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The paper queen's gambit: China's Nine Dragons bets on Southeast Asia

Leading manufacturer builds $4.6bn plant to overcome supply restrictions

A paper factory in Vietnam. Nine Dragons has stepped up investment in Vietnam and Malaysia to counter the impact of China's ban on wastepaper.   © Reuters

DONGGUAN, China/TOKYO -- When China announced it would stop importing foreign waste -- including a crucial component in the production of cardboard -- Cheung Yan, the co-founder and chairwoman of the country's largest paper manufacturer, faced a government-imposed check on her thriving business that could stunt growth.

Now, three years later, Cheung, known in China as the "paper queen," and her Hong Kong-listed Nine Dragons Paper Holdings have announced plans to build a 30.2 billion yuan ($4.6 billion) factory close to Vietnam, part of a raft of investments that has extended into the Southeast Asian country, as well as Malaysia, to counter the impact of China's ban on wastepaper, the raw material for paper products.

By reconfiguring the supply chain to better integrate Southeast Asia, Cheung will draw closer to becoming not only China's Paper Queen but the reigning queen of the global paper industry.

The newest paper mill, located in the Guangxi Zhuang Autonomous Region along China's border with Vietnam, is anticipated to be one of the biggest in the country once it is completed in 2025. The factory will have the capacity to produce 7.95 million tons of paper a year, with the chief product being base paper found in cardboard.

Nearby the plant will be a port that will be able to receive large ships. Nine Dragons is positioning the complex as a major hub tying China with Southeast Asia.

"This is China's front line facing Southeast Asia," Cheung told local media.

Cheung Yan's path to becoming the reigning queen of the global paper industry runs through Southeast Asia. (From Nine Dragons Paper's website)

In recent years, Nine Dragons has added to its Southeast Asian production hubs. In 2019, the company bought a factory in Malaysia that makes recycled pulp. There are plans to build a base paper factory in that country next year. In 2017, Nine Dragons expanded capacity at its base paper plant in Vietnam.

Informing these moves is the Chinese ban against importing wastepaper. The leadership under President Xi Jinping has phased in cuts to such imports since 2018, and the prohibition reached full implementation this month.

Base paper for cardboard is made from used cardboard, magazines, newspapers and other wastepaper. Chinese paper manufacturers used to procure this material from offshore sources such as Japan, Europe and the Americas on top of domestic suppliers.

Foreign sources made up roughly 16% of wastepaper procurement in 2019, meaning the import ban has left a large mark.

China's consumption of cardboard had once grown by double digits, but that rate has steadily decreased, according to data from the China Paper Association. The growth between 2015 and 2019 has slowed to just 1.2% annually.

With Chinese papermakers unable to rely on a growing supply of wastepaper at home, procuring material from across the border has become an urgent business concern.

Nine Dragon's strategy is based on the fact that recycled pulp is exempt from China's wastepaper ban. China is responsible for about 30% of global paper production, and the market enjoys proximity to Southeast Asia, which is running up imports of wastepaper.

It has become more difficult to collect wastepaper in Southeast Asian countries in large part due to stay-at-home orders related to the coronavirus. The region's demand for wastepaper produced by Japan helped lift the export price to 17.4 yen (16 cents) a kilogram in December, according to Japanese trade data, up from a 2019 nadir that dipped below 10 yen.

The company will procure wastepaper outside of China and send the material to Malaysian facilities where it will be converted to recycled pulp, then ship the intermediate to China. In addition, Nine Dragons will deepen its collaboration with Chinese wastepaper collectors to overcome the shortage in raw material.

The decision to build the new plant in Guangxi represents the step. "Plans for the factory are still in initial stages," said a Nine Dragons manager.

Nine Dragons Paper Holdings is the largest paper producer in China and the second largest in the world. (Photo by Shin Watanabe)

Even so, it appears that the mill, along with other factories in China, will produce base paper for cardboard with pulp procured from Southeast Asia. The government's wastepaper import ban has triggered a reorganization of parts of Nine Dragon's supply chain.

Southeast Asia's sharply expanding internet shopping market is also on the company's radar. Countries in the region are shifting toward the digital economy in response to the pandemic.

The consumption of packaging cardboard "is expected to climb by roughly 5% a year going forward throughout all of Southeast Asia," said a paper industry source. In short, the region will serve as both a source of raw materials and a promising market for finished product.

Cheung began a paper collection business in Hong Kong when she was 27. She later made a name for herself selling recovered paper from the U.S. to China.

In 1998, Cheung was among the first Chinese entrepreneurs to establish a paper manufacturing business. Her company Nine Dragons currently holds a roughly 20% share in the Chinese paper market.

Nine Dragon's strength is rooted in its overwhelming scale of operations. The company's sales of cardboard base paper are estimated at over 13 million tons a year, or more than 3.5 times the nearest Japanese rival Oji Holdings. This places Nine Dragons in a position to pare costs through mass procurement and production.

The annual production capacity at U.S.-based International Paper, the world's leading paper producer, is forecast at 17.7 million tons this year, amounting to a 22% drop compared with 2019. The change is the result of the heavyweight getting rid of its print paper operations.

Meanwhile, Nine Dragons plans to boost its annual capacity past 19.3 million tons in 2022, up 11% from 2020. As the Southeast Asian strategy moves forward, the company has the global lead in its sights.

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