Smuggling hurts the paper industry-like other businesses

One of the many industries we have that has been greatly affected by the global meltdown is the paper industry.

We got some inputs from Mr. Miguel del Rosario, president of the Pulp and Paper Manufacturers Association of the Philippines, a 15-member organization of the biggest paper manufacturers in the country today. There has been a big contraction in orders from abroad, specifically for brown paper which is essentially used for packaging. If it is any consolation, this is not happening only in the Philippines. China has been more severely affected than us. The difference, I guess, can be traced to the scale by which both countries operate.

China used to import a lot of waste paper from us to use as the basic material for their paper products. Recently, they embarked on a huge expansion program for paper manufacturing, with several mills opening to serve both domestic and global needs. I guess they were banking on the economy of scale to serve them well where they could offer the best prices and eventually dominate the market, easing out the smaller players.

The 2008 debacle which happened in the 3rd quarter of 2008 hit them with the force of a sledgehammer. By now, many of the paper mills and plants in China, just recently opened, had to close up, albeit temporarily. Orders from foreign countries were coming in trickles, and the domestic market was not big enough for so many factories operating at full capacity with new and modern machineries.

Being small sometimes does have its benefits, though we can’t always invoke this if we are to survive in our globalization efforts. Right now, we still export, but mostly to the ASEAN region, namely Malaysia, Vietnam, Singapore, and previously, China. Singapore does not have paper manufacturing plants, so they rely heavily on imported paper which the Philippines and Thailand supply.

Because we have managed to survive, our paper export seems to be weathering the storm. It is not thriving, but the paper manufacturers have managed to post a minimal growth. Not stagnating and definitely not posting negative figures speak well for any company these days in the face of this global contraction. Of course, the figures are nowhere near what the BPOs have made, but the paper manufacturers are encouraged by this minimal growth nonetheless.

Speaking of BPOs, the industry registered a very healthy $6.4 billion in revenues. Not many know that the Philippines is no. 15 in the world BPO ranking. Europe remains as the biggest BPO provider. Mr. Ed Lacson, president of PCCI, says that if the country can only tap 10 percent of this business, it is going to drive the economy out of the doldrums. We hope we can see a little more aggressive marketing from the country’s BPOs out there to tap the European market.

Back to the paper industry. Before the pressures eased in the 2nd quarter of 2009, they had to decrease production significantly and suffer the low prices of paper. Export is down, so there is very little demand for packaging materials. It got so bad, according to Mr. del Rosario, that the woes trickled down to the “dyaryo/bote” guys who depend on this trade for a living. The manufacturers used to pay them P6.50 - 7.00 per kilo before the global crisis. This same waste paper now earns for them P2.00/kilo.

This industry is not only about the factories and the people they employ here. The contraction has severely hit the marginalized bote/dyaryo people, and the traders who collect these to sell to the big factories. In the Philippines, we have the most efficient recyclers, using waste paper as base for all the paper products. When these go to the grinder, the manufacturers add virgin fiber, which are usually imported from the West (U.S., Europe and Latin America) in order to strengthen the paper. This, again costs them a lot in foreign exchange, so with the peso sliding, their problems are compounded.

What adds to their woes is the rampant smuggling which hurts the business more than anything else because it severely curtails their domestic market. Smuggled paper, usually from China, come in with very little tariff because they are either mis-declared, under-valued or out and out smuggled. Some are declared as waste paper, which carry zero tariff. When they find their way to Divisoria, they are sold for a pittance, and you can’t blame parents for opting to buy these cheap products. As for quality, well, it doesn’t take a rocket scientist to know that these products constitute dumped surplus, so what can one expect?

Smuggling has been every manufacturer’s bane. Our anti-smuggling laws seem pernicious, but the Kyoto Protocol seems promising at least. This is a harmonized effort of some ASEAN countries to fight the evils of smuggling. Let’s wait and see, but knowing how the Pinoy can innovate around rules, we need to crack down on our own just as hard. The PCCI cites that the Philippines loses somewhere between P56 – 100 billion in taxes from smuggled oil alone!

The association has tried to lobby with the Dept. of Trade & Industry to help them. They are petitioning for some safeguards at least, like the proper levy on imported paper for instance. According to Mr. Del Rosario, he personally went to the DTI to lobby for their cause. He was referred to the agency in charge of cases like theirs-the Export Development Agency of the Philippines. As he waited in line for his appointment, it suddenly struck him that this was a lost cause, right from the start, if this was the agency that was supposed to take up their cause. Sure enough, the answer was negative-they couldn’t help the paper manufacturers. They were knocking on the wrong door.

The paper manufacturers face a dim future, but they are doggedly plodding on, undaunted by the prospects. The factories spent a lot putting up their plants, buying the machineries. I was informed that it takes at least two years to build a paper plant. Most of these machineries which were purchased mainly from Japan and Europe back when the peso was still quite strong are old now. The youngest would be around 10 years old, and it would be difficult to replace them now with newer, more efficient machines. That is probably the reason why we haven’t seen any expansion in this industry, nor are we likely to see any in the near future.

Rather than close their plants like many in China have done, the paper manufacturers have opted to just decrease production, and wait for better times. PIPCO, the country’s only integrated paper company, is almost closed and they cite the very limited local and foreign demand as their reason. Another manufacturer, the only one who manufactures paper for the broadsheets, complains that some broadsheets even use imported paper rather than patronize the local industry. Where do they go from here?

Mabuhay!!! Be proud to be a Filipino.

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