educational institute closures and travel restrictions have reduced paper consumption, affecting also the away-from-home tissue segment. Preliminary numbers from Europe suggest that the first half of 2020 saw a 16% decrease in communication paper consumption (newsprint and printing/writing papers) against same period a year ago. Tissue paper consumption grew by 4% and packaging by about 2%.
The effects on consumption in Japan would probably be similar. Preliminary estimates indicate an about one million tonnes decrease in local hardwood pulp production for 2020, caused mainly by decrease in printing and writing paper production. Some of this decrease is likely to return once the economy recovers, but it may take years before reaching the previous ‘normal’ if at all, considering the underlying longer-term trend of decreasing demand for communication papers in general.
Implications for Hardwood Chip Demand
The largest users of imported hardwood chips in Japan are Nippon Paper, Oji, Hokuetsu, Daio, Mitsubishi and Chuetsu. The closures of the above-mentioned printing and writing paper machines have taken place at mills owned by Nippon Paper, Oji, Hokuetsu, Daio, Mitsubishi, Chuetsu and Marusumi. This is not an isolated case of one company closing capacity, this is the whole Japanese paper industry adjusting to lower demand. And it is likely to continue. The good thing is that these mills still have several small and old paper machines that can be closed one by one while retaining the expensive pulp production operations. This will ensure the continuing need for imported wood chips albeit with gradually reducing imported volumes each year.
As we have seen, Japanese pulp and paper mills are not competitive and are facing continuous cost pressure. This is especially the case when the global pulp and paper sector is at or near the bottom of a price cycle (as it appears in the current climate). Cost pressures lead to an ongoing search for lower cost wood chips and relaxed acceptance of lower quality materials; this is unsurprising given raw material input represents some 50-60% of the cost of pulp manufacturing. This already happened during the first half of this year with imports from Australia being partly replaced by lower cost supplies from Vietnam.
Japanese companies have established several fast-growing plantations in Asia-Pacific, South America and Africa with the intention of increasing self-sufficiency in raw material supply. Most of these plantations have been divested in recent years, breaking one link in the supply chain.
Ilkka Kuusisto is independent forest industry consultant based in Singapore and cooperating with Margules Groome. For more information contact info@margulesgroome.com