Paper sector crumpling under high costs
A struggling local industry fails to meet spiking demand
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.”