The impact of the appreciating rupee on exports has been well documented. An increase of about 14% in the rupee to the dollar so far has meant that exports have been marred quite a bit, especially, in sectors such as handicrafts, textiles, marine products and leather. To what extent this has happened can be gauged from the words of Union commerce secretary G K Pillai, who was quoted recently saying that handicraft exports had dropped by 66%, textiles by 22%, marine products by 20% and leather by 9%.
Though exports for the month of October this year grew by 35% on the back of strong shipments of petroleum products, gems and jewellery and engineering goods, touching $13.3 billion in comparison to $9.8 billion a year ago, the general consensus is that the country may not achieve its overall export target of $160 billion at the end of the current fiscal.
And this is just part of the story. Though the picture appears rosy on the imports front, with a cheaper dollar implying cheaper imports, the fact remains that this makes sense in the case of import of raw materials, semi-finished goods or products that do not have competition in the domestic marketplace. But for those that do have competition in the domestic marketplace, the scenario changes a bit. Cheaper imports make it an attractive proposition in comparison to the local product pushing domestic manufacturers to fall in line with their foreign counterparts. The result? Margins are under pressure for the domestic manufacturer.
Take the case of coated paper manufacturers in India. The going hasn?t been easy for them since the rupee?s upward climb over the last one year. That is because the segment is characterised by imports of up to 25-30%.
Cheaper imports mean that the local product is far expensive than the foreign variety, making it less attractive than the latter.
At a time, when demand for coated paper, which is nothing but glossy paper used in product and company literature, magazines, etc, is growing at about 12% per annum in the country, it makes sense for local players to want to retain their market share, even fighting hard for some more.
Which is exactly what most of them are doing by bringing down price to remain competitive. Currently the market, which is about 3.2 lakh tonnes per annum in terms of volume, has two major players ? Ballarpur Industries and JK Paper, which together produce about 1.7 lakh tonne of coated paper per annum.
Fringe players such as West Coast Paper Mills produce about 10,000-15,000 tonnes of coated paper per annum. Then there are very small regional players, who take the total domestic production to about 2-2.2 lakh tonne. The balance requirement is met by imports.
Naturally, with imports being a major source for the finished product in the country, its role in market dynamics here is huge. Which is why when the price of imported coated paper (at ex-factory level) came down from Rs 38,000-39,000 per tonne in April this year to about Rs 35,000-36,000 per tonne, local players were forced to react with two rounds of price revision.
These revisions, incidentally, were effected over the last few months, with the net reduction in price being about Rs 3,000 per tonne.
?This revision,? says B Hariharan, group director?finance, Avantha, the Gautam Thapar-led group, which includes companies such as Ballarpur Industries, Crompton Greaves and Global Green Company among others, ?was simply required.?
Ballarpur, for the record, has a production of about 1.3 lakh tonnes per annum, with JK Paper at about 40,000 tonnes per annum. So the pressure on the former to bring down price of its coated paper was enormous.
As Hariharan says, ?We compete with imports directly. So there was no way we could ignore where the price was going.?
J K Paper, of course, had to fall in line sooner than later, though its overall production capacity is switchable from coated to uncoated. ?This is because we have an offline coater,? says V Kumara- swamy, chief financial officer of the company. ?So, we basically produce uncoated paper, some of which is then routed through the offline coater to produce coated paper,? he says.
This strategy of switchable capacities, of course, is useful in times of distress, but J K has opted not to completely switch-off production of coated paper on account of strong demand for it in the country.
What is also helping players tide over the current round of weak pricing in the coated market is the firm pricing in the uncoated market, which is much larger in size to the former.
In terms of volume, the size of the uncoated market, which is basically writing paper, is about 21-22 lakh tonnes per annum, growing at about 8-10% per annum. Over the last year-and-a-half, the total price hike undertaken by players in the uncoated paper market has been to the tune of 15%, with the trend unlikely to change going forward. Besides Ballarpur, JK and West Coast, key players include Tamilnadu Newsprint, Andhra Pradesh Paper, Sirpur Paper and Seshasayee Paper among others, making it fairly fragmented as opposed to the coated paper market in the country.
Bulk of the overall production for players such as Ballarpur and JK Paper, who straddle both coated and uncoated, is the latter, which, according to Hariharan has helped them tide over the margin pressure felt in the coated paper market on account of lower prices.
?Two-third of our overall production is uncoated and one-third is coated. On this two-third production, there has been a net increase in price of about Rs 3, 000 over the last few months, while the net decrease in price of Rs 3,000 is on one-third production. The result is that we have had a net gain of about Rs 10-15 crore,? he says.
With prices of coated paper prices currently a bit stable, the world over, local manufacturers are hoping that they can reverse this round of lower prices in the coming months.