Industry Structure and Competitiveness PAPER INDUSTRY Introduction In the manufacture of paper-based packaging, the following paper products are used: kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating medium, and corrugated paper. The attached linkage chart shows the flow of commodities from the raw materials to paper-based packaging (see Figure 1). The production process from raw materials to finished cartons and boxes is as follows: ➲ Pulp and waste paper preparation – involves sorting, handling and feeding of fiber and old carton/paper into the stock line. ➲ Stock preparation- involves pulping, steaming, screening, refining and blending of different grades of raw materials. ➲ Filler and additives preparation – involves the storing, diluting and feeding of rosin, alum and dye to the pulp stock in the machine chest. ➲ Board forming – involves the final screening, pressing (removal of water), drying and surface sizing of the board. ➲ Finishing – involves the winding, and slitting of rolls to the desired trim size and roll diameter before storing in the warehouse. The objective of this study is to provide a competition analysis of the paper industry which serves as input to the paper-based packaging industry, using an analytical framework specifically developed for this purpose, and to make recommendations, if necessary, on how to make the industry competitive or improve its competitiveness. It is hypothesized that to improve the input sectors of the Philippine export industry will translate into competitiveness or better competitiveness of Philippine exports. The packaging industry is critical to the export sector since high-quality and sophisticated packaging is a requirement for success in the global market. Competition and Competitiveness Analysis I Defining the Relevant Market A relevant market is defined as, “… a product or group of products and a geographical area in which it is produced or sold such that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future producer or seller of those products in that area likely would impose at least a ‘small but significant and nontransitory’ increase in price, assuming the terms of sale of all other products are held constant. A relevant market is a group of products and a geographic area that is no bigger than necessary to satisfy this test1”. Simply put, a relevant market is defined by the product or service involved, the geographical area in which said product or service is sold, and the sellers and buyers of such product or service. Product Market The relevant product market is defined as local and imported kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating medium, and corrugated paper. In defining the relevant product market, the approach followed is: assuming a hypothetical monopolist for a product, would said monopolist profit by imposing at least a small but significant and non-transitory increase in price? In manufacturing cartons, boxes, sacks, bags and other paper-based packaging containers, kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating medium, and corrugated paper are used. Assuming that a hypothetical domestic monopolist producing these paper products were to impose a small but significant and non-transitory increase in the prices of said products, the price increases would probably prove unprofitable since consumers would likely switch to imported products. Since the monopolist is unlikely to profit, a relevant product market limited to locally manufactured paper products is too narrow, i.e. imported paper products should be considered part of the product market. If the question is again posed on whether a hypothetical monopolist producing local and selling imported paper products would profit from an increase in its prices, then the answer would be positive since there would be no other sources of above products which consumers could switch to. Thus, the relevant product market is defined as local and imported kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating medium, and corrugated paper. 1 As defined by Section 1 of the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines dated 2 April 1992. ! Geographical Market The relevant geographical market, specifically for inputs to the paper- based packaging industry, is defined as the Philippine national territory. The geographical market is defined thus: it is the region where a hypothetical monopolist, being the only present or future producer of the product, could profitably impose at least a small but significant and non-transitory price increase holding the terms of sale constant at all other locations. Defining the geographical market has become much more difficult with the increasing globalization of markets and the use of electronic trade, e.g. ordering through the Internet. For purposes of this study, the geographical market for the inputs to the paper-based packaging industry will be defined as the Philippine national territory. ! Participants in the Market The relevant participants in the market are the mills manufacturing kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating medium, and corrugated paper for the paper-based packaging industry, and importers of such materials for sale to the domestic market. The local pulp and paper industry is currently composed of 42 mills. Of these, one (1) is a fully integrated pulp and paper mill, four (4) are purely pulp (abaca) mills, and thirty- seven (37) pulp and reclaimed fiber mills. The major mills registered with the Board of Investments (BOI) and producing liner board, sack kraft, and corrugating medium are listed in Table 1. The smaller firms producing specialty paper, i.e. paper not used for packaging goods for export, do not form part of this study. PICOP is the largest integrated wood-processing complex. As of 1996, its capacity is 375,714 metric tons per year. The company is a major manufacturer of corrugated carton, pulp and paper products, and containerboard products aside from supplying 80% of the newsprint paper requirements of newspapers. The aggregate production of four (4) mills - PICOP, Manila Paper Mills (MPM), Trust International Paper Corporation (TIPCO), and Container Corporation of the Philippines - account for at least 43% of the total annual capacity of the entire industry. The production of packaging paper and board (composed of liner and other boards, corrugating medium and sack kraft) is dominated by PICOP with a capacity of 66,000 MT per year, and formerly by MPM2 with a capacity of 60,000 MT per year. While PICOP and MPM account for 40% of capacity, 16 other mills contribute to the remaining 60%. The annual capacity of paper and board is 1,100,000 MT. The Pulp and Paper Manufacturers’ Association, Inc. (PULPAPEL) is composed of the following major paper mills: Bataan Pulp and Paper Mills, United Pulp and Paper Company (UPPC); Mayleen Paper Inc., TIPCO, and PICOP. Since imported paper products are considered part of the product market, the import sector is another market participant. II Calculating Market Share In order to make an accurate evaluation of the degree of competition within a market and the presence of market dominance and abuse, the calculation of market shares is necessary. 2 MPM has already ceased operations, per BOI data. Market shares have to be computed using the best indicator of a firm’s significance as a market player both in the present and in the future. The level of sales is generally deemed a desirable indicator. However, this data could not be obtained due to the refusal of the participants to divulge information. With no information on sales by paper producer, market shares were computed on the basis of gross revenues. Since the import sector is a market participant, the value of imports of the relevant paper products was also culled. A competitiveness analysis of the Philippine market for paper-based packaging is not, however, complete without considering suppliers thereof that are based abroad but provide the needs of importer. For the purpose of this paper, foreign manufacturers and suppliers shall be lumped together as one group and measure their impact on the market by computing the value and volume of imports of such products. The market is now considered to be composed of gross revenues plus imports and the relevant shares were calculated. The top five (5) players in the market and their respective revenue shares from 1995 to 1997 are shown below: Table 1. Revenue Shares: 1995 – 1997 Players 1995 1996 1997 Imports 26.1 36.2 35.3 PICOP Resources Corp. 38.1 16.2 22.4 Manila Paper Mills, Inc. 8.7 10.3 4.0 Mayleen Paper, Inc. 6.4 8.3 8.0 United Pulp and Paper Co., Inc. 5.2 8.2 7.4 Source of Basic Data: Foreign Trade Statistics, National Statistics Office Top 7,000 Corporations, Philippine Business Profiles and Perspectives, Inc. For the purpose of estimating the market shares of imports, importers were treated as a single market supplier. The lack of available data makes disaggregation according to importer impracticable. In addition to this limitation, import data are undervalued, on the one hand, since CIF values were used instead of landed cost (in cases where the importer is the end-user) or selling price (in cases where the importer is a trader). Assumptions to be used to adjust these values to the level of landed cost or selling price may further distort the true cost of the imported product. On the other hand, the import figure is overvalued since data cannot be disaggregated into the value of inputs used for the manufacture of paper packaging materials and the value of inputs used for the manufacture of other made-up paper articles. III Evaluating Level of Concentration Market concentration depends on the number of firms in a market and their respective market shares.