Current State of Waste Paper Business
According to CEPI (European Kraft Paper Producers for the Flexible Packaging Industry), from the estimated waste paper worldwide reserves of 230-260 million tons, 160 million tons was collected in 2003 and increased to 190 million by the end of 2005. Average worldwide utilization ratio is about 48%. Compared with European, North American and recent Asian statistics the current Russian waste paper resources look quite modest (up to 2 million tons).
The last ten years the Russian paperboard market has transformed rapidly in the direction of the world’s most developed countries. Even with the abundance of prime fiber sources in the country, local packaging suppliers are following the world trend towards recycled paper. Today’s market statistics for paperboard materials make a particular column for recycled fiber showing the high importance of this item.
However there are a few differences. Russia historically was very rich in timber sources and totally insensitive to ecological problems. Therefore the utilization of waste paper and board was not on the high priority list. Only during the years of so-called “developed socialism”, starting in the mid 1970s, when the country was experiencing major shortages in all consumer categories, the government looked at paper recycling. As a result, the elaborate and relatively well-organized waste paper collection system was established across the country with well-advertised government incentives like book discount coupons. This system was operating until 1991. After the collapse of the Soviet Union this organization gradually deteriorated and finally died down. According to Bumprom (Russian Association of Paper and Pulp Producers) there were between 80 and 90 million tons of unutilized secondary fiber stock lost during the years of perestroika. In recent years waste paper collection and recycling is recovering on a new commercial basis with a growth rate of about 2% a year, but is still far behind that of the Soviet era (collection amount was about 1.6 million tons in 1980 vs. 1.2 million tons in 2004).
In the late 1990s the situation was very serious for chipboard manufacturers due to the inadequate supply of waste paper. At that time, the St. Petersburg mill, the largest greyboard producer, imported waste paper from Finland. (Even currently the scrap paper and paperboard prices are prone to unexpected fluctuation caused by competition by local recyclers.) During the 1990s, processed higher quality secondary fiber from the Moscow region might be sold to Ukraine and Moldova. Local chipboard makers at the same time might use imported waste paper from the Netherlands, Germany, France and Romania. The largest steady exporters of higher quality waste paper to Russia are Finland and South Korea.
In general there is a flow of low grade waste paper from Western Europe being exported to Russia due to low utilization cost. Periodically Western chipboard producers de facto exchange their low quality secondary fiber for high quality Russian product. It makes sense, considering that the turnaround of used chipboard could reach 10-12 times in Germany, while in Russia with the existing domestic recycling technology, the turnaround might be only 2-3 times. In reality about 40% of recovered fiber is utilized only once: the lowest cost used chipboard in Russia typically goes straight to the landfill.
Currently there are three major waste paper source groups in Russia. The most competitive and efficient group consist of paper and paperboard converters including packaging, printing and label making enterprises. They supply 50-55% of higher quality waste paper providing a stable flow of secondary fiber with the established grades and volume. This segment has achieved the highest efficiency in waste paper collecting (about 97%). The second significant source embodies domestic supermarket chains like Pyaterochka, Ramstor, Sedmoi Continent, Perekriostok and large consumer product franchises (M. Video, IKEA) supplying another 40-45%. They are obligated to utilize used packaging according to the country’s fire protection and food safety standards. Therefore, in order to avoid costly fines, all major retail stores have contracts with the local trash collection businesses to pick up recyclables. The remaining share of the waste paper supply comes from private households and is currently flat. The major obstacle to increase waste paper collection from the population is a shortage of specialized companies.
The estimated cost to set up and operate a waste paper collection business in Russia with a daily capacity of 100 tons is about $1.5 million and is often beyond the reach of new entrepreneurs in this business.
Key chipboard manufacturers can afford to operate their own waste paper collection subsidiaries competing with private independent companies. St. Petersburg KPK mill (Leningrad region) runs its own company Kommunarvtorresursi which collects about 200,000 tons of waste paper annually to support its greyboard production at the mill. Stupinsky KPK (Moscow region) operates its waste paper collection and recycling division and provides over 100,000 tons of secondary fiber for its own production of the greyboard brands Sever and Arctica.
Two Russian regions stand out in the waste paper consumption and utilization – Moscow and St. Petersburg. In the St. Petersburg / Leningrad Region, the area with the highest concentration of paperboard producers and converters, the annual waste paper consumption achieves 400,000 tons. The collection level for the same region does not exceed 150,000 tons of secondary paper annually. Due to the absence of modern collection facilities, a huge amount of secondary paper is being lost. Moscow and its region currently generate over 800,000 tons of secondary fiber a year, utilizing only 300,000 tons. The rest is being burned or goes to numerous landfills.
There are currently 27 companies in Moscow in the paper and paperboard recycling business. Four of them (Eco-Bridge, collecting paper in the North and Northwest of Moscow, PZP Kotlyakovo, PZP Pervomayskoe, collecting paper in the Northeast of Moscow, and Fond Resursosberezhenia) recycle over 1,000 tons monthly. The other companies are newly opened small private businesses and privatized former Soviet trash collection agencies running old equipment. The most modern privately owned companies Eco-Bridge and Fond Resursosberezhenia are still struggling and show very small profit margins.
In recent years the recovered fiber market situation is gradually improving. Waste paper collection becomes more efficient. Based on the growing concern about the future of recovered fiber in the country, the Russian government (Ministry of Industry, Science and Technology) is in the process of planning a wide range of actions to improve collection and utilization by introducing new recycling laws similar to European Union regulations and creating business incentives for small enterprises involved in secondary fiber. The previous efforts in the late 1990s to introduce financial incentives similar to German “Green Dot” laws were not successful.
Waste paper categorization in Russia is based on the government standard system (GOST). GOST 10700-97 covers all categories of recovered fiber sources coming from paper and paperboard and utilized for greyboard/chipboard manufacturing. (See Fig. 1)
Chipboard Expansion
Chipboard is currently the fastest growing product segment in paperboard packaging. The application of coated greyboard comes as a natural solution to cutting cost in consumer packaging while the country is experiencing the rapid growth of energy and transportation prices along with high inflation and growing salaries.
As a whole, recent penchants of the growing greyboard market in Russia reflect the same basics, typical for world paperboard manufacturers. Russia was and still is the world’s largest source of virgin fiber. However, changes in the structure of this market, economic pressure coming with the wider acceptance of Adam Smith principles, changes in trade culture and growing consumerism all lead to a more frugal approach in dealing with the country’s natural resources.
High quality coated greyboard is still the most in demand packaging material among all other paperboard products in Russia. Even major paper mills like St. Petersburg KPK, with significant technical upgrades in production equipment, are still behind Western suppliers in higher WLC grades (GD-1and GD-2) and are presently manufacturing only GD-3 board. Currently Russia produces around 350,000 tons of paperboard annually and imports about 280,000 tons. The annual growth in demand for packaging in general is expected to be about 4.5%; for paperboard packaging it will be 10-15%. However, demand for “khrom-erzats” (a generalized Russian name for WLC coated chipboard products) will be growing 20-25% per year, according to PakkoGraff, a Russian think tank on printing and packaging industries.
There are now over 40 companies in Russia producing paperboard from recycled fiber. Chipboard producers in Russia (see Fig. 2) with already established economy-priced brands are focusing on the regional secondary fiber resources gradually improving their collection channels. Even with the substantial growth of consumer packaging in the country, a flow of recycled fiber is still limited by undeveloped infrastructure and lack of investment funds. However, with an abundance of highly experienced professionals in Russia’s pulp and paper industry, that have good education and access to modern software and hardware, domestic producers and converters are making progress despite still existing social obligations to the local communities. These obligations, such as support for local hospitals and day care centers, were inherited from the previous regime and will remain for some time reducing net profits. Some of these companies include:
- St. Petersburg KPK is a leading producer of chipboard ($110 million). It was established in 1980 under the Soviet government driven recycling program and made the first batch of chipboard in 1982. Recently the company invested over $24 million in new board processing and printing equipment from Pasaban and MAN Roland. St. Petersburg KPK employs 1900, utilizes 700 tons of waste paper a day and manufactures greyboard products, including its own brands Neva, Ladoga and Atlantica. The company has gained ISO 9001 and 14001 certificates.
- Stupinsky KPK ($15 million) was founded in 1964 in Moscow and is the largest user of secondary fiber in this region. The mill is a part of Novopak holding and makes coated greyboard brands MG Sever, MM Sever, N Arctica. Its 2 board machines made by Itochu (Japan) were started in the early 1970s. In 2002-2003 Stupinsky KPK acquired modern process equipment for its product and is planning to start production of GD-3 greyboard.
Several multinational companies involved in corrugated (Stora Enso, SCA and Kappa Packaging) have made considerable investments over the last 7 years in Russian mills specializing in secondary fiber processes, producing testliner and fluting for internal consumption as well as for export.
The largest and most efficient Russian mills (see Fig.3) processing recovered paper (capacity of more than 100,000 tons of waste paper) are St. Petersburg KPK (approx. 18% of the market in 2004, according to PakkoGraff), owned by forestry industrial group Ilim Pulp Enterprise, Naberezhno-Chelninsky KBK (12.5%), Aleksinskaya KF (12.1%), Stupinsky KPK (10%), and Kartontara (9%). The smaller secondary fiber processors like Balakhninsky CKK, Permsky CBK, Svetogorsky CBK, Ryazansky KRZ and Karavaevo can handle from 20,000 to 50,000 tons of secondary fiber. The rest of the industry is smaller regional mills with the intake of 20,000 tons and below.
So far the government is dealing with the growing demand for high quality coated board for packaging by creating encouraging environment for imports. In 2003 the import duty for coated chipboard was reduced from 15% to 5%. This measure caused uproar from the domestic paperboard industry looking for investments to upgrade aging equipment and start manufacturing the higher quality board, which is currently imported. According to the Russian paper magazine CBK, only 10% of capital assets in the paperboard industry is up to date, with half of currently operating production equipment having been built 15 to 30 years ago and a quarter of it being over 30 years old.
There are several projects in the making to build greenfield paperboard mills in Central and Northwest Russia, Siberia and the Far East. Different investment groups from Western Europe, the US and recently China are involved in various stages of the projects. Despite high interest no significant investment funds have materialized yet. The cost of a modern greenfield pulp and paper mill built in Russia may vary from $500 million to $1.5 billion and cautious western investors are snapping up small timber mills and converting plants in the range of $50 to $100 million.
- UPM-Kymmene group (Finland) is in negotiations for a $1billion virgin pulp and paper mill project in the Russian Northwest with two sites in Vologda and Leningrad regions.
- Chinese companies Jengjun, Tsida and Huajen are funding ($530 million) construction of a pulp mill in Siberia. The mill site is 70 miles from the Chinese border and will provide employment for about 1300 Chinese citizens, due to the absence of local labor. The capacity of the mill is 200,000 tons of unbleached pulp by 2008 and 400,000 tons by 2010.
- The project in Turtas (Tyumen region, Siberia) is offered for investment by the regional government. The greenfield mill will produce 400,000 tons of mechanical pulp annually with about 350,000 tons to be converted into coated paperboard, topliner and fluting. The investor for the $890 million project has not been identified yet.
At the present time there is no clear and consistent Russian classification of chipboard grades mostly due to content and quality variations among local producers. This market is heavily dependent on imported higher quality coated greyboard for packaging (see Fig. 4). Basic technical requirements are still covered the Soviet government standard GOST 7933-75 “Boxboard” which was issued in 1975. This standard contains major paperboard specifications referring to content and coating, which are defined by Cyrillic letters (categories M, MHO, HM, A, ?, ?, and ?) and used by local producers along with brand names for the product. Technical aspects are also covered by the German DIN 53121 standard. For the last 10 years with the influx of imported coated greyboard from Europe and Asia local suppliers and traders use internationally accepted GD (Geschtrichener Duplex), GT (Geschtrichener Triplex) and WLC (White Lined Chipboard). A greater part of the Russian coated greyboard products is sold under GD-2 and GD- 3 versions.
Chipboard Market in Ukraine
Since gaining independence in 1991, Ukraine has put forth considerable effort to regain its reputation as the bread basket of the USSR. At that time, it provided more than a quarter of all Soviet agricultural output thanks to good climate and fertile black soil. Recent success with agricultural produce has shown the country’s potential as a major food supplier and exporter, even when farmers are hindered by inefficient practices and the slow pace of economic reforms.
Ukraine is rapidly developing its own packaging market. Paperboard packaging is leading the way in terms of growth, with greyboard dominating. With a current price of $500-$550 per ton (for both domestic and imported), greyboard is becoming a material of choice for struggling Ukrainian users and takes about 80% share in the market. Currently Ukraine is not producing primary pulp board for premium packaging and imports 50-60% of it from Poland, the rest coming from Finland and Sweden. The major greyboard exporters to Ukraine are Turkey, Austria, Germany, Bulgaria, Slovenia and Serbia, providing in general a higher quality material than domestic suppliers.
An efficient waste paper collection system, inherited from the Soviet Union, was operating until 1991. After Ukraine gained independence this trade has been struggling; however, improvement is being brought about slowly by growing paper consumption (according to the Paperboard and Corrugated Magazine, recent annual paper consumption growth in Ukraine is about 10,000 tons). Major Ukrainian mills like Kievsky KBK launch their own collection policies and heavily rely on imported waste paper. Currently the imported vs. domestic waste paper ratio is 70% to 30%.
The major Ukrainian board mill Kievsky KBK (Obukhiv, Kiev Region) produces 50-60% of greyboard fluting and testliner as well as other types of secondary fiber packaging. It is gradually closing a quality gap between domestic and imported stuff. This Kiev mill is the largest and most modern paperboard manufacturer outside Russia in the newly independent states ($66 million in 2003 sales) and employs 2,300. Quality wise, Kievsky KBK’s board is better than Bulgarian, Slovenian or Serbian, approaching very close to Turkish and some Polish brands, but far behind German and Austrian chipboard. The current price (as of June 2005) of Kiev mill’s uncoated greyboard is currently about $480-$500 per ton. The price of a similar product in the West is about $450. However, with shipping and custom fees added, imported chipboard stock looses its competitive advantage. International traders might consider exercising flexibility in their pricing.
According to MapUkraine, the local paperboard trader, Ukraine imported over $230 million in paperboard material and exported about $30 million. The economic reforms that began after the 1991 separation from Russia were inadequate to ensure a commitment to a Western style business model. With its legal and political corruption, lack of clear tax, legal and licensing laws, strict government regulation and high import tariffs, Ukraine’s economy did not attract considerable foreign investments for much of the 1990s. However, according to The Repton Group, during the last 4 years the country’s economy has shown an over 6% annual growth, a positive trade balance and low inflation. The Ukrainian Government plays a significant part in pricing policy formation by applying or calling off the 10% import duty to the paperboard industry segment. These changes, which take place with the frequency of a 3 month to a 1 year period, may require constant market monitoring by potential traders.