What factors will help packaging paper manufacturing businesses grow?

According to SSI Securities Corporation, the consumption of paper packaging in Vietnam is expected to increase by 12% during the 2021-2025 period thanks to the continuing urbanization. SSI forecasts that the urbanization rate in the country is expected to reach 40% in 2024, compared to 37% in 2019. The paper packaging sector will also benefit from the rapid development of e-commerce in Vietnam.

The Department of E-commerce and Digital Economy reported that Vietnam's e-commerce grew impressively in 2020 with an 18% increase, reaching a market size of $11.8 billion, estimated to account for 5.5% of the total retail sales and consumer service revenue nationwide. Vietnam is also the only country in Southeast Asia to achieve double-digit growth in e-commerce. In addition, Vietnam's total export turnover will maintain its growth momentum, which will drive future demand for paper packaging.

In terms of production capacity, according to statistics from the Vietnam Paper and Pulp Association (VPPA), at the end of 2020 and the beginning of 2021, there were 8 industrial packaging paper mills put into operation with a total designed capacity of about 1.4 million tons/year. By the end of 2020, with a capacity of about 800,000 tons, the businesses included: Marubeni Corporation 450,000 tons/year, Khoi Nguyen Paper Co., Ltd. 120,000 tons/year, Phat Dat Trading Production Paper Co., Ltd. 100,000 tons/year, Global Trading Production Co., Ltd. 80,000 tons/year, and Tan Huy Kiet Trading Company Limited 50,000 tons/year.

These paper production lines will operate at nearly maximum designed capacity in 2021 and will supply the market with over 700,000 tons of paper.

In 2021, some additional production lines are expected to be put into operation, with a total designed capacity of approximately 600,000 tons/year; of which, Miza Corporation will operate a line of 120,000 tons/year, Hung Ha Paper Co., Ltd. 100,000 tons/year, Hoang Van Thụ Paper Joint Stock Company 100,000 tons/year, Viet Tri Paper Joint Stock Company 150,000 tons/year, and other units about 100,000 tons/year

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VPPA also points out the positive factors affecting the growth of paper packaging in Vietnam. These include the target for national export turnover to increase by 5%, the industrial production index to rise by 8%, and maintaining the trade surplus as in 2020. Key sectors that use a lot of paper packaging aim for high export growth of over 10% in 2021, such as agricultural, forestry, fishery goods, and processed industrial goods including textiles, footwear, wooden products, all kinds of phones and components, computers, electronic products and components, vehicles and spare parts, etc.

The trend of shifting industrial factories of FDI enterprises from major production centers to Southeast Asian countries or relocating back to domestic production (multinational companies from Japan, the U.S., and the EU) has changed the structure and composition of the economies of these countries, including Vietnam.

Additionally, there is a shift of businesses from China, Hong Kong (China), and Taiwan (China) toward processing paper packaging for export due to the challenge of the 25% tariff imposed by the U.S. on China from late 2019 to mid-2021, which has begun to take effect.

The year 2021 will also be a year to maximize advantages from the free trade agreements (FTAs) that Vietnam has signed, especially new agreements such as the Vietnam-EU Free Trade Agreement (EVFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)… These agreements will enhance industries with a high demand for paper packaging such as agriculture, fisheries, textiles, leather, and electronics. Domestic retail consumption is also forecasted to rebound strongly by over 10%.

According to VPPA, the reduction of plastic waste, plastic bags, and the increase in the encouragement to use paper packaging substitutes are showing signs of widespread and strong development in Vietnam in 2021. Furthermore, global and Asian demand for paper packaging is expected to rebound by over 3.5%. Many countries and regions will issue bans or even restrict the use of plastic bags, especially in large economies that are implementing this measure strongly during 2021–2022.

Exports of paper packaging and paper packaging to the Chinese market in 2021 are expected to be higher than in 2020, as China is projected to be short of more than 5 million tons, which may increase further when the ban on imported recycled paper officially comes into effect from January 1, 2021. Higher paper prices due to domestic price pressures and particularly environmental and energy costs (tightened environmental policies since October 2020).

Exports of paper packaging and paper packaging to markets participating in new trade agreements such as CPTPP, EVFTA will significantly increase due to tax incentives and growing trade transactions. However, in terms of challenges, exports to China will also have to compete fiercely with many other countries as China has reduced the import tax on corrugated paper to 5% in 2020 for many countries, previously above 7% depending on the country, while this 5% tax was previously only favored for some ASEAN countries.

Vietnamese packaging paper manufacturers will also face many challenges, such as consumption competition among domestic manufacturers due to the introduction of more new production lines; competition with imported paper: imported paper is expected to increase significantly from countries in the region such as Laos (480,000 tons new), Malaysia (500,000 tons new), and from Indonesia, Thailand due to their low domestic consumption, leading to increased exports to Vietnam.

Packaging paper manufacturers also face the challenge of a lack of raw materials and maintaining high prices in the first half of 2021 due to the main source of recovered paper being North America, Europe, and Japan still being heavily affected by the COVID-19 pandemic.

Social distancing has reduced the rate of raw material paper collection; in addition, the lack of containers and high freight costs also pose significant problems, leading to a clear shortage of materials and high prices.

Meanwhile, the domestic collection source is low, the quality of materials is not high, and it is insufficient to meet demand when new capacities are expected to increase by 1 million tons.

Despite facing many significant challenges, paper enterprises have seized many opportunities to rise. VPPA reported that in 2020, total paper packaging consumption reached 4.286 million tons, growing by 0.9% compared to 2019. Although the growth rate of consumption is low, compared to the global growth rate of -5.0%, this is still a very impressive number.

Specifically, exports of paper packaging in 2020 reached 1.526 million tons, growing by 95.3% compared to 2019, marking the largest export increase in the industry’s history.

2020 was also a year when paper enterprises had very positive business results, particularly the strong growth in the paper packaging sector.

For instance, Dong Hai Ben Tre Joint Stock Company (stock code: DHC) reported that in 2020, its revenue from sales and services reached 2.888 trillion VND, more than double that of 2019, while its after-tax profit was 2.15 times higher than the previous year, reaching nearly 392 billion VND. This is the highest profit level in 13 years.

According to Viet Capital Securities Corporation (VCSC), Dong Hai Ben Tre's business results exceeded expectations mainly due to its paper sector. This securities company estimates that the paper sector's revenue in 2020 accounted for 88% of the company’s total revenue; in which, revenue from the packaging sector accounted for 12% of total revenue, up 2% compared to 2019. Specifically, in the fourth quarter, revenue from packaging increased by 8% compared to the same period in 2019 and 5% compared to the third quarter of 2020.

Regarding the prospects for the paper industry in 2021, VPPA believes that paper manufacturing businesses have both opportunities and challenges ahead, but the Vietnamese paper industry, especially those producing packaging paper, has and will overcome difficulties to seize opportunities for development.