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Africa: a potential for paper industry

It is widely speculated now that global key developed markets have begun facing growing political uncertainty and a plateauing in their commodity markets and profitability, possibly prompting investors with a risk appetite to pursue venture opportunities throughout global emerging markets, not the least interesting of which is Africa.

The second largest continent – which comprises of 54 diverse countries and a total population of more than 1.2 billion - boasted an economic forecast of 5% growth per year in recent years, a number which only seems to be climbing upwards, despite the associated risks for tighter global financial conditions and the geopolitical circumstances of some of the more fragile African states.

 

The African Scene

Nigeria – who is by far Africa’s biggest producers of oil with over 2.5 million barrels produced every day – has the largest population in the continent, with more than 190 million people living in it.

Of all the African countries, Algeria has the biggest surface area, covering 2,382 Km2 and occupies around 7% of Africa, and boasts a steadily growing population of 39 million.

The growth rate of the African population as a whole is so rapid, that studies indicate Africa is poised to become the most densely populated continent in the next two decades, surpassing the population of China and India.

A McKinsey report on the continent, titled the African Consumer, estimates that the African consumer-facing industries are expected to grow by more than $400 billion by 2020. Due to a lack of proper market research, foreign investors are currently hesitant about investing in Africa, although there is serious profitability to be made by being the first to enter the virgin markets scattered across the continent, especially in the tissue paper industry.

It should be noted that Africa’s population is not only the fastest growing; it is also the youngest in the world. The complex and diverse continent’s population is tech-savvy, brand aware, and quality conscious.

As it stands, the consumer-facing market mentioned above is heavily concentrated in 10 out of the 54 African countries – Algeria, Angola, Egypt, Ghana, Kenya, Morocco, Nigeria, South Africa, Sudan, and Tunisia – which account for around 81% of Africa’s private consumption in 2011, according to the McKinsey research.

Taking the above in mind, a perceptive entrepreneur would be aware that mid-tier, less urban cities would pose less competition, better profit margins, and a more-accessible virgin territory for starting up a paper business, while the effectiveness of investing in rural areas is yet to be established, given how 40% percent of the African population lives in cities, where urban spending is increasing at double the rate of rural spending.

 

Paper Production in Africa

The type of paper being produced by the African mills spans from tissue, board, fluting and liner, to writing and printing and newsprint.

As it stands, the following countries hold Africa’s major paper production: Algeria, Egypt, Kenya, Morocco, Nigeria, Tunisia, Tanzania, and South Africa.

On a smaller scale, we see that Ghana, Madagascar, Uganda, Zambia, Zimbabwe are beginning to pick up the pace in their own local paper production mills, a  challenging endeavor to wean off importing paper-based products, with hopes to have a larger role in their own domestic markets.

Strictly from a quantitative standpoint, South Africa currently dominates the packaging paper as well as tissue paper machine distribution market from a machinery stand point. The country boasts 18 different paper mills containing 22 machines, and currently exports its products to neighboring countries like Botswana, Zimbabwe, Namibia, Mozambique, Zambia and Swaziland.

In North Africa, Egypt holds the highest number of Paper Mills and machines and is currently operating at 8 Tissue Mills with 14 machines and more than 38 Paper Mills with 50 machines.

 

Opportunity in paper industry

The opportunities present in domesticating tissue paper production in Africa are clear, especially given the above-mentioned surge in Africa’s population and private consumption. Certain countries across the Northern and Western side of Africa may have a head start, as energy, water, and manpower are more readily-available, allowing them to expand their tissue mill installation/operation plans with lower risk.

It should be kept in mind, however, that the tissue paper sector was known to be one of the least affected markets by the 2008 crisis. The resilient, low-risk market means that the smaller, more urban countries in Africa still stand a chance to compete in the local and domestic tissue mill installations, as many major investments are piloting small tissue machine projects, which are low cost investments compared to other types of paper machines.

Various types of opportunities are available for the tissue industry in the nascent parts of Africa. Smaller or poorer countries may choose to invest in other tissue paper grades or seek partnerships with international investors to develop and change the type of paper grades used within their factories.

Others may pick investing in secondhand tissue mills, or modifying existing Fourdrinier machines into tissue paper production.

Given how diverse Africa is, it is important to note that the above measures may not apply to a country like South Africa or Nigeria.

In South Africa, we are witnessing extremely competitive large players in the tissue production and distribution market. Existing mills are in a constant cutthroat battle to improve their quality and increase their machines’ efficiency over their competition.

In Nigeria, the country’s consumer spend is also constrained due to currency depreciation and interest rate hikes, meaning that tissue producers have to seriously consider aggressive promotions throughout the year to drive market performance.

 

Resource Availability

Let’s start with the basics: when it comes to electricity, Africa has a huge discrepancy in the rates across the continent. For example, tariffs in South Africa and Zambia are among the lowest in the world, while prices in Djibouti and Gabon are among the highest globally.

Water, on the other hand, is available in the Western Africa but not in the rest of the continent.

It is not as readily available in other parts but can possibly be sourced with the association of the governments in Sub-Saharan and Northern Africa.

Manpower is available locally at very cheap prices, due to the young median age and growing unemployment rates in some of the emerging markets within Africa.

Moving on to the machinery, the latest technology in paper production is not available in the majority of the African market. Except from the North part of Africa, most of the continent is a virgin territory in this aspect, meaning that international financers with a risk appetite to invest in the latest technology can have a head start against local competitions relying on machinery that is decades old.

Raw material such as virgin pulp and de-inked pulp are predominantly imported, while OCC, office waste and mixed waste are often recycled locally.

 

The future of African paper mills

Currently, 2,750,000 tons of packaging paper and 1,850,000 tons of tissue paper are being produced annually in Africa. With new tissue paper mills opening up, and as the awareness on market demands and production technology is spread over the continent, the tissue production number is expected to rise by 500,000 additional tons in 2020.

While mass production of tissue paper is a profitable venture, mainly due to its consumer demand and low initial investment possibility, it is not the only viable option to start a profitable paper business.

In fact, with few modifications, existing African paper mills can easily shift their current production into the field of manufacturing Crepe paper, MG paper, or standard packaging paper with a wide range of grades.

Investors who wish to play it safe need to keep in mind that low production capacity tissue machines are widely available, and even these are capable of producing tissues with a higher profit margin.

Once a deeper understanding of the local and regional market is made, existing producers may pursue multiple special paper grades, such as high-quality printed packaging paper.

 

A glimpse at the challenges

While investors expect to make good profits in the paper manufacturing industry in Africa, picking the right paper grade and the exact right time and location is imperative to avoid the associated regulatory and strategic risks.

A case study worth noting is the Kenyan-based Pan Paper, now known as Rai Paper, which was one of the largest paper makers in East Africa.

Due to a cultural misunderstanding, lack of experienced management, and raw material procurement challenges, the scope of the paper mill’s output dropped drastically throughout the 2000s, leaving behind thousands of locals who depended on the paper mill for their living. This was followed by a 2 billion Kenyan Shilling (around USD $19.5 million) investment by the government through the ministry of industrialization, in a failed effort to revive the plant, which unfortunately resulted in it shutting down completely in 2009.

But it’s not all doom and gloom for Pan Paper, as the company has since then recovered after 11 years of closure. The company has recently been injected with a large investment from the Rai investments group, and the paper mill is operational since February 2017 under the name of Rai Paper.

Moreover, in the east African region the biggest paper mill is being built in Ethiopia; As a result of the agreement signed between Yekatit Pulp and Paper and China Engineering Corporation (CEC), 70,000 tons of packaging paper and 15,000 tons of tissue paper will be produced at the new facility.

 

The Bottom Line

With globalization and internet access on the rise in Africa, The African consumer is now more than ever brand conscious, and personal hygiene as well as living standards improvement, could become a driving force for the growth in consumption of paper products and hygiene paper.

Because it is difficult to lump such a diverse continent into one generalization, business ventures must understand the local culture inside-out. Choices made to invest in African paper mills must offer true value proposition in order to stand out in most of the continent’s nascent markets.

It is also important to conduct a thorough risk assessment of all the interconnected aspects of this industry, from shipping and logistics constraints to possible political instabilities and the willingness of local authorities to cooperate. Overall, our research indicates that the African market is open to all kind of paper grades importation and exportation, and the possibility for growth far outweighs the risks involved.


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Africa: a potential for paper industry