Pa­per sec­tor crum­pling un­der high costs

A strug­gling lo­cal in­dus­try fails to meet spik­ing de­mand

Business monthly (Egypt) - - INSIDE - BY TAMER HAFEZ

In to­day’s dig­i­tal world, it’s be­come in­creas­ingly fash­ion­able to talk­ing about “go­ing pa­per­less.” But stop for a minute and con­sider what a truly pa­per­less so­ci­ety would look like. No mag­a­zines like the one you’re hold­ing right now. No desk cal­en­dars, posters or shop­ping bags or the mul­ti­tude of brand­ing op­por­tu­ni­ties they of­fer. No busi­ness cards, sticky notes or text­books. No toi­let pa­per.

Even in the age of elec­tronic invitations and smart­phones re­plac­ing the morn­ing news­pa­per, we are still a long way away from be­com­ing a pa­per­less world. We pro­duce some 300 mil­lion tons of pa­per per year glob­ally. The United States, the planet’s num­ber one pa­per con­sumer, uses more than twice as much pa­per as it did 20 years ago, de­spite the high en­vi­ron­men­tal cost of this old, in­ef­fi­cient tech­nol­ogy. Pa­per rep­re­sents one of the largest com­po­nents of land­fill, and costs busi­nesses huge amounts of time and money—your av­er­age of­fice em­ploy­ees spends an es­ti­mated 30-40 per­cent of his or her day ei­ther fil­ing doc­u­ments or search­ing for in­for­ma­tion in filed doc­u­ments, ac­cord­ing to the The Pa­per­less Pro­ject, which es­ti­mates that or­ga­ni­za­tions still man­age 70 to 80 per­cent of their pro­cesses on pa­per.

Egypt was one of the world’s first civ­i­liza­tions to use pa­per; the very word is et­y­mo­log­i­cally de­rived from “pa­pyrus,” which the an­cients fa­mously used to make scrolls on which they wrote their hi­ero­glyph­ics. To­day, with up­wards of 90-mil­lion peo­ple and grow­ing, Egypt con­sumes around 500,000 tons of pa­per an­nu­ally. But while the na­tion’s ap­petite for pa­per is stronger than ever, the same can­not be said for Egypt’s pa­per in­dus­try, which is dom­i­nated by ag­ing, in­ef­fi­cient state-owned com­pa­nies that haven’t seen sig­nif­i­cant up­grades to their equip­ment or pro­cesses in decades. “We’ve never been able to op­er­ate at more than 70 per­cent of our ca­pac­ity,” says Ga­mal Mah­moud, chair­man of gov­ern­men­towned Qena Pa­per In­dus­try Co., the coun­try’s largest pa­per maker.

To fill the gap, Egypt is im­port­ing more and more of its pa­per and pa­per-based prod­ucts. More­over, as the cost of goods from abroad has sky­rock­eted in the wake

of the plum­met­ing pound, im­ported pa­per—like most other in­ter­na­tional goods—has got­ten sig­nif­i­cantly more ex­pen­sive. As of De­cem­ber, for­eign­made stan­dard printer pa­per cost LE 50,000 per ton ver­sus LE 14,000 per ton or less for the lo­cal va­ri­ety. With firms and con­sumers across the board squeezed by ris­ing prices, un­sur­pris­ingly, this cost dif­fer­en­tial has spurred a sud­den spike in de­mand for lo­cally made pa­per and pa­per-based prod­ucts. This would seem to be good news for Egypt’s strug­gling econ­omy, with of­fi­cials des­per­ately try­ing to bal­ance the trade deficit by en­cour­ag­ing the con­sump­tion of lo­cally made goods rather than im­ports wher­ever pos­si­ble. Un­for­tu­nately, the Egyp­tian pa­per sec­tor sim­ply isn’t up to the task. On top of their out­dated fa­cil­i­ties and pro­cesses, pa­per fac­to­ries have seen their costs shoot up re­cently. Even lo­cally avail­able ma­te­ri­als like the agri­cul­tural waste that’s used for pulp and scrap pa­per for re­cy­cled pa­per prod­ucts have got­ten more ex­pen­sive. The up­shot is that rather than seiz­ing an aus­pi­cious mo­ment to ex­pand a lo­cal in­dus­try, Egypt’s pa­per fac­to­ries are bor­der­ing on a cri­sis, say in­sid­ers—one that could have far­reach­ing con­se­quences.

Egypt’s three big state-owned pa­per mak­ers—QPIC, Misr Edfu and Rakta Co. (the Gen­eral Co. for Pa­per In­dus­try)— make up the vast ma­jor­ity of the lo­cal in­dus­try. Most of their busi­ness is mak­ing text­books, copy books and exam pa­pers and the like for Egypt’s vast pub­lic school sys­tem. The youngest of the firms is 14year-old QPIC, which is also the largest; the other two have both been in busi­ness for more than half a cen­tury. Eighty to 90 per­cent of the pa­per for pub­lic schools comes from these lo­cal sup­pli­ers, which have stayed in busi­ness thanks to ex­clu­sive con­tracts with the Min­istry of Ed­u­ca­tion. Pub­licly-run firms in Egypt are opaque about their fi­nan­cials, but in­dus­try in­sid­ers say the state-owned en­ter­prises make very low prof­its from this gov­ern­ment busi­ness, de­spite the vol­ume, and ris­ing costs over time have trans­lated into mas­sive losses for the big three. Still, they account for the vast ma­jor­ity of Egypt’s pa­per in­dus­try. Ac­cord­ing to Amr Khedr of the Cairo Cham­ber of Com­merce, pri­vate pa­per fac­to­ries in Egypt to­gether make around 20,000 tons of pa­per an­nu­ally, ver­sus the 180,000 tons man­u­fac­tured by state-owned firms.

Still, that is well be­low the pub­lic firms’ com­bined an­nual pro­duc­tion ca­pac­ity of around 250,000 tons. Like many of Egypt’s state-owned en­ter­prises, the pub­lic pa­per fac­to­ries have suf­fered from a lack of in­vest­ment and up­grades that would en­able them to keep pace with modern de­vel­op­ments in the in­dus­try. A case in point is Rakta Co., which still makes pa­per made from rice straw as it’s done since the com­pany’s in­cep­tion in the late 1950s, an ar­range­ment that was de­signed back then to ben­e­fit nearby rice farm­ers in the Delta. Not only is Rakta’s prod­uct out­dated—the rice straw pa­per is lower qual­ity than the kind made with sugar cane husks, or bagasse, the ma­te­rial used by Egypt’s other two state-owned pa­per fac­to­ries—the firm last got new ma­chines and other up­grades back in the 1980s. All this means that Rakta “can­not sell its prod­uct at any mean­ing­ful profit or quan­ti­ties,” says Khedr. “The fac­tory needs to be sold or have sig­nif­i­cant cash put into it to switch to sugar cane husks like the Qena and Edfu fac­to­ries.”

All lo­cal pa­per com­pa­nies, pub­lic and pri­vate, make most of their rev­enue sup­ply­ing print­ing houses that pro­duce cal­en­dars, cat­a­logues and mag­a­zines and sell­ing pack­ag­ing for prod­ucts rang­ing from phar­ma­ceu­ti­cals to pro­cessed foods and sta­tionery sup­plies like wrap­ping pa­per. As with many other prod­ucts, Egypt has been forced to im­port steadily more pa­per ev­ery year to fill the need for high-qual­ity pa­per that’s not be­ing met by lo­cal firms. In the last fis­cal year, Egypt im­ported 320,000 tons of pa­per, some 40,000 more than the pre­vi­ous year, ac­cord­ing to state statis­tics agency CAPMAS.

In the mean­time, the large gov­ern­ment-run fac­to­ries that make up the lion’s share of Egypt’s pa­per have gone from strug­gling to the brink of dis­as­ter. QPIC, the in­dus­try gi­ant, which pro­duced al­most half of the in­dus­try’s lo­cally made pa­per last year, is on the brink of bank­ruptcy. “We are in a very bad sit­u­a­tion,” sums up Mah­moud, the firm’s head, who notes that, legally, state-owned com­pa­nies are sup­posed to file for bank­ruptcy if their losses equal more than 50 per­cent of their capital. “Right now, it’s more than 100 per­cent,” he says. In ad­di­tion, Mah­moud adds that the price of bagasse, the lo­cally grown sugar cane husks that’s the pri­mary in­gre­di­ent in QPIC’s pa­per, has gone up in re­cent months. The cost of nat­u­ral gas, which was $3 per Bri­tish ther­mal unit be­fore the gov­ern­ment raised fuel prices in tan­dem with the cur­rency float in early Novem­ber, is now $5. “It was a double whammy,” says Mah­moud. Fi­nally, as of last Septem­ber, the fac­tory, which in the past paid no sales tax, must now pay a 13-per­cent VAT on all its rev­enues. Cast­ing even more doubt on its con­tin­ued sol­vency is the fact that QPIC owes $95 mil­lion to the Na­tional Bank of Egypt. “We took that debt when the pound was at LE 5 to the dol­lar, ex­pect­ing the ex­change rate would be LE 8 to the dol­lar at ma­tu­rity,” says Mah­moud. “Now the ex­change rate is LE 18 to the dol­lar, and we are still years away from ma­tu­rity.”

QPIC, which em­ploys around 800 peo­ple, is al­ready pro­duc­ing well be­low its ca­pac­ity of 120,000 tons of pa­per per year. “We do not have enough raw ma­te­rial, money or ma­chines to pro­duce more,” says the chair­man sim­ply. The firm re­cently raised prices for pri­vate cus­tomers from LE 9,600 to LE 13,200 per ton of pa­per. “De­spite this in­crease, we are still in­cur­ring a LE 1,400 loss on ev­ery ton,” says Mah­moud. “If we in­crease our prices more, we will lose those clients.” While he de­clined to give specifics, Mah­moud said that the firm has al­ready reg­is­tered a drop in or­ders from pri­vate cus­tomers—busi­ness that’s the firm’s only re­li­able source of profit.

Misr Edfu is not in much bet­ter shape. Last year, the com­pany switched from us­ing mazut, a heavy, in­ef­fi­cient fuel oil that re­mains in use mostly in the for­mer Soviet Union, to cleaner—and then cheaper—nat­u­ral gas. Un­for­tu­nately, “Now, the re­cent fuel-price hikes are driv­ing the com­pany into the ground,” says Ab­del Rah­man Ahmed, Misr Edfu’s chair­man. The com­pany has in turn hiked its

prices for pri­vate cus­tomers from LE 7,000 per ton to LE 12,600 per ton. As­sum­ing the pound re­mains at its cur­rent value of around LE 18 to the dol­lar, the com­pany ex­pects its 2016 cal­en­dar-year losses to ex­ceed LE 120 mil­lion. “The only good news is that we con­vinced our bank to con­vert a $50-mil­lion loan into an LE 880-mil­lion loan with a 10 per­cent in­crease in the in­ter­est rate,” says Ahmed.

Nat­u­rally, the price hikes on lo­cally made pa­per are hav­ing a rip­ple ef­fect on the many busi­nesses that need it. One lo­cal pub­lisher, Ab­del Rah­man el Marakby, said that the cost of pa­per has been ris­ing no­tice­ably since mid-2015, as lo­cal man­u­fac­tur­ers of all stripes were forced to turn to the black mar­ket for hard cur­rency to buy im­ported sup­plies. “We started notic­ing that the cost of pa­per was creep­ing up,” says Marakby, who runs Be­basata, a chil­dren’s mag­a­zine that went 100-per­cent dig­i­tal early last year in the wake of ris­ing print­ing costs and fall­ing ad­ver­tis­ing rev­enue.

An in­creas­ingly pop­u­lar so­lu­tion is re­cy­cled pa­per, which costs half as much. But there are just a hand­ful of re­cy­cled­pa­per com­pa­nies op­er­at­ing in Egypt, mainly small en­ter­prises tar­get­ing spe­cial­ized niches like re­tail pack­ag­ing. Tamer Khalil, man­ag­ing di­rec­tor of the Modern Print Shop, a re­cy­cled pa­per­maker, ex­plains that his plant uses scraps from pa­per fac­to­ries and used car­tons and of­fice pa­per to make “pack­ages for bis­cuits, choco­lates and sev­eral food chains.” Still, like ev­ery­one else, re­cy­cled­pa­per firms rely on im­ported ma­chin­ery and spe­cial chem­i­cals that—at the mo­ment, at least—aren’t made here.

The up­shot is that the fledg­ling re­cy­cled-pa­per sec­tor has also been hurt by ris­ing prices. Even scrap pa­per has gone up by around 150 per­cent since Novem­ber, ac­cord­ing to Khalil. Modern Print Shop has in turn nearly dou­bled its prices from LE 3,500 to LE 6,300 per ton. “More in­creases in costs and prices are com­ing,” he says. “This is by no means the end.” For now, how­ever, he says his sales re­main strong, be­cause his clients sim­ply have to buy pack­ag­ing for their prod­ucts. “It’s a ro­bust in­dus­try with ro­bust de­mand,” says Khalil, who none­the­less adds that he’s squeez­ing his profit mar­gins to the limit in or­der to avoid rais­ing prices even more.

With all the cur­rent cost pres­sures, a full-blown pa­per short­age could be im­mi­nent.

While there has been talk of pri­va­tiz­ing money-los­ing pub­lic-sec­tor firms in cer­tain in­dus­tries, state-owned pa­per fac­to­ries are not among them, mostly be­cause of their cru­cial role in sup­ply­ing the pub­lic school sys­tem with an af­ford­able, re­li­able source of ma­te­ri­als, says Gaber, of the FEI, who stresses that the SOEs are des­per­ately in need of im­prove­ments if they are to con­tinue to pro­duce.

Gaber be­lieves Egypt needs to pro­mote green­field in­vest­ment in the pa­per sec­tor’s feeder in­dus­tries, to sup­ply things like raw ma­te­ri­als, chem­i­cals and equip­ment needed to help smaller fac­to­ries up­grade and ex­pand. But for the mo­ment, look­ing to the rel­a­tively tiny pri­vate pa­per sec­tor to fill the gap if the big pub­lic fac­to­ries go un­der isn’t a re­al­is­tic so­lu­tion. “I be­lieve I make more money per pa­per sold than the big com­pa­nies,” says Khalil. “But I am also afraid to in­crease my ca­pac­ity only to find that there isn’t enough raw ma­te­rial to make pa­per.”

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