Ease of Doing Business for MSMEs: Western India Corrugated Box Manufacturers Association (WICMA) estimates that 40 percent of its 25,000 members will close if immediate relief is not provided.
The pressure on the industry will also put the jobs of the six lakh people it employs at stake.
Ease of Doing Business for MSMEs: The entire corrugated box industry in India, pegged at Rs 30,000 crore, is reeling under losses due to the 70 per cent hike in the cost of the raw material, the Kraft paper, over the last six months. Industry body Western India Corrugated Box Manufacturers Association (WICMA) estimates that of its 25,000 members across the country, almost everyone is operating in losses, its Secretary Shlok Kedia told Financial Express Online. “We anticipate about 40 per cent of total members to close if immediate relief is not provided,” he said.
The issue has been going on for the last six months but the situation has gone from bad to worse as these MSMEs are now staring at operating losses and many will not be able to sustain for long.
“Most firms in this sector are from the MSME sector and they can’t withstand such a sharp rise in their input cost. We are envisioning huge NPAs and defaults amongst the corrugaters in the next few months,” said Sandeep Wadhwa, President of pan India body Indian Corrugated Case Manufacturers’ Association (ICCMA).
The losses are due to the sharp rise in the cost of Kraft paper, the raw material that constitutes 70-80 per cent of their working capital requirement.
The hike in kraft paper cost is due to the “3Cs” – China, Covid lockdown and Containers, said Harish Madan, Vice President of ICCMA who is the owner of Roorkee-based packaging firm Securipax. Due to the disruption in the global supply chain, from the 16 sea lines, only four are operational and containers are stranded at various ports. Hence, imports of waste paper (used to make Kraft paper) have reduced. Also, due to lockdown, collection of scrap paper is not happening due to which the wasted cartons, etc are not coming back into the supply chain for recycling. Paper Mills cite the above two as the two main reasons for their increase in inputs cost and hence the rise in the price of their final product, the Kraft paper.
The third and most significant reason according to the industry is that paper mills are exporting Kraft paper to China due to better prices instead of keeping it for domestic consumption that is leading to shortage. From zero exports in 2018 to China, India exported 2 million tonnes worth of Kraft paper in 2020, which is a whopping 25 per cent of its domestic consumption requirement.
“Due to all these factors, the industry is grappling with the shortage of 4.5 million tonnes, that is 60 per cent of its annual requirement of Kraft Paper,” said Madan.
Impact on MSMEs
The increase in raw material cost by paper mills significantly increases the working capital requirement for the firms. “My one truck of 10 tonnes of Kraft paper which was about Rs 2 lakhs, now, it is almost Rs 4 lakhs because freight cost has also risen. So, my working capital requirement has doubled,” said Kedia.
Sandeep Wadhwa of ICCMA who owns Bangalore-based packaging solutions firm Wadpack agrees. He said, “while corrugated boxes are a customised product they are sold like a commodity as it is a competitive market. As a result, the margins aren’t high to absorb the steep rise in working capital requirement.”
“We are the MSME industry who are sandwiched between the paper mills (who supply us raw material) and clients who are big brands like FMCG players or retailers and both dictate their terms,” said Kedia who also runs Mumbai-based Kedia Paper Industries.
He explained, that the paper mills together are inflating the prices across the country. Plus, the clients don’t agree, or take too long to commit, to share the rise in input cost. Many also started signaling to move to other cheaper manufacturers. “I have been going to several clients for the last 6 months to increase realisation but the response has been slow. Retaining customers is getting difficult now.” He added that manufacturers who have holding power will survive but small businesses are in deep soup.
ICCMA estimates that the industry manufactures 7.5 million tonnes of corrugated boxes and has a market size of Rs 30,000 crore.
It will have a trickle down effect and will soon impact other sectors as well who will have to pay more for packaging, said Sandeep Jain, MD of automotive parts manufacturer Solo Group. He added, “I had to pay 30 per cent more to my packaging partner because I had some urgent exports to make.”
“Unless some strong measures like ban of exports of Kraft paper to China are introduced, we don’t think the situation will change. The pressure on the industry will also put the jobs of the six lakh people it employs at stake,” said Wadhwa.