Bureau o f Agricul tural Economics, Canberra

A BAE submission to the IAC

Project 51326

PULP, PAPER AND PAPERBOARD INDUSTRY

Australian Government Publishing Serv ice Canberra 1986

@Commonwealth of Australia 1986

ISSN 0814-9445 ISBN 0 644 05364 X

PRINTED BY PlRlE PRINTERS SALES PTY LTD, FYSHWICK, A.C.T. 2-

I n November 1985 t h e M i n i s t e r f o r Indus t ry , Technology and Commerce, Senator John Button, announced an inqu i ry i n t o t h e pulp , paper , paper p roduc t s and p r i n t i n g i n d u s t r i e s . T h i s i n q u i r y a r o s e because a s s i s t a n c e t o t h i s i n d u s t r y group a s a whole has no t been reviewed f o r more t h a n twenty y e a r s and a s a r e s u l t t h e r e is wide d i s p a r i t y i n c u r r e n t arrangements a f f e c t i n g those i n d u s t r i e s .

A s p a r t of i ts re sea rch program t h e Bureau conducts r e sea rch i n t o market and economic p o l i c y i s s u e s concerning t h e f o r e s t r y s e c t o r . I n t h i s submission t h e emphasis is on t h e i s s u e s of longer term demand, t r a d e , import s u b s t i t u t i o n and a s s i s t a n c e f o r pulp , paper and paperboard.

P repa ra t ion of t h e submission was c a r r i e d o u t by Paul Morr is , Moazzem Hossain, Phi1 Paul and Ken Menz of t h e F o r e s t r y Economic Research S e c t i o n under t h e supe rv i s ion of Onko Kingma.

ANDY STOECKEL D i r e c t o r

Bureau of A g r i c u l t u r a l Economics Canberra ACT

August 1986

iii

ACKNOWLEDGMENTS

A number of i n d i v i d u a l s and o r g a n i s a t i o n s were very h e l p f u l i n provid ing in fo rma t ion and d i s c u s s i n g t h e under ly ing i s s u e s . I n p a r t i c u l a r , s p e c i a l thanks a r e due t o M r B. La Fon ta ine of t h e Pulp and Paper Manufac turers Fede ra t ion of A u s t r a l i a , Mr A. OtShannessy of Associa ted Pulp and Paper M i l l s , Mr G. Bowd of AMCOR Ltd and Mr B. S t a f f o r d s of A u s t r a l i a n Newsprint M i l l s Ltd.

CONTENTS

Summary and Conclusions

1. Introduction

1.1 Background 1.2 Terms of reference 1.3 Objectives and scope of this submission

2. Structure, Market Share and Comparative Advantage

2.1 Product description 2.2 Industry structure 2.3 Australia's market share of domestic consumption 2.4 Australia's comparative advantage

3. Current Assistance Arrangements

3.1 Tariffs and bounties 3.2 By-law 3.3 Preferential trading agreements 3.4 Closer economic relations agreement

4. Market Prospects

4.1 Future consumption trends 4.2 Demand for imports

5. Policy Options

5.1 Uniformity of assistance levels 5.2 Tariff -bounty mix 5.3 Anti-dumping legislation and compensatory assistance 5.4 Overall level of assistance 5.5 Assistance to the forestry sector 5.6 Research and development 5.7 Industry policy - need for co-ordination

Appendix A: Terms of Reference and Items covered by the Reference on Pulp, Paper, Paper Products and Printing Industries

Appendix B: Characteristics of World Production and Trade of Pulp, Paper and Paperboard

Appendix C: Assistance to the Pulp, Paper and Paperboard Industry in Australia

Appendix D: Long Term Consumption Projections of Pulp, Paper and Paperboard in Australia

Appendix E: Import Demand for Printing and Writing Paper

References

Text Figures

1 Investment in land, buildings, plant and machinery in the pulp, paper and paperboard industry

2 Capital intensity in the pulp, paper and paperboard industry relative to capital intensity in total manufacturing

3 World and import prices of kraft packaging and printing and writing papers

4 Projections of paper and paperboard consumption

Text Tables

Australian pulp, paper and paperboard mills

Employment and capital in the pulp, paper and paperboard industry and total manufacturing

Trends in the consumption of pulp, paper and paperboard from 1976-77 to 1984-85

Australian production, trade and apparent consumption of pulp, paper and paperboard in 1974-75 and 1984-85

Estimated contribution to costs of inputs in paper production

Costs of major inputs in paper production in 1984-85: by country

Scale and utilisation of pulp, paper and paperboard capacity in 1984: by country

Average effective rates of assistance to the paper, paper products, printing and publishing industries group

Imports of pulp, paper and paperboard in 1984-85: by tariff level

Bounty entitlements in the pulp, paper and paperboard industry

Australia's trade in pulp, paper and paperboard with New Zealand in 1984-85

Projections of pulp consumption

Appendix Figures

B1 World production of pulp, paper and paperboard 4 8

B2 World exports of pulp, paper and paperboard 4 8

B3 Real world prices for pulp 49

B4 Real world prices for paper and paperboard 4 9

D1 Idealised long term pattern of consumption of a product 61

D2 Projections of paper consumption to 2020 67

El Import demand with perfect substitutability and free trade 74

Appendix Tables

B1 World exports, production and prices of pulp, paper and paperboard 44

B2 Exports of pulp, paper and paperboard in 1984: by region and country 4 5

B3 Imports of pulp, paper and paperboard in 1984: by region and country 4 6

B4 Variability of world production, trade and prices of pulp, paper and paperboard 4 7

B5 Assistance measures to pulp and paper producers in Australia and major exporting countries 5 0

B6 Summary of assistance measures provided to pulp and paper producers in Australia and major exporting countries 5 5

C1 Assistance measures for pulp, waste paper and paperboard used in paper makihg in 1986 56

C2 Assistance measures for selected uncoated and coated papers and paperboards in rolls or sheets: 1986 5 7

D1 Projections of current trends in paper and paperboard consumption 68

D2 Assumptions behind scenario 2: utilisation of production capacity 70

D3 Assumptions behind pulp projections: composition of paper and paperboard 71

D4 Pulp consumption projections 71

D5 Pulp capacity projections 7 2

El Import demand for printing and writing paper in the short run 7 8

PULP, PAPER AND PAPERBOARD INDUSTRY

SUMMARY AND CONCLUSIONS

The Industries Assistance Commission has been asked by the Minister for Industry, Technology and Commerce to undertake an inquiry into the structure, competitiveness, efficiency and growth of the pulp, paper, paper products and printing industries and report by 24 February 1987.

This submission to that inquiry focuses on the pulp, paper and paperboard industry and has three broad objectives:

- to assess future demand prospects in the market for pulp, paper and paperboard in Australia;

- to determine whether Australia has a comparative advantage in supplying that market; and

- to recommend policy changes to improve Australia's competitiveness relative to that of overseas countries.

In this submission it is argued that sound long term demand prospects exist in Australia for these products and that the domestic industry potentially has a comparative advantage over overseas suppliers in meeting this demand. However, there is the potential to improve the efficiency of the industry in a number of areas, including investment, raw material availability and government policy. Changes recommended to assist in achieving this improvement include:

- ihbplementation of uniform levels and types of assistance within the pulp, paper and paperboard industry;

- a reduction in assistance to the industry, the extent of which should be determined by whether or not resources would move from the relatively lightly assisted pulp, paper and paperboard industry into

I higher cost activities elsewhere in the economy; and

- co-ordination of policy implementation in areas such as protection, taxation incentives and wood availability.

1 Long Term Demand Prospects

Consumption of paper and paperboard in Australia has grown at a trend rate of approximately 2.4 per cent a year since 1969-70, although growth has varied between products. The consumption of pulp has grown at 1.6 per cent a year since 1973-74.

The demand for pulp, paper and paperboard should continue to increase to the year 2000 and beyond. An analysis of consumption trends indicates Australian apparent consumption levels of pulp and waste paper and of

I paper and paperboard should increase to the year 2000 by 2.1 per cent and , 2.7 Per cent a year, respectively. Rapid growth in consumption is expected

for printing and writing paper (3.2 per cent a year) and wrapping and packaging paper (5.2 per cent a year). Slower growth is expected for newsprint (l per cent a year), household and sanitary tissues (1.8 per cent a year) and paperboard (2.5 per cent a year) .

A u s t r a l i a ' s Comparative Advantage

Given t h e p r o s p e c t of cont inued i n c r e a s e s i n domestic demand, c o n s i d e r a t i o n is g i v e n t o t h e a b i l i t y of t h e A u s t r a l i a n pulp , paper and paperboard i n d u s t r y t o compete f o r t h i s market success fu l ly .

The t o t a l p roduc t ion c a p a c i t y of t h e i n d u s t r y has been growing a t a slower r a t e t han consumption i n r ecen t y e a r s , leading t o a l o s s of market s h a r e held by some domestic producers . Although domestic producers ' sha re of t h e market f o r uncoated p r i n t i n g and w r i t i n g paper inc reased from 69 p e r c e n t i n 1975-76 t o 79 p e r c e n t i n 1984-85, t h e i r s h a r e of t h e coa ted paper market dec l ined over t h e same pe r iod from 37 p e r c e n t t o 1 6 p e r c e n t . The i r domestic market sha re of newsprint was a s h igh a s 73 p e r c e n t i n 1982-83 a f t e r t h e opening of t h e newsprint m i l l a t Albury, but was 55 p e r c e n t i n 1984-85. The s h a r e of packaging paper and paperboard market held by domest ic producers g r a d u a l l y dec l ined from 85 p e r c e n t i n 1974-75 t o approximately 75 p e r c e n t i n 1984-85.

No c l e a r long run t r end i n world p r i c e s is ev iden t f o r t h e p a s t twenty yea r s . However, world p r i c e s have f a l l e n s u b s t a n t i a l l y ove r t h e p a s t few y e a r s , a l though some recovery has occurred s i n c e the beginning of 1986. The d e p r e c i a t i o n o f t h e A u s t r a l i a n d o l l a r h a s counterac ted t h e f a l l s o t h a t , i n A u s t r a l i a n d o l l a r te rms, p r i c e s have r i s e n f o r p r i n t i n g and w r i t i n g paper and been mainta ined f o r packaging paper and paperboard. Never the less , l a r g e e f f i c i e n t p l a n t s ove r seas , h igh popu la t ions and government backing mean t h a t t h e expor t s of ove r seas c o u n t r i e s w i l l con t inue t o be from marginal product ion , a t p r i c e s which c a n p o t e n t i a l l y undercut A u s t r a l i a n p r i c e s . I n gene ra l , s t rong import compet i t ion is l i k e l y t o con t inue i n t h e p r i n t i n g and w r i t i n g paper , newsprint , packaging paper and paperboard segments of t h e indus t ry .

. Major r e s t r u c t u r i n g of i n d u s t r i e s i n Japan and t h e United S t a t e s is p r e s e n t l y under way and t h i s w i l l i n c r e a s e t h e e f f i c i e n c y of A u s t r a l i a ' s major compet i tors .

. S i g n i f i c a n t p r o t e c t i o n and/or f i n a n c i a l i n c e n t i v e s a r e provided by most f o r e i g n governments t o t h e i r pu lp and paper producing i n d u s t r i e s , t h u s enhancing t h e compet i t iveness of t h e s e i n d u s t r i e s r e l a t i v e t o t h e A u s t r a l i a n indus t ry .

. I n t h e s h o r t t o medium term, ove rcapac i ty i n major producing c o u n t r i e s should con t inue t o r e s u l t i n excess world supply.

A u s t r a l i a is, neve r the l e s s , i n a p o s i t i o n t o remain compet i t ive i n 1 supplying t h e domestic market due t o d i s t a n c e , resource advantages and inpu t c o s t l e v e l s .

. A u s t r a l i a ' s geograph ica l l o c a t i o n p rov ides it wi th a n a t u r a l advantage over t h e major e x i s t i n g and emerging ove r seas s u p p l i e r s by v i r t u e of t r a n s p o r t c o s t s . Th i s i s p a r t i c u l a r l y important due t o t h e r e l a t i v e l y low value of paper pe r u n i t weight. However, a c o n t i n u a t i o n of low world f r e i g h t r a t e s , which have e x i s t e d i n r ecen t yea r s , may reduce t h i s comparative advantage.

. Diminishing s u p p l i e s of n a t i v e hardwoods w i l l l a r g e l y be o f f s e t by inc reas ing softwood r e sources a f t e r 1990, ensu r ing cont inued wood

Supply. However, t h i s change i n s p e c i e s mix w i l l have impl i ca t ions f o r t h e product mix wi th in t h e indus t ry .

. Cost l e v e l s i n A u s t r a l i a tend t o be below o r e q u i v a l e n t t o those of l ead ing pu lp and paper producers ove r seas . The p r i c e s of major i f iputs a t t h e m i l l s such a s pulpwood, power, energy and water a r e among the lowest i n t h e world, while labour r a t e s a r e about average.

The domestic i ndus t ry has s u c c e s s f u l l y competed and grown i n t h e f a c e of s t r o n g world compet i t ion and wi th r e l a t i v e l y low r a t e s of a s s i s t a n c e . F u r t h e r , wi th t h e emerging importance of South-East Asian c o u n t r i e s a s impor t e r s and A u s t r a l i a ' s proximi ty t o t h a t r eg ion , A u s t r a l i a may have a comparative advantage i n supplying t h a t market.

There a r e , however, a number of problems which h inder t h e i n t e r n a t i o n a l compe t i t i veness of t h e A u s t r a l i a n indus t ry . The average c a p a c i t i e s of both pu lp and paper p l a n t s i n A u s t r a l i a a r e below t h e average s c a l e s of ope ra t ion i n o t h e r c o u n t r i e s . The advantages of economies of s c a l e a r e t h e r e f o r e g e n e r a l l y n o t being r e a l i s e d . This i s d e s p i t e t h e indus t ry being h igh ly concent ra ted and f i r m s s p e c i a l i s i n g i n p a r t i c u l a r product l i n e s i n an a t tempt t o achieve t h o s e economies. However, more f i r m s (compet i t ion) w i t h i n t h e i n d u s t r y would r e s t r i c t even f u r t h e r t h e a b i l i t y of t h e A u s t r a l i a n i n d u s t r y t o t a k e advantage of economies of s c a l e . Some m i l l s i n A u s t r a l i a a r e cons idered aged, p a r t i c u l a r l y i n t h e p r i n t i n g and w r i t i n g paper segment, and o p p o r t u n i t i e s f o r cont inued improvements i n p roduc t ion l i n e s i n e x i s t i n g m i l l s a r e being exhausted.

Overa l l , t h e domestic i ndus t ry f a c e s sound long term demand p rospec t s . Given t h e f a c t t h a t consumption growth exceeds growth i n c a p a c i t y f o r some p roduc t s , t h e r e may be scope f o r expansion a s we l l a s modernisa t ion and r a t i o n a l i s a t i o n of t h e indus t ry .

Po l i cy I s s u e s

The pulp , paper and paperboard indus t ry r e c e i v e s p r o t e c t i o n i n t h e form of t a r i f f s (ad valorem and s p e c i f i c ) and bount ies . T a r i f f s vary from zero t o 30 p e r c e n t i n t h e i n d u s t r y but , i n g e n e r a l , t h e i n d u s t r y is r e l a t i v e l y l i g h t l y a s s i s t e d .

There i s some t h e o r e t i c a l suppor t f o r t h e replacement of t a r i f f a s s i s t a n c e wi th bount ies . For example, t h e a n a l y t i c a l p a r t of t h i s submission i n d i c a t e s t h a t a 1 p e r c e n t f a l l i n t h e p r i c e of imports , s ay from a r educ t ion i n t a r i f f s , would l e a d t o a r educ t ion i n domestic p r i c e s of 0.6 p e r c e n t f o r p r i n t i n g and w r i t i n g paper. I n o t h e r words, any r educ t ion i n t a r i f f s on p r i n t i n g and w r i t i n g paper i n t h e s h o r t term would lower p r i c e s t o consumers. I n s o f a r a s t h e f i n a l product p r i c e s a r e una f fec t ed by boun t i e s t h e r e would, i n a p a r t i a l a n a l y s i s s ense , be a more e f f i c i e n t a l l o c a t i o n of consumption expendi ture and p roduc t ive r e sources i f boun t i e s replaced t a r i f f s a s a form of a s s i s t a n c e .

When a mixture of t a r i f f and bounty a s s i s t a n c e is a f fo rded to c l o s e l y r e l a t e d products , t h e d i f f e r e n c e s between i n p u t p r i c e s and consumer p r i c e s f o r t h o s e p roduc t s a r e a r t i f i c i a l l y widened. A uniform type of a s s i s t a n c e ( b o u n t i e s o r t a r i f f s ) should be app l i ed t o c l o s e l y r e l a t e d p roduc t s i n

I o r d e r t o e l i m i n a t e t h e a t t e n d a n t a r t i f i c i a l p r i c e d i f f e r e n t i a l s .

A s i m i l a r r a t i o n a l e a p p l i e s t o t h e l e v e l s of a s s i s t a n c e af forded. That is, even wi th a uniform type o f t r a d e p r o t e c t i o n such a s t a r i f f s , t h e p r i c e d i f f e r e n t i a l s caused by d i f f e r e n t l e v e l s of t a r i f f s r e s u l t i n a m i s a l l o c a t i o n of resources and should be e l imina ted . While t h e r e may be r e l a t i v e l y few demand and supply s u b s t i t u t i o n p o s s i b i l i t i e s between d i f f e r e n t t y p e s of paper i n t h e s h o r t term, t h i s is no t t h e c a s e i n t h e long term. Therefore t h e r e may be m i s a l l o c a t i o n of p roduc t ive r e sources w i t h i n t h e s e c t o r i n t h e longer term a s a r e s u l t of t h e d i s t o r t e d p r i c e s .

No o v e r a l l judgment about t h e l e v e l of a s s i s t a n c e a p p r o p r i a t e t o t h e pulp , paper and paperboard i n d u s t r y through t a r i f f s and/or bount ies i s a t tempted i n t h i s submission. Such a judgment r e q u i r e s an assessment of t h e e f f e c t s of a s s i s t a n c e on product demand and on t h e o r i g i n s and d e s t i n a t i o n s of r e sources a t t r a c t e d t o o r away from t h e indus t ry through t h e p r o v i s i o n of a s s i s t a n c e . I f resources a r e drawn from more p r o t e c t e d i n d u s t r i e s , o v e r a l l economic e f f i c i e n c y is improved, and v i c e versa . Given t h a t an o v e r a l l reduct ion i n t a r i f f s is seen a s d e s i r a b l e f o r t o t a l manufacturing, it may be d e s i r a b l e from an economic viewpoint t o reduce t a r i f f s i n t h e pu lp , paper and paperboard indus t ry . However, s i n c e t h a t i ndus t ry is r e l a t i v e l y l i g h t l y a s s i s t e d , it' is recommended t h a t o v e r a l l a s s i s t a n c e l e v e l s a r e not reduced u n t i l a s s i s t a n c e t o more h igh ly p r o t e c t e d i n d u s t r i e s is evaluated .

The l ack of responsiveness of pu lp and paper supply t o p r i c e changes i n t h e s h o r t run i n A u s t r a l i a means t h a t producers bear t h e b run t of any r educ t ion i n p r i c e s . Thus t h e i n d u s t r y is l i k e l y t o be s e n s i t i v e t o any a c t i o n s by ove r seas compe t i to r s which lead t o lower p r i c e s f o r pulp, paper and paperboard i n Aus t r a l i a . A s anti-dumping a c t i o n s have been used a s a proxy f o r long term i n d u s t r y p r o t e c t i o n measures, it is d e s i r a b l e t h a t anti-dumping l e g i s l a t i o n be i n t e g r a t e d more c l o s e l y wi th longer run p r o t e c t i o n p o l i c y and o b j e c t i v e s .

The b i l a t e r a l monopolies which e x i s t between S t a t e f o r e s t s e r v i c e s and t h e p u l p and paper companies i n t h e pulpwood market r a i s e t h e ques t ion of whether o r no t t h e domestic p r i c i n g of wood r e f l e c t s t h e t r u e c o s t t o s o c i e t y of t h e r e sources used i n pulpwood product ion . This is important a s wood c o s t s r ep resen t 5-20 pe r c e n t of t o t a l c o s t s , depending on t h e f i n a l product . More r e sea rch on t h i s i s s u e is requ i r ed s i n c e any underpr ic ing ( o r ove rp r i c ing ) of wood by t h e S t a t e s would i n c r e a s e ( o r dec rease ) t h e l e v e l of a s s i s t a n c e t o t h e pu lp , paper and paperboard indus t ry . Fu r the r , t h e a v a i l a b i l i t y of pulpwood supply is an a r e a of concern t o t h e indus t ry . The i s s u e of conse rva t ion invo lves p o s s i b l e a l t e r n a t i v e uses of f o r e s t s and of land used f o r f o r e s t s , and t h u s h a s an impor tant bear ing on a v a i l a b i l i t y . Th i s is more d i r e c t l y a m a t t e r f o r S t a t e Governments. However, t he p r o v i s i o n of a s s i s t a n c e a t t h e Commonwealth l e v e l has imp l i ca t ions f o r t h e f a c t o r s a f f e c t i n g a v a i l a b i l i t y . Accordingly, t h e s e m a t t e r s should n o t be resolved independently. Increased weight g iven t o non-forestry uses o f f o r e s t s and f o r e s t land, e i t h e r by government dec ree o r through t h e p r i c i n g mechanism, could reduce t h e supply of pulpwood. Reso lu t ion of t h e s e p o t e n t i a l c o n f l i c t s r e l a t i n g t o m u l t i p l e o b j e c t i v e s and environmental p lanning would be a key i n g r e d i e n t f o r any o v e r a l l i n d u s t r y s t r a t e g y , should fo rmula t ion of such a s t r a t e g y be judged use fu l .

Commonwealth t a x a t ion l e g i s l a t i o n may discourage t h e supply of pulpwood by p r i v a t e growers ( i n d i v i d u a l taxpayers) , which may exp la in why they supply only a sma l l p r o p o r t i o n of t h e t o t a l supply. The ' pe r iod

i n e q u i t y ' e f f e c t (caused by t h e long l a g i n inves tment , t h e lumpy r e t u r n s a t h a r v e s t i n g and t h e p rogres s ive marginal t a x r a t e ) r e q u i r e s f u r t h e r examination, a s i n d i v i d u a l p r i v a t e t axpaye r s may be a p o t e n t i a l l y l a r g e source of f u t u r e wood supply.

Commonwealth r e sea rch and development a s s i s t a n c e f o r t h e f o r e s t s e c t o r i s provided through t h e funding of CSIRO. Approximately $2.5m was spen t on p u l p and paper r e s e a r c h i n 1983-84. When t h i s i s combined wi th t h e 150 p e r c e n t t a x d e d u c t i b i l i t y of a l l p r i v a t e r e sea rch and development expend i tu re , t h e c a s e f o r a d d i t i o n a l a s s i s t a n c e v i a t h i s avenue is no t s t rong . Firms i n t h e i n d u s t r y appear t o be l a r g e enough t o a p p r o p r i a t e b e n e f i t s from t h e i r own re sea rch expendi ture . The i n a b i l i t y of f i r m s i n o t h e r r u r a l i n d u s t r i e s t o do t h i s because of t h e i r sma l l s i z e p r o v i d e s t h e r a t i o n a l e f o r government t o a s s i s t r e sea rch i n those i n d u s t r i e s . Nonetheless, some r a t i o n a l i s a t i o n of r e sea rch i n te rms of funding and p r i o r i t y s e t t i n g may be i n o r d e r f o r t h e pulp , paper and paperboard indus t ry .

Co-ordination of t h e v a r i o u s a s s i s t a n c e measures i s c l e a r l y a d i f f i c u l t t a s k because of t h e number and types of agenc ie s involved. Any program of a s s i s t a n c e should t ake account of t he l a r g e and lumpy c a p i t a l replacement d e c i s i o n s faced by t h e pulp , paper and paperboard i n d u s t r y . A forum a l r eady e x i s t s f o r he lp ing wi th t h e co-ordinat ion of a s s i s t a n c e measures - t h e F o r e s t and F o r e s t Products Indus t ry Council. Indeed t h e Counci l has proposed a set of g e n e r a l o b j e c t i v e s f o r t h e f o r e s t s e c t o r p l u s a ' s t r a t e g i c p l a n ' f o r meeting them. Both t h e o b j e c t i v e s and t h e p l a n a r e s t i l l a t a p re l imina ry s t a g e of development and mainly r e l a t e t o g e n e r a l i n d u s t r y po l i cy . They cou ld be broadened t o encompass s p e c i f i c i n d u s t r y a s s i s t a n c e measures.

1. INTRODUCTION

1.1 Background

The aim of t h i s submission is t o c o n t r i b u t e t o the I n d u s t r i e s Ass i s t ance Commission inqu i ry i n t o t h e pulp , paper , paper products and p r i n t i n g i n d u s t r i e s . The M i n i s t e r f o r Indus t ry , Technology and Commerce r e f e r r e d t h e i n q u i r y t o t h e Commission i n November 1985 and asked it t o r e p o r t by 24 February 1987.

The inqu i ry is considered a p p r o p r i a t e because a s s i s t a n c e t o t h e i n d u s t r y group a s a whole has n o t been reviewed f o r more t h a n twenty y e a r s and t h e r e is wide d i s p a r i t y i n c u r r e n t a s s i s t a n c e arrangements a f f e c t i n g t h e group. I n a d d i t i o n , t h e p r e s e n t bounty arrangements o n c e r t a i n t y p e s of p r i n t i n g and w r i t i n g paper a r e due t o t e rmina te i n February 1987. Books a r e a l s o included w i t h i n t h e scope of t h e c u r r e n t r e fe rence d e s p i t e t h e completion by t h e Commission of a f i n a l r e p o r t on book product ion i n December 1985 (IAC 1985b). Th i s i s t o enab le t h e Commission t o examine t h e i n t e r r e l a t i o n s h i p s between books and o t h e r goods under r e fe rence .

1.2 Terms of Reference

The terms of r e fe rence r e f l e c t t he broad na tu re of t h i s i nqu i ry and s p e c i f y t h a t t h e I n d u s t r i e s Ass i s t ance Commission i d e n t i f y and r e p o r t on s i g n i f i c a n t f a c t o r s t h a t may a f f e c t t h e s t r u c t u r e , compet i t iveness , e f f i c i e n c y and growth of t h e pulp , paper , paper p roduc t s and p r i n t i n g i n d u s t r i e s . The Commission has a l s o been asked t o i d e n t i f y and e v a l u a t e o p t i o n s a v a i l a b l e t o t h e Government and t h e i n d u s t r i e s t o improve t h e i r s t r u c t u r e , compet i t iveness , expor t performance and c o n t r i b u t i o n t o t h e economy. The d e t a i l s of t h e terms of r e fe rence and i t ems covered by t h e r e fe rence a r e provided i n appendix A.

1 .3 Ob jec t ives and Scope of T h i s Submission

The o b j e c t i v e s of t h e Bureau 's submission a r e :

- t o a s s e s s f u t u r e demand p r o s p e c t s i n t h e market f o r pulp, paper and paperboard i n A u s t r a l i a ;

- t o determine whether A u s t r a l i a has a comparative advantage i n supplying t h a t market; and

- t o recommend p o l i c y changes t o improve A u s t r a l i a ' s compet i t iveness r e l a t i v e t o t h a t of o v e r s e a s c o u n t r i e s .

T h i s submission cove r s mainly in t e rmed ia t e p roduc t s such a s wood pulp , newsprint , p r i n t i n g and w r i t i n g paper and o t h e r paper , and paperboard. End p roduc t s such a s c o n t a i n e r s , books and o t h e r p r i n t e d mat ter a r e no t included i n t h e a n a l y s i s .

T h i s r e p o r t c o n s i s t s of f i v e sec t ions . A b r i e f review of t he s t r u c t u r e of t h e pulp , paper and paperboard i n d u s t r y i n A u s t r a l i a fo l lows t h i s i n t roduc t ion . The d e s c r i p t i o n of t h e i n d u s t r y p rov ides background t o t h e p o l i c y framework and e n a b l e s A u s t r a l i a ' s a b i l i t y t o ma in ta in o r i n c r e a s e i t s compe t i t i veness r e l a t i v e t o ove r seas s u p p l i e r s t o be assessed . I n s e c t i o n 3, c u r r e n t a s s i s t a n c e arrangements f o r t h e A u s t r a l i a n i n d u s t r y a r e

reviewed and some inhe ren t problems wi th t h e arrangements a r e h igh l igh ted . A u s t r a l i a n market p r o s p e c t s f o r pulp , paper and paperboard a r e a s ses sed i n s e c t i o n 4, i n o r d e r t o make a judgment about growth p r o s p e c t s f o r t h e A u s t r a l i a n indus t ry . Pol icy i s s u e s conf ron t ing t h e i n d u s t r y a r e addressed i n d e t a i l i n s e c t i o n 5, which i n c l u d e s a d i s c u s s i o n of p o l i c i e s which a r e r equ i r ed t o ensu re t h e i n t e r n a t i o n a l compe t i t i veness of t h e indus t ry . The suppor t ing m a t e r i a l f o r t h i s submission is p resen ted i n t h e f i v e appendixes.

2 . STRUCTURE, MARKET SHARE AND COMPARATIVE ADVANTAGE

Severa l broad conc lus ions can be drawn from t h i s s ec t ion .

. The domestic pulp , paper and paperboard i n d u s t r y is h igh ly concen t r a t ed and some b a r r i e r s t o e n t r y e x i s t .

. Pulp and paper manufacture i n A u s t r a l i a , a s e lsewhere , is h igh ly c a p i t a l i n t e n s i v e .

. Investment l e v e l s i n A u s t r a l i a have dec l ined over r ecen t y e a r s and t h i s may c o n t r i b u t e t o a f a l l i n A u s t r a l i a ' s f u t u r e compet i t iveness .

. The e f f i c i e n c y of t he i n d u s t r y has been adverse ly a f f e c t e d by t h e smal l domestic market and u n t i l r e c e n t l y t h e lack of acceptance of hardw~od-based p roduc t s i n world markets. Also, t he p r i n t i n g and w r i t i n g paper segment of t h e i n d u s t r y has t echno log ica l ly aged and i n e f f i c i e n t m i l l s .

. The i n d u s t r y has a number of advantages - t he raw m a t e r i a l base is expanding; and t h e growing A u s t r a l i a n and neighbouring markets provide an inc reas ing p o t e n t i a l demand f o r A u s t r a l i a n pulp , paper and paperboard; and c o s t l e v e l s a r e comparable wi th those i n o t h e r producing c o u n t r i e s .

. The e f f e c t s of r ecen t low world p r i c e s f o r some p roduc t s have been amel iora ted f o r A u s t r a l i a n producers by t h e d e p r e c i a t i o n o f t h e A u s t r a l i a n d o l l a r r e l a t i v e t o t h e c u r r e n c i e s of c o u n t r i e s which a r e major expor t e r s .

2.1 Product Desc r ip t ion

The emphasis i n t h i s submission is on paper , which i s a major i npu t i n t h e product ion of paper p roduc t s a s w e l l a s i n t h e p r i n t i n g and a l l i e d i n d u s t r i e s . The a n a l y s i s is a l s o extended t o inc lude pu lp which i s an important i npu t i n t h e paper i n d u s t r y i n A u s t r a l i a . The major c a t e g o r i e s

.of paper a r e newsprint , p r i n t i n g and w r i t i n g paper, household and s a n i t a r y t i s s u e s , and packaging paper and paperboard.

Pulp product ion invo lves t h e d i s a s s o c i a t i o n of wood i n t o i t s c o n s t i t u e n t f i b r e s . The u s e f u l component of wood pu lp i s t h e c e l l u l o s e f i b r e con ten t , and t h e e x t e n t t o which t h e remaining l i g n i n i s removed forms t h e b a s i s of t h e c l a s s i f i c a t i o n of pulp. Mechanical pu lp ( o r groundwood pulp) is formed when wood is d i s a s s o c i a t e d i n t o f i b r e by mechanical means ( s o l i g n i n remains i n t h e p u l p ) . The p u l p ob ta ined p e r u n i t of wood used is high and t h e pulping process has a h igh energy requirement and compara t ive ly low water requirement. Mechanical pu lp is n o t s u i t a b l e f o r producing papers where whiteness and permanence a r e requi red . Th i s pu lp is used mostly i n t h e product ion of newsprint and t i s s u e . Chemical pu lp is ob ta ined when va r ious chemical s o l u t i o n s a r e used t o remove t h e l i g n i n i n t h e wood. This p rocess g i v e s low pulp y i e l d s and r e q u i r e s compara t ive ly low energy input . The main forms of chemical pulp ing a r e t h e su lpha te ( o r ' k r a f t ' ) process , t h e n e u t r a l s u l p h i t e semi-chemical p rocess and t h e soda-anthraquinone p rocess (Senate Standing Committee on Trade and Commerce 1981) .

Newsprint is used i n t h e p r i n t i n g of newspapers, a l though some lower q u a l i t y pape r s used f o r o t h e r p r i n t i n g purposes a r e a l s o included i n t h i s

paper category. Almost 60 per cent of newsprint in Australia is produced using softwood thermomechanical pulp. The remaining 40 per cent i s produced using a combination of hardwood mechanical pulp and softwood semi-chemical pulp.

Printing and writing paper i s a heterogeneous category with end uses i n such areas as books, magazines, office stationery, and catalogue advertising. A mixture of hardwood and softwood chemical pulp forms over 70 per cent of the pulp furnished for these papers. Small amounts of semi-chemical pulp and wastepaper are also used.

Household and sanitary tissues have predominantly a household use. The major pulp types used t o produce these are softwood chemical pulp, semi-chemical pulp, and thermomechanical pulp.

Packaging paper and paperboard have a range of end uses in the retai l ing and industrial sectors. Wastepaper forms 55 per cent of f ib re used in the production of these products. Chemical pulp and semi-chemical pulp are also important f ibre sources.

2.2 Industry Structure

The Australian pulp, paper and paperboard industry is characterised by a small number of capital-intensive firms, each specialising in broad product categories. The broad categories of printing and writing paper, and packaging paper and paperboard conceal a much wider range of products tha t are produced domestically to f i l l a number of relatively small market niches. Market power in each segment of the industry i s limited by various factors including import competition, the potential entry of new firms t o the market, and intense competition between firms in those areas where there i s more than one domestic producer.

(a) Concentration

The pulp, paper and paperboard industry currently comprises eight firms (see table 1). The six major firms produce pulp, paper or paperboard. The apparent concentration level, as defined by the number of firms in the industry, i s high; however, the real concentration level is much higher, given the specialisation of firms in specific products (Douglas 1 9 6 9 ) . In the short term, these products are not close substi tutes for one another and production processes are designed specifically fo r a given quality of paper. The high concentration of the industry has most l ikely arisen as a result of economies of large scale in pulp, paper and paperboard production and the small domestic market.

(b) Barriers t o entry

Barriers t o entry occur in the form of existing long term contracts between the producers and buyers and the vert ical integration of the industry which t i e s up a proportion of the market demand in the short t o medium term. Entry is also constrained by the avai labi l i ty of fores t resources needed for the production of pulp. Existing firms have substantial t r a c t s of forest resources and agreements with State fores t services regarding access t o State resources. The small market in Australia

Table 1: AUSTRALIAN PULP, PAPER AND PAPERBOARD MILLS

Company Location products

Smorgon Consolidated

Visy Board 0

Bowater-Scott

Maryvale, Victoria Fairfield, Victoria Broadford, Victoria Port Huon, Tasmania (closed in 1982) Millicent, South Australia Botany, New South Wales Petrie, Oueensland Spearwood, Western Australia

Kraft and NSSC pulp; packaging paper Packaq ing paper Packaq ing paper NSSC pulp SGW pulp: papers Packaging paper CM pulp: packaging paper Packaqinq paper

West Footsqray, Victoria NSSC pulp; packaging paper

Reservoir, Victoria Warwick Farm, New South Wales

Box Hill, Victoria Myrtleford, Victoria

Packaqing paper Packaging paper

Household and sanitary tissues CM pulp

Kimberly-Clark Australia Millicent, South Australia Bisulphite and TM pulp: household and sanitary tissues

Cosco Holdings Ipswich, Queensland Household and sanitary tissues

Australian Newsprint Mills Boyer, Tasmania Albury, New South Wales

APPM Burnie. Tasmania Wesley Vale, Tasmania Nowra, New South Wales

Alkaline SGW, GIB, cold soda and TM pulp: newsprint pulp: newsprint

Soda AQ and cold soda pulp: printing and writing paper Cold soda and RM pulp: printing and writing paper Printing and writing paper

Note: NSSC - neutral sulphite semi-chemical: CM - chemi-mechanical: AQ - anthraquinone: SGW - stone groundwood; GIB - groundwood from impregnated billets: TM - thermomechanical: RM - refiner mechanical.

f o r Paper p roduc t s and a t r a d i t i o n a l l ack of expor t markets i n neighbouring c o u n t r i e s have formed a n a t u r a l b a r r i e r t o e n t r y , a s t h e number o f f i r m s which can e f f i c i e n t l y compete l o c a l l y is l imi t ed . Indeed, an i n c r e a s e i n t h e number of f i r m s would r e s u l t i n each f i r m producing a t a h igher u n i t c o s t l e v e l t han it c u r r e n t l y does.

B a r r i e r s t o e n t r y , whether n a t u r a l o r imposed by incumbent f i rms , a c t t o r e s t r i c t compet i t ion wi th in an i n d u s t r y and g i v e producers a c e r t a i n degree of market power. Within t h e pulp , paper and paperboard i n d u s t r y , excess ive use of t h i s market power i s r e s t r a i n e d by a number of f a c t o r s . For example, a l though monopolies e x i s t i n t h e product ion of newsprint and p r i n t i n g and w r i t i n g paper , producers f a c e s i g n i f i c a n t import compet i t ion . Fu r the r , market power is r e s t r a i n e d because of t h e p o s s i b i l i t y of new e n t r a n t s from wi th in t h e i n d u s t r y t o t h e v a r i o u s market segments. I n p a r t i c u l a r , a l though product ion p r o c e s s e s cannot g e n e r a l l y be conver ted qu ick ly i n t o t h e p roduc t ion of d i f f e r e n t t y p e s of paper ( f o r example, p r i n t i n g and w r i t i n g paper i n s t e a d of t i s s u e s ) , f i r m s i n t h e paper i ndus t ry have a good d e a l of t e c h n i c a l e x p e r t i s e , marketing expe r i ence and access t o raw m a t e r i a l s which p o t e n t i a l l y a l lows them t o swi tch r e l a t i v e l y e a s i l y i n t o d i f f e r e n t market segments.

( C ) C a p i t a l i n t e n s i v e n e s s

S ince 1974-75 t h e r e a l va lue of c a p i t a l s tock ( l and , bu i ld ings , p l a n t and machinery) has remained r e l a t i v e l y c o n s t a n t both i n t h e pulp , paper and paperboard indus t ry and i n manufacturing a s a whole. However, c a p i t a l investment i n t h e pulp , paper and paperboard i n d u s t r y has dec l ined d r a m a t i c a l l y i n r ecen t y e a r s ( s e e f i g u r e 1).

T o t a l employment i n t h e pulp , paper and paperboard indus t ry i n 1983-84 was 7900, 30 p e r c e n t below t h e 1974-75 l e v e l , whi le employment i n t o t a l manufacturing i n 1983-84 was 18 p e r c e n t below t h e 1974-75 l e v e l (see t a b l e 2 ) . Consequently, t h e r e a l va lue of c a p i t a l p e r employee ( i n 1980-81 va lues ) i n 1983-84 is es t imated t o have been 42 p e r c e n t h ighe r t han i n 1974-75 i n t h e pulp , paper and paperboard indus t ry and 22 p e r c e n t h ighe r t han i n 1974-75 i n t o t a l manufacturing. The pulp, paper and paperboard i n d u s t r y is s i g n i f i c a n t l y more c a p i t a l i n t e n s i v e than t h e manufacturing s e c t o r a s a whole ( a s i n d i c a t e d by t h e f i g u r e s i n t a b l e 2 ) . I t can a l s o be noted t h a t t h e r e l a t i v e c a p i t a l i n t e n s i t y ( t h e r a t i o of r e a l c a p i t a l p e r employee i n t h e pulp , paper and paperboard indus t ry t o t h a t i n t o t a l manufacturing) has g e n e r a l l y been inc reas ing s i n c e 1976-77, a s shown i n f i g u r e 2.

2.3 A u s t r a l i a ' s Market Share of Domestic Consumption

Consumption of paper and paperboard grew a t a t r end r a t e of 2.4 p e r c e n t a yea r ove r t h e pe r iod 1976-77 t o 1984-85 ( see t a b l e 3 ) . However, t h e r e were marked d i f f e r e n c e s i n t h e annual r a t e s f o r d i f f e r e n t p roduc t s ove r t h i s pe r iod - ranging from 1.1 p e r c e n t i n t h e c a s e of paperboard t o 4.6 pe r c e n t f o r p r i n t i n g and w r i t i n g paper . There were a l s o f l u c t u a t i o n s i n consumption over t h a t pe r iod ; f o r example, t h e r e was an 11.5 p e r c e n t d e c l i n e i n t h e consumption of pulp, paper and paperboard i n 1982-83,

1 co inc id ing wi th t h e g e n e r a l economic r e c e s s i o n i n t h e A u s t r a l i a n economy.

F i g u r e 1: INVESTMENT I N LAND, BUILDINGS PLANT AND MACHINERY I N THE PULP,PAPER AND PAPERBOARD INDUSTRY

140

120

F i g u r e 2: CAPITAL INTENSITY I N THE PULP, PAPER AND PAPERBOARD INDUSTRY RELATIVE TO CAPITAL INTENSITY IN TOTAL MANUFACTURING

2.0

1.5

I n 1980-81 v a l u e s

0.5

r a t i o BAE c h a r t

I I I I I

20

$m

1967-68 1970-71 1973-74 1976-77 1979-80 1982-83

Data source : Derived from ARS (1979, 1985) . L

BM c h a r t

I I l l l l l

1968-69 1970-71 1972-73 1974-75 1976-77 1978-79 1980-81 1982-83

Data s o u r c e : ABS (1979, 1985) . --

Table 2: EMPLOYMENT AND CAPITAL I N THE PULP, PAPER AND PAPERBOARD INDUSTRY AND TOTAL MANuFACTURING(~)

Real va lue of l and , bu i ld ings , p l a n t , C a p i t a l p e r - -

Employment and equipment (b) employee (b ) pulp, T o t a l R J ~ P I T o t a l pulp I T o t a l

paper and manu- paper and manu- paper and manu- Year paperboard f a c t u r i n g paperboard f a c t u r i n g paperboard f a c t u r i n g

(c) no. no.

( a ) Excludes g a s and e l e c t r i c i t y . (b ) In 1980-81 values . (c) This series is no longer publ ished. The f i g u r e s f o r 1974-75 t o 1983-84 a r e based on t h e 1967-68 f i g u r e which has been ad jus t ed f o r t h e expendi ture on l and , bu i ld ings , p l a n t and equipment (less d i s p o s a l s ) t o approximate c a p i t a l s tock l e v e l s . D i sc repanc ie s i n a c t u a l c a p i t a l s tock may a r i s e f o r t h e fo l lowing reasons : s t a t i s t i c a l e r r o r i n t h e c o l l e c t i o n of o u t l a y and d i s p o s a l s t a t i s t i c s ; changes i n i n d u s t r y code i n 1968-69 and 1977-78; and i n t e r p o l a t i o n of s t a t i s t i c s f o r employment, o u t l a y and d i s p o s a l f o r 1970-71, f o r which d a t a were not c o l l e c t e d . (d ) In 1977-78 t h e i n d u s t r y ASIC code changed from 2511 t o 2631. Sources : Data f o r 1967-68 a r e der ived from Davidson and Stewardson (1979) ; d a t a f o r o t h e r y e a r s a r e de r ived from ABS (1979, 1985) .

Table 3: TRENDS I N THE CONSUMPTION OF PULP, PAPER AND PAPERBOARD FROM 1976-77 TO 1984-85

Product Annual t r e n d r a t e ( a )

% Pulp 1 .6ns(b) Newsprint 2. 0** P r i n t i n g and w r i t i n g paper 4.6** Other paper 2.6** Paper board 1.1** Paper and paperboard 2.4""

( a ) Annual t r e n d f i g u r e s were ob ta ined by f i t t i n g the fo l lowing loga r i thmic t r e n d l i n e by r eg res s ion : log Y t = a + b t + e t , where Yt is t h e v a r i a b l e being cons ide red and t is t i m e , a is t h e i n t e r c e p t , b t is t h e t r e n d growth r a t e and e t is t h e e r r o r term. (b) For 1973-74 t o 1984-85. ** S i g n i f i c a n t a t t h e 1 p e r c e n t l e v e l . * S i g n i f i c a n t a t t h e 5 p e r c e n t l e v e l . ns , Not s i g n i f i c a n t .

Domestic producers ' sha re of t h e A u s t r a l i a n market f o r paper and paperboard i n 1984-85 was s i m i l a r t o t h a t i n 1974-75, whi le f o r pu lp it was 82 pe r c e n t i n 1984-85 compared wi th 66 p e r c e n t i n 1974-75 (see t a b l e 4 ) . The market s h a r e p a t t e r n f o r individual . paper and paperboard g r a d e s has va r i ed over time.

For p r i n t i n g and w r i t i n g paper , domestic product ion is dominated by one producer. However, two o t h e r l o c a l producers , who t r a d i t i o n a l l y s p e c i a l i s e d i n o t h e r t y p e s of paper , have r e c e n t l y increased t h e i r p roduc t ion of p r i n t i n g and w r i t i n g paper a s a r e s u l t of t h e favourable out look f o r t h e s e t y p e s of paper. Imports form a major compet i t ive f o r c e i n t h i s market. The domestic market sha re of t h e p r i n t i n g and w r i t i n g paper segment he ld by l o c a l producers was 58 p e r c e n t i n 1975-76 and 50 pe r c e n t i n 1984-85, but was a s low a s 38 pe r c e n t i n 1981-82. Some imports , however, do not compete d i r e c t l y with domest ic production. The i d e n t i f i c a t i o n of p roduc t s which can be d i r e c t l y s u b s t i t u t e d f o r domes t i ca l ly produced goods and those which cannot is a d i f f i c u l t t a sk . Considering t h e broad c a t e g o r i e s of uncoated and coa ted p r i n t i n g and w r i t i n g pape r s - i n 1984-85 t h e market s h a r e s of domestic producers were 79 p e r c e n t f o r uncoated pape r s and only 1 6 p e r c e n t f o r coated papers.

Newsprint is produced by a s i n g l e A u s t r a l i a n producer a t two m i l l s . P r i o r t o t h e completion of t h e A u s t r a l i a n Newsprint M i l l s (ANM) m i l l i n Albury i n 1981 t h e A u s t r a l i a n market was suppl ied approximately equa l ly by domestic and ove r seas s u p p l i e r s . S ince t h e n A N M 1 s market s h a r e has been a s h igh a s 73 p e r c e n t (1982-83), a l though it f e l l t o 55 p e r c e n t i n 1984-85 d e s p i t e t h e domestic producer ope ra t ing a t f u l l capac i ty . The main ove r seas s u p p l i e r s t o t h e A u s t r a l i a n market a r e F in l and , New Zealand and Canada. Competition i n t h e market is somewhat l i m i t e d a s ANM is owned by two major newspaper companies ( F a i r f a x and Herald & Weekly T i m e s ) . These companies a r e a l s o l a r g e buyers of imported newsprint and t h e r e f o r e t h e domestic newsprint p r i c e is based on t h e import p r i c e . S ince ANM produces a t c l o s e t o f u l l c a p a c i t y t h e r e is l i t t l e scope f o r i nc reas ing supply i n t h e s h o r t term i n response t o p r i c e o r demand inc reases .

Packaging paper and paperboard a r e produced i n A u s t r a l i a by t h r e e f i r m s - AMCOR (p rev ious ly APM) , Smorgon Consolidated I n d u s t r i e s (SCI) and Visy Board. Imports r ep resen t only 25 p e r c e n t of t h e market compared wi th a market s h a r e of 54 p e r c e n t f o r APM, 18 p e r c e n t f o r SCI and 3 p e r c e n t f o r Visy Board. However, t h e domestic market s h a r e o f l o c a l producers was 85 p e r c e n t i n 1974-75. A wide v a r i e t y of packaging paper and paperboard i s produced i n A u s t r a l i a t o meet domestic requi rements and s o t h i s is a f a i r l y heterogeneous ca tegory . The t h r e e companies a r e e x t e n s i v e l y v e r t i c a l l y i n t e g r a t e d , producing end p roduc t s from paper and paperboard a s w e l l a s from non-forest p roduc t s such a s p l a s t i c and metal . Much o f t h e compe t i t i on t h e r e f o r e occur s i n t h e f i n a l product a r ea .

There a r e t h r e e f i r m s producing household and s a n i t a r y t i s s u e s i n A u s t r a l i a - Bowater-Scott, which has a domestic market sha re of approximately 40 p e r c e n t , Kimberly-Clark A u s t r a l i a ( p a r t l y owned by AMCOR), which has a market s h a r e of about 47 p e r c e n t , and Cosco Holdings, which has 1 3 p e r c e n t of t h e market. Imports of t h i s p roduc t have remained i n s i g n i f i c a n t f o r a long t i m e . Competition between brands i n t h e market is q u i t e s t rong ; however, it is l i k e l y t h a t t h e f i r m s s t i l l have some market power because of consumer l o y a l t y .

Table 4: AUSTRALIAN PRODUCTION, TRADE AND APPARENT CONSUMPTION OF PULP, PAPER AND PAPERBOARD IN 1974-75 AND 1984-85

product Production Exports Imports Apparent consumption

1974-75 1984-85 1974-75 1984-85 1974-75 1984-85 1974-75 1984-85

Newsprint 196 372 - 4 325 303 521 671 (45) Printing and writing paper 160 228 13 14 164 251 311 46s (54) Packaging paper and paperboard 659 834 15 6 4 113 260 757 1 030 (25) Household and sanitary tissues 92 119 - - 4 1 9 6 l20 (1)

P Total paper and UI paperboard

Mechanical pulp 175 126 Thermomechanical pulp - 231 Chemical pulp 169 326 Semi-chemical pulp 227 216 Wastepaper 407 513 Other - 11

Total pulp and waste paper 9 78 1 423

Note: Figures in parentheses are the proportions of imports in apparent consumption in 1984-85.

Sources: FAO (1985a) ; BAE (1985)

2.4 A u s t r a l i a ' s Comparative Advantage

Long run i n t e r n a t i o n a l compe t i t i veness depends on p r i c e s , i npu t c o s t s , d i s t a n c e from o t h e r s u p p l i e r s and markets, economies of i n t e g r a t i o n , economies of s c a l e , t h e t echno log ica l c o n d i t i o n of m i l l s , and raw m a t e r i a l a v a i l a b i l i t y . A u s t r a l i a appea r s t o have a comparative advantage i n i t s raw m a t e r i a l supply, whi le c o s t s a r e comparable wi th those i n ove r seas c o u n t r i e s . However, t h e r e a r e problems wi th t h e average s c a l e and t echno log ica l c o n d i t i o n of m i l l s i n A u s t r a l i a . These f a c t o r s a r e now considered .

( a ) P r i c e s

There h a s been no pronounced upward o r downward t r e n d i n world p r i c e s o f pulp, paper and paperboard s i n c e 1965 ( s e e appendix B) . However, world p r i c e s have been f a l l i n g s i n c e 1982. The world p r i c e of p r i n t i n g and w r i t i n g paper i s c u r r e n t l y low, whi le t h e p r i c e of packaging paper , which recovered from a l o w a t t h e end of 1982, i s d e c l i n i n g once aga in ( s e e f i g u r e 3 ) . Newsprint p r i c e s on world markets have a l s o dec l ined due t o reduced demand i n t h e United S t a t e s and Europe.

Using f i g u r e 3 a comparison can be made o f import and world p r i c e s of p r i n t i n g and w r i t i n g paper , and packaging paper. These d e c l i n e s i n world p r i c e s have been o f f s e t by t h e d e p r e c i a t i o n o f t h e A u s t r a l i a n d o l l a r r e l a t i v e t o t h e c u r r e n c i e s of t he major s u p p l i e r s , a l though t h i s is not f u l l y r e f l e c t e d i n f i g u r e 3 because 1985-86 d a t a a r e not y e t a v a i l a b l e . Had t h e A u s t r a l i a n d o l l a r no t d e p r e c i a t e d , t h e A u s t r a l i a n indus t ry would be f ac ing cons ide rab ly g r e a t e r compe t i t i on from imported products . The nega t ive a s p e c t of t he d e p r e c i a t i o n is manifes ted i n inc reased p r i c e s f o r imported inpu t s .

F igure 3: WORLD AND IMPORT PRICES OF KRAFT PACKAGING AND PRINTING AND WRITING PAPERS

140 B a s e : S e p t e m b e r q u a r t e r 1981-82 = 100

130 /

80 .

World; p r i n t i n g and wr i t i ng paper

70

~ n d e x I I I

D e c . D e c . D e c .

1982-83 1983-84 1984-85

BAE c h a r t

Over t h e p a s t decade , domes t ic p r o d u c t s have commanded premiums (o f up t o 40 p e r c e n t ) o v e r imported p r o d u c t s o f comparable q u a l i t y . T h i s premium h a s been d e s c r i b e d a s ' t h e margin i n f avou r o f l o c a l supp ly which t h e marke t w i l l bea r ... due to a v a i l a b i l i t y , r e l i a b l e d e l i v e r y , a b i l i t y t o meet s m a l l o r d e r s and proven per formance . . . on l o c a l c o n v e r t i n g equipment ' (IAC 1978 ) . T h i s quo t e r e l a t e s t o p r i n t i n g and w r i t i n g p a p e r i n p a r t i c u l a r , bu t a s i m i l a r e x p l a n a t i o n would a l s o app ly f o r o t h e r t y p e s of pape r .

(b ) I n p u t c o s t s

The c o n t r i b u t i o n to costs of v a r i o u s i n p u t s f o r d i f f e r e n t p a p e r p r o d u c t i o n p r o c e s s e s i n A u s t r a l i a a r e shown i n t a b l e 5. Of n o t e i s t h e major c o n t r i b u t i o n t o costs of c a p i t a l e x p e n d i t u r e , which i n c l u d e s i n t e r e s t , d e p r e c i a t i o n and d i v i d e n d s . T h i s r a n g e s from 35 p e r c e n t to 45 p e r c e n t , depending on t h e p roduc t . Raw m a t e r i a l ( v a r i a b l e ) c o s t s c o n s t i t u t e 30-40 p e r c e n t o f t o t a l costs. T ranspo r t and packaging costs a r e r e l a t i v e l y minor, and l abou r costs a r e g e n e r a l l y l e s s t h a n 1 0 p e r c e n t o f t o t a l costs. These cost components were d e r i v e d f o r h y p o t h e t i c a l new m i l l s and s o may n o t a c c u r a t e l y r e f l e c t a c t u a l costs. I n p a r t i c u l a r , e x i s t i n g s m a l l m i l l and machine s i z e s would have h i g h e r l a b o u r and e n e r g y costs.

I n p u t c o s t s i n A u s t r a l i a t end to be below t h e ave r age of t h e l e a d i n g p u l p and pape r producing c o u n t r i e s . Using exchange r a t e s a t June 1985 ($A1 = US$0.66), t h e c o s t s o f major i n p u t s such a s pulpwood a t t h e m i l l ,

Tab l e 5: ESTIMATED CONTRIBUTION TO COSTS OF INPUTS I N PAPER PRODUCTION

I n p u t Super L igh twe igh t

Newsprint c a l e n d a r e d c o a t e d Woodf r e e K r a f t l i n e r

Wood 8.9 5.6 7.5 9.9 23.9 Purchased f i b r e 5.9 18.2 - - - Chemicals 3.1 9.1 21.0 13.8 2.1 Pac kag ing 2.4 1 .9 1.5 2.8 0.6 Energy 21.1 12.4 8.8 7.0 6.1

T o t a l v a r i a b l e 41.5 47.3 38.9 33.4 32.7

Labour 6.8 7.3 6.6 10.2 8.6 M a t e r i a l s 6.8 5.2 5.7 6 .1 6.4 Overheads 2.6 2.3 2.8 2.9 2.9

T o t a l f i x e d 16 .3 14.8 15.0 19.3 17 .9

C a p i t a l e x p e n d i t u r e 38.5 35.0 43.7 44.7 45.0 T ra nspo r t costs 3.7 3.0 2.4 2.6 4.4

T o t a l 100.0 100.0 100.0 100.0 100.0

Note: C o s t s f o r a new m i l l o f economic s c a l e .

Source : F o r e s t r y and F o r e s t P roduc t s I n d u s t r y Counc i l , Melbourne, p e r s o n a l communication, October 1985.

Table 6: COSTS OF MAJOR INPUTS I N PAPER PRODUCTION I N 1984-85: BY COUNTRY

Pulpwood ( a ) Labour pe r (under bark) Chips(a) So f t - Hard- Sof t - Hard-

person

Country wood wood wood wood Fue l (b ) Power Operator S t a f f

A u s t r a l i a New Zealand Japan Canada West United S t a t e - west - south Fin land Sweden B r a z i l Ch i l e

( a ) A t m i l l door. (b) O i l equ iva len t .

Source: Fo res t ry and F o r e s t Products I n d u s t r i e s Council , Melbourne, p e r s o n a l communication, October 1985.

power and f u e l a r e among t h e lowest i n t h e world, while labour r a t e s a r e approximately average ( s e e t a b l e 6 ) . The l e v e l of investment depends on t h e p r e v a i l i n g and expected i n t e r e s t and exchange r a t e s , the a v a i l a b i l i t y of domestic equipment, f r e i g h t r a t e s of any imported equipment, c o n s t r u c t i o n methods, t h e p r i c e of c o n s t r u c t i o n m a t e r i a l s , t h e c o s t and p r o d u c t i v i t y of labour , and t h e f inanc ing of i n f r a s t r u c t u r e requirements ( i n p a r t i c u l a r , t h e s p l i t between p r i v a t e and government f inanc ing ) . The c o s t of imported c a p i t a l equipment i n A u s t r a l i a (a l lowing f o r exchange r a t e f a c t o r s ) , t h e f r e i g h t c o s t and, t o some e x t e n t , t he c o n s t r u c t i o n c o s t s and p r i c e of c o n s t r u c t i o n m a t e r i a l s make investment c o s t s i n A u s t r a l i a h igher t han i n some ove r seas c o u n t r i e s - 1 5 p e r c e n t h igher t han i n Scandinavian c o u n t r i e s and 7 pe r c e n t h igher t han i n New Zealand. But they a r e about equal t o those i n Japan and 20 pe r c e n t lower than i n North America ( F o r e s t r y and Fores t Products Indus t ry Council , Melbourne, pe r sona l communication, October 1985) .

(C) D i s t ance from s u p p l i e r s and markets

H i s t o r i c a l l y t h e domestic pulp , paper and paperboard indus t ry has been based on supplying t h e l o c a l market. The geograph ica l l o c a t i o n of A u s t r a l i a away from major pulp , paper and paperboard impor ters and e x p o r t e r s has l i m i t e d t h e a b i l i t y of t h e indus t ry t o compete i n t e r n a t i o n a l l y , but has g iven t h e l o c a l i ndus t ry an advantage i n producing f o r t h e domestic market. Furthermore, t h e emerging importance of South-East Asian c o u n t r i e s a s impor ters and A u s t r a l i a ' s r e l a t i v e proximi ty sugges t t h a t o p p o r t u n i t i e s e x i s t f o r A u s t r a l i a t o supply t h a t market (Parsons 1982) .

(d) A v a i l a b i l i t y of wood

H i s t o r i c a l l y t h e A u s t r a l i a n pulp , paper and paperboard i n d u s t r y has been based on t h e indigenous hardwood resource . I n t h e p a s t , hardwood-based papers were not we l l accepted on world markets. However, market p re fe rences have changed i n r e c e n t y e a r s s o t h a t hardwood p u l p and paper a r e now becoming i n c r e a s i n g l y accepted f o r h igh q u a l i t y uses. A u s t r a l i a c u r r e n t l y e x p o r t s hardwood woodchips f o r t h e p roduc t ion of hardwood pu lp i n Japan, t h e Republic of Korea and Taiwan. Th i s wood could be used t o produce p u l p i n A u s t r a l i a f o r expor t t o t h o s e c o u n t r i e s a s w e l l a s o t h e r markets i n South-East Asia. I n doing t h i s , A u s t r a l i a would have a l o c a t i o n a l advantage ove r emerging ove r seas hardwood pu lp s u p p l i e r s such a s B r a z i l , Po r tuga l and South Af r i ca , a l though s e a f r e i g h t c o s t s a r e expected t o remain low u n t i l a t l e a s t 1990. Tasmania may w e l l r e p r e s e n t t h e most d e s i r a b l e p o s i t i o n f o r a m i l l , g iven raw m a t e r i a l , water and energy a v a i l a b i l i t y . However, w i th t h e c u r r e n t low world p r i c e s f o r hardwood pu lp and t h e oversupply, such a p r o j e c t may n o t be commercially f e a s i b l e . Some problems wi th d e c l i n i n g a v a i l a b i l i t y of t h e indigenous hardwood re source a r e a l s o occur r ing , a l though t h e s e a r e l i k e l y t o be overcome by s u b s t a n t i a l i n c r e a s e s i n softwood a v a i l a b i l i t y a f t e r 1990 ( A u s t r a l i a n F o r e s t I n d u s t r i e s J o u r n a l 1986).

( e ) Economies o f i n t e g r a t i o n

Economies i n t h e paper i n d u s t r y can be ga ined by v e r t i c a l i n t e g r a t i o n from raw m a t e r i a l (wood) ownership t o t h e p roduc t ion of end p roduc t s . I n p a r t i c u l a r , s u b s t a n t i a l c o s t s av ings a r e made i n i n t e g r a t i n g pulp and paper product ion . The A u s t r a l i a n paper i n d u s t r y i s e x t e n s i v e l y i n t e g r a t e d . The major paper manufacturers produce a l a r g e p ropor t ion of t h e pu lp requi red and t h i s is o f t e n produced from f o r e s t r e sources owned by t h e companies or from m i l l r e s i d u e s from sawmil ls o r p a r t i c l e b o a r d m i l l s owned by t h e companies. In a d d i t i o n , t h e companies own f i r m s which u s e p a r t of t h e i r o u t p u t t o produce end p roduc t s ( f o r consumers) . T h i s s i t u a t i o n i s not unique t o A u s t r a l i a a s l a r g e ove r seas producers a r e s i m i l a r l y i n t e g r a t e d .

( f ) Economies of s c a l e

Large economies of s c a l e e x i s t i n pulp , paper and paperboard product ion , according t o Davidson and Stewardson (1979) and a s confirmed by t h e F o r e s t r y and F o r e s t Products I n d u s t r i e s Council (pe r sona l communication, May 1985) . A problem faced by domestic producers is t h e s c a l e of t h e A u s t r a l i a n i n d u s t r y r e l a t i v e t o ove r seas i n d u s t r i e s . From t a b l e 7, it seems t h a t A u s t r a l i a n paper and paperboard p roduc t ion c a p a c i t y p e r m i l l i n 1984 was somewhat below t h e world average s c a l e , whi le pu lp c a p a c i t y p e r m i l l was s u b s t a n t i a l l y below t h e ave rages of o t h e r c o u n t r i e s . The r e s u l t s of comparisons vary f o r d i f f e r e n t product types . For example, t h e average machine s i z e f o r newsprint i n A u s t r a l i a i s comparable wi th t h a t of most ove r seas compe t i to r s , whi le machine s i z e s f o r p r i n t i n g and w r i t i n g pape r s a r e w e l l below ove r seas l e v e l s . I n f a c t , average p r i n t i n g and wr i t i ng paper machine s i z e s i n t h e most e f f i c i e n t c o u n t r i e s a r e more than double t h e average s i z e i n A u s t r a l i a . S i m i l a r l y , packaging paper machines i n A u s t r a l i a tend t o be sma l l compared wi th world average l e v e l s (Fores t ry and F o r e s t Products Indus t ry Council , Melbourne, pe r sona l

1 communication, October 1985) . T h i s s c a l e f a c t o r may l i m i t A u s t r a l i a ' s compet i t iveness .

Table 7: SCALE AND UTILISATION OF PULP, PAPER AND PAPERBOARD CAPACITY I N 1984: BY COUNTRY

Average Number of T o t a l c a p a c i t y

Country m i l l s c a p a c i t y pe r m i l l U t i l i s a t i o n

Paper and paperboard A u s t r a l i a United S t a t e s Canada Finland Sweden Japan New Zealand Pulp A u s t r a l i a United S t a t e s Fin land Sweden Japan New Zealand

no. k t t 8

62.0 ( a ) 97.2 88.7 92.8 72.9 78.5

( a ) N e w c a p a c i t y added du r ing 1984 may make t h i s f i g u r e un rep resen ta t ive . The 1985 f i g u r e is 76.9 p e r c e n t .

Source: Pulp and Paper I n t e r n a t i o n a l (1985) .

Using t a b l e 7 a comparison of c a p a c i t y u t i l i s a t i o n ( t h a t is, t h e r a t i o of p roduc t ion t o c a p a c i t y ) can a l s o be made. I n 1984, A u s t r a l i a was one of t h e h i g h e s t u s e r s of paper and paperboard product ion capac i ty , but i ts u t i l i s a t i o n of pu lp c a p a c i t y was somewhat lower t h a n t h e averages f o r o t h e r c o u n t r i e s . S ince 1984 some p roduce r s i n Scandinavian c o u n t r i e s and i n North America have had cons ide rab le 'down t i m e ' i n pu lp product ion i n o rde r t o reduce r a p i d l y r i s i n g s tocks . T h i s would have lowered u t i l i s a t i o n r a t e s cons iderably .

(g) Technologica l c o n d i t i o n of m i l l s

Another problem encountered by domest ic producers i s t h e t echno log ica l c o n d i t i o n o f A u s t r a l i a n m i l l s . The c o n d i t i o n of a m i l l can be measured by i ts 'apparent age ' , which is t h e age of t h e m i l l a f t e r al lowing f o r r ebu i ld ing and mod i f i ca t ions which can s i g n i f i c a n t l y improve t h e m i l l ' s cond i t ion . Costs a s s o c i a t e d wi th energy use, l abour , f i b r e and f i l l e r s i n c r e a s e wi th apparent age. On t h i s b a s i s , newsprint m i l l s i n A u s t r a l i a a r e of s i m i l a r apparent age t o ove r seas m i l l s ; however, t h e apparent age ' of domestic p r i n t i n g and wr i t i ng paper m i l l s is s i g n i f i c a n t l y h igher t h a n 1 over seas m i l l s . Some r a t i o n a l i s a t i o n of p r i n t i n g and wr i t i ng paper m i l l s may be necessary , and t h e r ecen t m i l l c l o s u r e s , such a s Burnie Eas t and t h e B a l l a r a t coa t ing f a c i l i t y , may be a s t e p i n t h i s d i r e c t i o n . Packaging paper and paperboard m i l l s a r e of s i m i l a r apparent age t o m i l l s i n l a r g e producing c o u n t r i e s (Fores t ry and F o r e s t Products Indus t ry Council , Melbourne, p e r s o n a l communication, October 1985).

3. CURRENT ASSISTANCE ARRANGEMENTS

Government a s s i s t a n c e measures, through t h e i r i n f l u e n c e on t h e l e v e l s of consumption, p roduc t ion and p r i c e s , a f f e c t t h e s t r u c t u r e , compe t i t i venes s , e f f i c i e n c y and t h e growth of a n indus t ry . The I n d u s t r i e s A s s i s t a n c e Commission i d e n t i f i e d i n its background paper t o t h i s i n q u i r y s e v e r a l t a r i f f and non- t a r i f f i n s t rumen t s which s i g n i f i c a n t l y i n f l u e n c e t h e pu lp , pape r and paperboard i n d u s t r y ' s l e v e l of p r o t e c t i o n . Accordingly, t h i s s e c t i o n reviews t h e main forms of government a s s i s t a n c e - namely, t a r i f f s , boun t i e s , by-law, p r e f e r e n t i a l t r a d i n g agreements and t h e c l o s e r economic r e l a t i o n s agreement.

The review of c u r r e n t a s s i s t a n c e l e v e l s h i g h l i g h t s f e a t u r e s of t h e a s s i s t a n c e which have i m p l i c a t i o n s f o r t h e growth of t h e pu lp , pape r and paperboard i n d u s t r y i n A u s t r a l i a .

. The e f f e c t i v e r a t e of p r o t e c t i o n a f fo rded t h e pu lp , paper and paperboard i n d u s t r y is low r e l a t i v e t o t o t a l manufacturing. However, t h e r a t e of p r o t e c t i o n is not uniform a c r o s s p r o d u c t s o r a c r o s s i n d u s t r i e s w i t h i n t h e paper , pape r p roduc t s , p r i n t i n g and p u b l i s h i n g i n d u s t r y group.

. The pulp , paper and paperboard i n d u s t r y is c u r r e n t l y p r o t e c t e d a g a i n s t impor t s predominantly by t a r i f f s . However, t h e type of p r o t e c t i o n d i f f e r s from p roduc t t o product . Cur ren t ly a mix of both t a r i f f s and boun t i e s i s used f o r c e r t a i n p r i n t i n g and w r i t i n g pape r s . For example, uncoated p r i n t i n g and w r i t i n g pape r produced under p a r t i c u l a r pu lp ing p r o c e s s e s is s u b j e c t t o a $70/t bounty and no t a r i f f s , whi le uncoated p r i n t i n g and w r i t i n g paper produced by o t h e r p r o c e s s e s r e c e i v e s no bounty bu t is s u b j e c t t o t a r i f f s of 2 p e r c e n t o r more. An impor tant i s s u e is whether t a r i f f s r a t h e r t h a n boun t i e s should be used a s p r o t e c t i o n ins t ruments .

. Ass i s t ance provided through boun t i e s has d e c l i n e d s i n c e t h e y were i n t roduced i n 1979 f o r s e l e c t e d coa t ed and uncoated p r i n t i n g and w r i t i n g pape r S.

. New Zealand c u r r e n t l y en joys a n advantage ove r A u s t r a l i a i n pu lp , pape r and paperboard t r a d e under t h e c l o s e r economic r e l a t i o n s agreement. I t is, however, t o o e a r l y t o say whether t h a t agreement w i l l have any s u b s t a n t i a l i n f l u e n c e on t h e f u t u r e development of t h e A u s t r a l i a n pulp , pape r and paperboard indus t ry .

P o l i c y a s p e c t s of t h e c u r r e n t a s s i s t a n c e measures a r e cons ide red i n s e c t i o n 5.

3.1 T a r i f f s and Boun t i e s

The e f f e c t i v e r a t e s of a s s i s t a n c e a c r o s s t h e v a r i o u s i n d u s t r i e s i n t h e paper , paper p roduc t s , p r i n t i n g and pub l i sh ing i n d u s t r y group have no t been uniform (see t a b l e 8 ) . I n 1982-83 t h e s e r a t e s ranged from 46 p e r c e n t f o r paper bags t o -3 p e r c e n t f o r pub l i sh ing . The pu lp , paper and paperboard i n d u s t r y maintained an e f f e c t i v e r a t e of a s s i s t a n c e of 8-10 p e r c e n t ove r t h e p e r i o d 1977-78 t o 1982-83, w e l l below t h a t of t h e paper , paper p roduc t s , p r i n t i n g and pub l i sh ing i n d u s t r y group (24-26 p e r c e n t ) and t h a t of t h e manufacturing s e c t o r a s a whole (23-25 p e r c e n t ) . The I n d u s t r i e s A s s i s t a n c e Commission c a l c u l a t e d t h e average e f f e c t i v e r a t e of

Table 8: AVERAGE EFFECTIVE RATES OF ASSISTANCE TO THE PAPER, PAPER PRODUCTS, PRINTING AND PUBLISHING INDUSTRIES GROUP

ASIC I n d u s t r y code d e s c r i p t i o n

2631 Pulp, paper and paperboard 9 9 9 8 8 1 0 2632 Paper bags ( i n c l u d i n g

t e x t i l e bags) 42 47 48 49 49 46 2633 S o l i d f i b r e b o a r d c o n t a i n e r s 31 34 33 34 35 29 2634 Corrugated f i b r e b o a r d

c o n t a i n e r s 32 34 35 36 36 26 2635 P a p e r p r o d u c t s n e c 21 22 20 1 7 1 8 23

263 Paper and pape r p roduc t s 20 21 21 21 21 20

2641 Pub l i sh ing -5 -4 -4 -4 -4 -3 2642 P r i n t i n g and pub l i sh ing 21 21 21 22 22 22 2643 Paper s t a t i o n e r y 33 34 31 29 30 29 2644 P r i n t i n g and book b inding 36 37 37 37 37 38 2645 P r i n t i n g t r a d e s e r v i c e s nec 24 24 23 21 22 21

264 P r i n t i n g and a l l i e d i n d u s t r i e s 28 30 29 28 29 29

26 Paper, paper p roduc t s , p r i n t i n g and pub l i sh ing 24 26 25 25 25 24

(23) (24) (23) (23) (25) (25)

nec, Not e l sewhere c l a s s i f i e d .

Note: F i g u r e s i n p a r e n t h e s e s a r e t h e average e f f e c t i v e r a t e s f o r t o t a l manufacturing.

Source: IAC (1985a, Table 3.7) .

a s s i s t a n c e t o t h e pu lp , paper and paperboard i n d u s t r y i n 1974-75 a t 14 p e r c e n t (Davidson and Stewardson 1979) . Th i s i n d i c a t e s t h a t , s i n c e t h e mid-1970s, e f f e c t i v e a s s i s t a n c e t o t h e pulp , paper and paperboard i n d u s t r y h a s f a l l e n s i g n i f i c a n t l y . There were, however, s u b s t a n t i a l year-to-year f l u c t u a t i o n s i n measured a s s i s t a n c e dur ing t h e p e r i o d 1973-74 t o 1977-78, a l t hough i n t h e subsequent y e a r s t h e f l u c t u a t i o n s were l e s s pronounced.

The predominant form of a s s i s t a n c e provided t o t h e pu lp , paper and paperboard i n d u s t r y is t a r i f f s . T a r i f f s p rov ide a s s i s t a n c e t o l o c a l manufac turers by i n c r e a s i n g t h e p r i c e of competing impor ts on t h e l o c a l market , t h u s p e r m i t t i n g s a l e s o f l o c a l l y produced p roduc t s a t p r i c e s h ighe r t h a n would be t h e c a s e i n t h e absence of t h e t a r i f f .

The p r o p o r t i o n s o f imports which en t e red t h e domestic market under t h e d i f f e r e n t t a r i f f l e v e l s apply ing f o r pulp , paper and paperboard a r e shown i n t a b l e 9. T a r i f f l e v e l s f o r i n d i v i d u a l i tems range from ze ro t o 30 p e r cen t . T h i s h i g h l i g h t s t h e l a c k of uni formi ty i n a s s i s t a n c e l e v e l s , which may cause a m i s a l l o c a t i o n of r e sou rces w i t h i n t h e pu lp , paper and paperboard indus t ry . T h i s i s s u e is cons ide red i n s e c t i o n 5.

Tab le 9: IMPORTS OF PULP, PAPER AND PAPERBOARD I N 1984-85: BY TARIFF LEVEL

Product T a r i f f l e v e l

0-5% 6-19% 20-308

Pulp 99.9 Waste pa pe r 100.0 Newsprint 100.0 P r i n t i n g and w r i t i n g (uncoa ted) pape r 27.3 P r i n t i n g and w r i t i n g ( coa t ed ) pape r 61.4 Household and s a n i t a r y t i s s u e s 99.7 Packaging pape r 61.8 Misc e l l a neous pape r 55.0 Paper board 29.8 T o t a l pape r and pape rboa rd 67.0

Source : Der ived f ram ABS impor t s t a t i s t i c s .

D e t a i l s o f t h e r a t e s of t a r i f f c u r r e n t l y a p p l i c a b l e to some s e l e c t e d i t e m s under r e f e r e n c e a r e s e t o u t i n appendix C. The t a b l e s i n t h e appendix i n c l u d e both g e n e r a l and s p e c i a l ( p r e f e r e n t i a l ) l e v e l s o f t a r i f f S

c u r r e n t l y a p p l i c a b l e . Some g e n e r a l t a r i f f s a l s o appea r under c o n c e s s i o n a l r a t e s where by-law p r o v i s i o n s apply .

Ma nufac tu r e r s of c e r t a i n p r i n t i n g and w r i t i n g p a p e r s a r e a s s i s t e d by way of b o u n t i e s p a i d on t h e i r p roduc t i on . A p r o d u c t i o n bounty i n v o l v e s t h e payment of money t o domes t i c p roduce r s . Thus it encourages domes t i c p roduc t i on and e n a b l e s p r o d u c e r s to sel l a t p r i c e s below t h e l e v e l s of imported goods. P roduc t i on b o u n t i e s were i n t roduced f o r c e r t a i n p r i n t i n g and w r i t i n g p a p e r s f o r t h e p e r i o d Feb rua ry 1979 to Feb rua ry 1987. Renewal o f t h e s e is under r e f e r e n c e du r ing t h e p r e s e n t i n q u i r y . The b o u n t i e s a v a i l a b l e on d i f f e r e n t t y p e s of p r o d u c t i n t h e p e r i o d 1979-87 a r e shown i n t a b l e 1 0 ( s e e a l s o appendix C ) . A s s i s t a n c e i n t h e form of b o u n t i e s t o t a l l e d $2.lm i n 1979-80, $1.4m i n 1982-83 and $1.6m i n 1984-85.

Ta b l e 10: BOUNTY ENTITLEMENTS I N THE PULP, PAPER AND PAPERBOARD INDUSTRY

T a r i f f i t e m P roduc t d e s c r i p t i o n Bounty

48.01.100 As p r e s c r i b e d by by-law $70.00/t (uncoa ted pape r c o n t a i n i n g more t h a n 1 0 p e r c e n t b u t l e s s t h a n 60 p e r c e n t mechanica l p u l p ; uncoa ted pape r c o n t a i n i n g 60 p e r c e n t o r more bu t l e s s t h a n 70 p e r c e n t mechanica l p u l p )

48.07.100 As p r e s c r i b e d by by-law ( l i g h t w e i g h t c o a t e d mechan i ca l s f o r p r i n t e d m a t t e r )

Under the by-law (or commercial t a r i f f concessions) provision, some products a r e pa r t l y o r t o t a l l y exempt from t a r i f f s - newsprint i s t o t a l l y exempt and ce r t a in pr in t ing and writing papers ( t a r i f f item 48.01.200, t ab l e C2) imported from various countr ies a r e pa r t l y exempt. Imports of the l a t t e r item, fo r example, a t t r a c t a t a r i f f of 2 per cent under the general ra te , but a r e f r e e of duty i f from developing countries. In other words, t h i s item is dut iab le a t a very low r a t e v i a t he by-law provisions, but the duty i s t o t a l l y exempt when imports a r e from developing countries.

3.3 Preferen t ia l Trading Agreements

Under both un i l a t e r a l and mu l t i l a t e r a l p r e f e r en t i a l trading arrangements, imports of par t icu la r paper and paperboard grades from spec i f ic countr ies a re allowed entry a t a r a t e of t a r i f f which is lower than the general r a t e ( fo r examples, see appendix C ) . ~ u s t r a l i a has p r e f e r en t i a l trading agreements fo r pulp, paper and paperboard with a number of countr ies , including New Zealand, Canada and the island members of the South Pacif ic Forum. In addi t ion, p re fe ren t ia l r a t e s of duty apply t o imports from a number of developing countr ies under the Australian System of Tar i f f Preference.

3.4 Closer Economic Relations Agreement

In addi t ion t o concessional t r ade arrangements, Austral ia has a b i l a t e r a l t rade agreement, the c loser economic re la t ions (CER) agreement, with New Zealand fo r a l l ranges of manufactured goods. This agreement came in to e f f ec t a t the beginning of 1983 and covers a range of fo r e s t products traded between the two countries. I t should be noted, however, tha t only a few grades of pulp, paper and paperboard which f a l l within the agreement a r e covered in t h i s submission.

Table 11: AUSTRALIA'S TRADE IN PULP, PAPER AND PAPERBOARD WITH NEW ZEALAND IN 1984-85

Imports from New Zealand Exports t o New Zealand A s proportion A s proport ion

of t o t a l A s proportion of t o t a l Australian of apparent New Zealand

Product Total imports consumption Total imports

Pulp 86 307 4 4 8 0 0

Newsprint 93 344 31 Print ing and writing paper 10 017 4

Other papers 23 892 8 8

Paperboard 965 0.62 0.15 0 0

Source: BAE (1985) .

For many years, pulp, paper and paperboard enjoyed re la t ive ly f r ee t rade under the New Zealand - Austral ia Free Trade Agreement (NAFT'A), an agreement p r io r t o the CER agreement, and t h i s s i t ua t ion did not a l t e r s ign i f icant ly when the l a t t e r agreement came in to e f f ec t . In 1983-84, New Zealand supplied 32 per cent and 48 per cent of Aus t ra l ia ' s imports of newsprint and wood pulp, respectively (Senate Standing Committee on Industry and Trade 1985) and these items were imported f r e e of duty. Since 1983 the duty on ce r t a in papers imported from New Zealand has been phased down so tha t these products have become f r ee of duty. The implementation of the CER agreement had no implications fo r the Australian pulp, paper and paperboard industry, since most of the products of t h i s industry were already f r ee of duty under NAFTA. It is apparent from t ab l e 11 t h a t New Zealand current ly enjoys a re la t ive advantage over Australia i n pulp, paper and paperboard t rade and t h a t Aus t ra l ia ' s t o t a l imports from New Zealand are substant ial , a t l e a s t for pulp, newsprint and 'other papers' .

4. MARKET PROSPECTS

The long te rm consumption p r o j e c t i o n s p re sen ted i n t h i s s e c t i o n f o r pu lp , pape r and paperboard p r o v i d e t h e b a s i s f o r t h e l i k e l y f u t u r e t r e n d s i n l o c a l p roduc t ion and n e t impor ts t o t h e yea r 2000, based on c u r r e n t p r o t e c t i o n l e v e l s .

Ove ra l l , t h e domest ic market f o r pulp , paper and paperboard is expected t o c o n t i n u e t o expand t o t h e y e a r 2000, a l t hough t h e growth r a t e w i l l slow a f t e r t h e y e a r 2000.

. Consumption growth t o t h e y e a r 2000 w i l l be f a s t e s t f o r p r i n t i n g and w r i t i n g paper (3.2 p e r c e n t a y e a r ) and wrapping and packaging pape r (5.2 p e r c e n t a y e a r ) .

. Only low t o moderate growth i n consumption t o t h e yea r 2000 is expected f o r newspr in t (l p e r c e n t a y e a r ) , household and s a n i t a r y t i s s u e s (1.8 p e r c e n t a y e a r ) and paperboard (2 .5 p e r c e n t a y e a r ) .

. Pulp and wastepaper consumption is p r o j e c t e d t o grow a t 2.1 p e r c e n t a yea r t o t h e y e a r 2000.

Growth i n t h e domest ic market f o r pu lp , paper and paperboard p r o v i d e s t h e b a s i s f o r expansion of t h e domest ic i ndus t ry . Given an expanding domest ic market , c o n s i d e r a t i o n is g i v e n t o whether A u s t r a l i a n p roduce r s a r e l i k e l y t o be a b l e t o expand p roduc t ion i n response t o t h e demand.

. The domest ic i n d u s t r y h a s some comparative advantages i n meeting t h i s demand.

. I t is p r o j e c t e d t h a t l o c a l paper manufac turers w i l l no t s i g n i f i c a n t l y i n c r e a s e t h e i r domest ic market s h a r e be fo re t h e yea r 2000 excep t i n t h e newspr in t market.

. Impor ts of packaging paper and paperboard a r e expected t o grow s i g n i f i c a n t l y and c a p t u r e a n i n c r e a s i n g s h a r e of t h e domestic market .

4.1 Fu tu re Consumption Trends

S i x paper c a t e g o r i e s were chosen f o r a n a l y s i s - newspr in t , paperboard, p r i n t i n g and w r i t i n g paper , k r a f t wrapping and packaging paper , household and s a n i t a r y t i s s u e s , and misce l l aneous paper. The p u l p c a t e g o r i e s covered i n t h e a n a l y s i s a r e mechanical pulp , thermomechanical pulp , chemical pu lp , semi-chemical pulp , wastepaper, and o t h e r . F igu re 4 p r e s e n t s t h e 'most l i k e l y ' p r o j e c t i o n s of pape r and paperboard consumption to t h e yea r 2020 and t a b l e 1 2 p r e s e n t s t h e 'most l i k e l y ' p r o j e c t i o n s of pu lp consumption t o t h e yea r 2000. D e t a i l s of t h e p r o j e c t i o n s a r e con ta ined i n appendix D. The paper and paperboard consumption p r o j e c t i o n s a r e r e v i s i o n s o f p r o j e c t i o n s prepared i n 1984 (Edquis t and Morr is 1985) .

Newsprint consumption is p r o j e c t e d t o grow a t between 0.6 p e r c e n t and 1.3 p e r c e n t a yea r between 1984-85 and t h e y e a r 2000 and a t between 0.5 p e r c e n t and 1.2 p e r c e n t a y e a r between t h e y e a r s 2000 and 2020. Newsprint can be regarded a s an 'overmature ' p roduc t i n t h e s ense t h a t newspr in t consumption growth i s d e c l i n i n g r e l a t i v e t o t h e growth i n g r o s s

Figure 4: PROJECTIONS OF PAPER AND PAPERBOARD CONSUMPTION

1400 -

l200 -

1000 -

800 -

600 -

Miscellaneous

1970 1980 1990 2000 2010

BAE chart

domestic product . So t h e r e is l i k e l y t o be on ly l i m i t e d growth i n newspr in t consumption a s a r e s u l t of s a t u r a t i o n of t h e domest ic market a s w e l l a s compe t i t i on from new s u b s t i t u t e s f o r newspapers - mainly t h e e l e c t r o n i c media.

The consumption of p r i n t i n g and w r i t i n g paper is expected t o c o n t i n u e t o grow f a i r l y r a p i d l y (between 3.1 p e r c e n t and 3.3 p e r c e n t a y e a r ) t o t h e yea r 2000. I t is l i k e l y t h a t t h e ' i n fo rma t ion ' i n d u s t r y w i l l be r e s p o n s i b l e f o r i nc reased p r i n t i n g and w r i t i n g pape r usage. This , combined wi th t h e con t inued i n c r e a s e i n importance of t e r t i a r y i n d u s t r i e s i n economic a c t i v i t y , w i l l be r e s p o n s i b l e f o r t h e cont inued growth i n consumption of p r i n t i n g and w r i t i n g paper. However, un l e s s new end uses f o r p r i n t i n g and w r i t i n g paper a r e developed, t h e c e i l i n g t o consumption p e r person w i l l be a t t a i n e d by about t h e yea r 2000 and growth w i l l s low d r a m a t i c a l l y t o between 0.8 p e r c e n t and 1.1 p e r c e n t a yea r . Th i s is l i k e l y t o be a r e f l e c t i o n of improvements i n i n fo rma t ion p roces s ing technology which a l l ow more e f f i c i e n t use of o f f i c e computers and a consequent r educ t ion i n pape r consumption. Some evidence of t h i s t r e n d is a l r eady a v a i l a b l e (de S o l a Pool 1983) , a l t hough it is not c u r r e n t l y apparent i n A u s t r a l i a .

The consumption of household and s a n i t a r y t i s s u e s is expected t o grow by between 1 .7 p e r c e n t and 1.9 p e r c e n t a y e a r up t o t h e yea r 2000. Growth i s t h e n expected t o d e c l i n e t o between 0.8 p e r c e n t and 1.1 p e r c e n t a yea r . Th i s growth p a t t e r n r e f l e c t s t h e f a c t t h a t t h e consumption of t i s s u e s p e r pe r son is approximately a t c e i l i n g l e v e l , s o t h a t f u r t h e r growth w i l l mainly r e f l e c t popu la t ion growth. However, s o c i a l t r e n d s toward t h e i nc reased use of newer p r o d u c t s such a s d i s p o s a b l e napp ie s may l ead t o g r e a t e r growth i n consumption.

Growth i n t h e consumption of k r a f t wrapping and packaging paper is expected t o remain s t r o n g - between 4.9 p e r c e n t and 5.5 p e r c e n t a y e a r t o t h e y e a r 2000 and between 2.4 p e r c e n t and 2.6 p e r c e n t a y e a r a f t e r 2000. However, t h e cont inued s u b s t i t u t i o n of o t h e r m a t e r i a l s such a s p l a s t i c may reduce t h e market s h a r e of pape r and t h i s r a t e of growth.

Paperboard consumption is expected t o grow i n l i n e w i th economic a c t i v i t y . The r a t e of growth t o t h e y e a r 2020 i s expected t o be between 2.1 p e r c e n t and 2.8 p e r c e n t a yea r . Again it is necessary t o q u a l i f y t h e s e p r o j e c t i o n s because of t h e p o s s i b i l i t y t h a t new packaging s u b s t i t u t e s cou ld , through new t e c h n o l o g i c a l advances, reduce t h e paperboard market s h a r e of i n d u s t r i a l packaging.

The consumption of a number of mi sce l l aneous s p e c i a l t y g r a d e s of pape r is p r o j e c t e d t o con t inue t o grow a t t h e same r a t e a s g e n e r a l economic a c t i v i t y . The p r o j e c t i o n s a r e based on a c o n t i n u a t i o n of ave rage consumption l e v e l s p e r d o l l a r of g r o s s domest ic product .

Pulp and was te paper a r e used a s i n p u t s i n t h e p roduc t ion of paper i n r e l a t i v e l y f i x e d q u a n t i t i e s . The consumption of t o t a l f i b r e i n t h e form of p u l p and wastepaper w i l l change a t t h e r a t e shown i n t a b l e D3 i n appendix D a s t h e p roduc t ion o f paper and paperboard changes. Three s c e n a r i o s , based on d i f f e r e n t assumptions about t h e p roduc t ion of paper , were prepared . S c e n a r i o 1 is based on domest ic paper p roduc t ion remaining a t c u r r e n t l e v e l s , whi le s c e n a r i o 3 is based on domest ic paper p roduc t ion meeting t o t a l f u t u r e demand. These s c e n a r i o s r e p r e s e n t extreme bounds t o t h e p r o j e c t i o n s , s i n c e it is l i k e l y t h a t paper p roduc t ion w i l l expand and it is equa l ly l i k e l y t h a t A u s t r a l i a w i l l remain a n e t importer of paper p roduc t s a t l e a s t u n t i l t h e yea r 2000. Scena r io 2 r e p r e s e n t s t h e most l i k e l y s i t u a t i o n ( s e e t a b l e 12) and is based on domest ic paper p roduc t ion c a p a c i t y r i s i n g a s expected by manufac turers . It is f u r t h e r assumed t h a t t h e p r o p o r t i o n s of v a r i o u s t y p e s of pu lp and wastepaper used i n t h e p roduc t ion of d i f f e r e n t t y p e s of pape r w i l l remain r e l a t i v e l y unchanged from c u r r e n t l e v e l s . (These a r e shown i n t a b l e D4 i n appendix D.) The excep t ion t o t h i s is wastepaper i n t h e ' o t h e r pape r and paperboard ' c a t ego ry , which i s expected t o i n c r e a s e from 55 p e r c e n t of t o t a l f i b r e used i n 1985 t o 60 p e r c e n t i n 2000. Th i s assumption is based on a combination of h i s t o r i c a l t r e n d s i n usage, i nc reased wastepaper use worldwide, and p o s s i b l y r e sou rce c o n s t r a i n t s .

Table 12: PROJECTIONS OF PULP CONSUMPTION

Product 1985 1990 2000

Mechanical Thermomechanical Chemical Semi-chemical Wastepaper Other

T o t a l 1 621 1 815 2 197

Under s c e n a r i o 2 t h e growth i n pu lp and wastepaper consumption is expected t o be 2.1 p e r c e n t a y e a r t o t h e yea r 2000. The annual growth r a t e s f o r d i f f e r e n t g r a d e s a r e : 1.4 p e r c e n t f o r wastepaper, 2.1 p e r c e n t f o r mechanical pu lp , 3.5 p e r c e n t f o r thermomechanical pulp , 2.2 p e r c e n t f o r chemical p u l p and 1.4 p e r c e n t semi-chemical pulp . Scena r ios 1 and 3 g i v e a range f o r p u l p and wastepaper consumption growth o f 0-5.3 p e r c e n t a yea r .

4.2 Demand f o r Imports

T h i s subsec t ion c o n s i d e r s l i k e l y f u t u r e t r e n d s i n t h e demand f o r impor ts of paper , g iven t h e consumption p r o j e c t i o n s . In a d d i t i o n , c o n s i d e r a t i o n is g iven t o t h e s h o r t run impact of changes i n world p r i c e s on t h e import demand f o r p r i n t i n g and w r i t i n g paper.

Imported newspr in t is comparable wi th domestic newspr in t i n te rms of q u a l i t y and end-use a p p l i c a t i o n . It is ob ta ined l a r g e l y t o supplement domes t i ca l ly produced newsprint . The market f o r domes t i ca l ly produced newspr in t is cap tu red i n t h e sense t h a t t h e newspr in t producer can se l l a l l it produces e i t h e r t o t h e newspaper groups which it owns o r through c o n t r a c t s wi th o t h e r p r i n t i n g agencies . Therefore , demand f o r imported newspr in t f i l l s t h e gap between what is consumed and what is produced domest ica l ly .

A s t h e c o s t of newsprint is a r e l a t i v e l y sma l l p r o p o r t i o n of t h e c o s t of producing a newspaper, p r i c e has been found t o have an i n s i g n i f i c a n t e f f e c t on newsprint demand (Edquis t and Mor r i s 1985) . I n t h e long run, however, p r i c e changes would be expected to a f f e c t t h e domest ic supply d e c i s i o n s of l o c a l newsprint producers. Capacity growth would be based on both l i k e l y p r i c e t r e n d s and consumption growth. The l i k e l y growth i n newspr in t p roduc t ion c a p a c i t y , based on manufacturers ' e x p e c t a t i o n s and consumption growth, sugges t s t h a t n e t impor ts of newspr in t w i l l f a l l from a peak o f 303 k t i n 1984-85 t o 259 k t i n 1990 and t o 178 k t i n t h e y e a r 2000 (de r ived from appendix D) .

P r i n t i n g and w r i t i n g paper impor ts a r e made up of uncoated and coated papers . Imports of uncoated papers had a 21 p e r c e n t domestic market s h a r e i n 1984-85 and impor ts of coated papers had a 84 p e r c e n t share . A s i g n i f i c a n t p ropor t ion of imported p r i n t i n g and w r i t i n g paper does n o t compete d i r e c t l y wi th domestic product ion o r have a major market s h a r e f o r t h e i n d i v i d u a l product . Other p roduc t s , however, do compete d i r e c t l y wi th domes t i ca l ly produced paper i n t h e same end use and have reduced t h e market sha re of domestic producers.

S h o r t term import demand modell ing was undertaken f o r t h e t o t a l p r i n t i n g and w r i t i n g paper market ( s e e appendix E f o r d e t a i l s ) . R e s u l t s need t o be i n t e r p r e t e d c a u t i o u s l y a s t hey r e l a t e t o t h e market i n aggregate r a t h e r t h a n t o uncoated and coa ted pape r s s e p a r a t e l y and do n o t r e f l e c t t h e long run e f f e c t s of changes i n exogenous v a r i a b l e s and changes i n resource a l l o c a t i o n between s e c t o r s a s a r e s u l t of r e l a t i v e a s s i s t a n c e changes.

The r e s u l t s i n d i c a t e t h a t t h e s h o r t run impact of a l p e r c e n t i n c r e a s e i n t h e p r i c e of p r i n t i n g and w r i t i n g paper impor ts would be a 0.6 p e r c e n t i n c r e a s e i n domestic product p r i c e s and a 0.5 p e r c e n t r educ t ion i n imports . Domestic supply was found t o be on ly s l i g h t l y responsive t o domestic p r i c e changes i n t h e s h o r t run, so t h e 0.6 p e r c e n t

domestic price increase would accrue to producers as short run profi ts . In the longer term, domestic supply would increase in response t o the higher price, as capacity and other fixed inputs were varied. The effects would be reversed for a 1 per cent decrease in the price of imports.

On the basis of expected capacity changes by manufacturers and the long term consumption trends outlined in appendix D , imports of printing and writing paper are projected t o increase marginally from 250 k t in 1984-85 to 282 k t by the year 2000. This suggests a f a l l i n the domestic market share of imports from 49 per cent in 1984-85 t o 37 per cent by 2000, largely as a result of expansion of existing domestic capacity a s well a s instal lat ion of new capacity by new entrants to t h i s market.

For household and sanitary t issues, imports have only a minor share of the domestic market. I t i s expected that capacity increases w i l l keep pace with consumption growth so that Australia w i l l remain largely self-sufficient in those products.

The si tuation for packaging paper and paperboard i s similar to that of printing and writing paper. Imports of packaging paper represent 20 per cent of the market and imports of paperboard comprise 25 per cent of the market. Projections of the consumption of these two products are based on population, income and price trends. The consumption projections, together with manufacturers' expected capacity increases, suggest that imports of these products w i l l increase from 227 k t in 1984-85 t o 360 k t in 1990 and t o 794 k t in 2000. This implies that the market share of imports w i l l r i s e from 21 per cent in 1984-85 t o 46 per cent by 2000. However, it i s possible that the substitution of other products may reduce imports. The increase in imports can be expected to be supplied from increased capacity in South-East Asian countries, by existing supplying Scandanavian countries, and from likely expansion in South Africa and Brazil.

Imports of pulp comprise 18 per cent of to ta l apparent consumption. However, th i s proportion varies substantially for different grades. For example, 40 per cent of chemical pulp requirements were imported in 1984-85, but less than 1 per cent of mechanical and thermomechanical pulp requirements were met by imports. Consumption trends broadly follow trends in paper production. Manufacturers forecast no new mechanical pulp capacity before 2000, although thermomechanical pulp capacity i s expected to increase by 75 per cent (see FAO 1985b). Given that there may be some substitution between these two pulps, capacity expansion is l ikely to meet the projected growth in consumption of these two pulps. However, since expansion prospects for chemical pulp capacity are expected t o be limited t o improvements in processing, imports of chemical pulp are projected to increase from 40 per cent of that market in 1984-85 to well over 50 per cent of the market by the year 2000. If u t i l i sa t ion of existing chemical pulp capacity improves, approximately 45 per cent of the market may be met by imports. Increased semi-chemical pulp consumption w i l l be met by existing capacity only if u t i l i sa t ion improves.

5. POLICY OPTIONS

The key economic f a c t o r s which in f luence A u s t r a l i a ' s a b i l i t y t o compete wi th ove r seas s u p p l i e r s of pulp , paper and paperboard a r e t h e l e v e l and t y p e s ( f o r example, boun t i e s and t a r i f f s ) of p r o t e c t i o n a s s i s t a n c e , t a x a t i o n , r e sea rch and development, a s w e l l a s g e n e r a l macroeconomic cond i t ions . P r i c e and a v a i l a b i l i t y of raw m a t e r i a l (wood), which a r e under t h e c o n t r o l of S t a t e governments, a r e a l s o important . I n t h i s s e c t i o n t h e s e economic f a c t o r s a r e d i scussed and r e l e v a n t p o l i c i e s a r e i d e n t i f i e d and analysed. It is recommended t h a t :

- uniform r a t e s and types of a s s i s t a n c e ( f o r example, t a r i f f s o r bount ies) a r e implemented f o r t h e d i f f e r e n t segments of t h e pulp , paper and paperboard indus t ry ;

- o v e r a l l a s s i s t a n c e l e v e l s t o t h e i n d u s t r y a r e reduced, t h e e x t e n t of any reduct ion depending on whether o r no t r e sources w i l l f low t o h igher c o s t a c t i v i t i e s elsewhere i n t h e economy;

- anti-dumping a c t i o n and l e g i s l a t i o n should be more c l o s e l y i n t e g r a t e d wi th broader p r o t e c t i o n p o l i c y ;

- compensatory a s s i s t a n c e should no t be provided t o t h e i n d u s t r y a s a means of matching i n c e n t i v e s provided by ove r seas c o u n t r i e s f o r t h e expor t of pulp , paper and paperboard;

- t h e p r i c i n g o f pulpwood should r e c e i v e g r e a t e r r e sea rch a t t e n t i o n ;

- t h e t a x a t i o n p r o v i s i o n s which apply t o t h e i n d i v i d u a l p r i v a t e f o r e s t grower should be reviewed; and

- t h e co -o rd ina t ion of r e sea rch funding f o r t h e pulp , paper and paperboard i n d u s t r y cou ld be improved.

5.1 Uniformity of Ass i s t ance Levels

A f e a t u r e of t h e pulp , paper and paperboard i n d u s t r y is t h e d i f f e r e n t l e v e l s of import p r o t e c t i o n accorded t o d i f f e r e n t products . For example, c e r t a i n c l a s s e s o f p r i n t i n g and w r i t i n g paper r ece ive boun t i e s t h a t a r e between $70/t and $90/t; some wrapping paper is s u b j e c t t o a t a r i f f of $50/t ; paper bags a r e s u b j e c t t o 25 p e r c e n t t a r i f f ; and pu lp has no t a r i f f o r bounty. (Sec t ion 3 and appendix C have d e t a i l s of t h e c u r r e n t range of import p r o t e c t i o n measures. )

When t h e r a t e s of p r o t e c t i o n d i f f e r f o r d i f f e r e n t products , p r i c e s a r e d i s t o r t e d i n t h a t they a r e d i f f e r e n t from t h e r e a l oppor tun i ty c o s t of o b t a i n i n g and producing t h e products . Theory sugges t s t h a t p r i c e d i s t o r t i o n r e s u l t s i n an i n e f f i c i e n t a l l o c a t i o n of consumption expendi ture , i f n o t immediately then even tua l ly , a s peop le swi t ch products . Resources w i l l subsequent ly be switched i n product ion , a l though aga in t h e r e may be a s u b s t a n t i a l t i m e l a g involved. For a c l o s e l y r e l a t e d group of p roduc t s , such a s those i n t h e pulp , paper and paperboard i n d u s t r y , t he s u b s t i t u t i o n p o s s i b i l i t i e s , both on t h e demand s i d e and on t h e supply s i d e , a r e g e n e r a l l y g r e a t e r t h a n f o r un re l a t ed goods. I n t h e s h o r t run, t h e s u b s t i t u t i o n p o s s i b i l i t i e s among pulp , paper and paperboard

produc t s may w e l l be q u i t e smal l , but they i n c r e a s e i n t h e longer run. Thus p r i c e d i s t o r t i o n s wi th in t h e pulp, paper and paperboard i n d u s t r y a r i s i n g from non-uniformity of a s s i s t a n c e l e v e l s a r e l i k e l y t o cause a s u b s t a n t i a l m i s a l l o c a t i o n of r e sources w i t h i n t h a t i ndus t ry . Consequently, t h e use of widely d ive rgen t t a r i f f and bounty r a t e s which cause p r i c e d i s t o r t i o n s w i t h i n t h e pulp , paper and paperboard i n d u s t r y should be avoided.

A move toward uniform and reduced p r o t e c t i o n l e v e l s w i t h i n t h e pulp , paper and paperboard indus t ry i n l i n e wi th t h a t f o r a l l manufacturing should r ece ive p r i o r i t y . However, because c a p i t a l p l a n t and equipment cannot r e a d i l y be s h i f t e d t o t h e product ion of a l t e r n a t i v e p roduc t s i n t h e s h o r t run, t h e phasing-in of uniform and reduced p r o t e c t i o n r a t e s should be gradual .

5.2 Tariff-Bounty Mix

A s a l r eady noted the c u r r e n t p r o t e c t i o n mix f o r t h e pu lp , paper and paperboard i n d u s t r y is bount ies and t a r i f f s . I f t h e p r i c e of a good is t a r i f f - i n f l a t e d , bounty a s s i s t a n c e f o r a s i n g l e r e l a t e d good w i l l reduce t h e p r i c e of t h a t good r e l a t i v e t o t h a t of t h e t a r i f f - a s s i s t e d s u b s t i t u t e . The r e l a t i v e l y l o w p r i c e of t h e bounty-ass is ted product w i l l encourage consumption of t h a t good r a t h e r t han t h e t a r i f f - a s s i s t e d good. Consequently t h e use of a mixture of t a r i f f s and boun t i e s w i t h i n a s e c t o r is not a d e s i r a b l e long term p r o t e c t i o n s t r a t e g y . Ne i the r is it a good s t r a t e g y i n t h e s h o r t run f o r p roduc t s which a r e c l o s e s u b s t i t u t e s , a s is s p e l t o u t subsequently.

A ca se t h e r e f o r e e x i s t s f o r minimising p r i c e d i f f e r e n t i a l s caused by a s s i s t a n c e measures by moving t o a system o f uniform r a t e s and types of p r o t e c t i o n wi th in t h e pulp , paper and paperboard indus t ry . Any such move should be g radua l and i n t e g r a t e d where p o s s i b l e wi th c a p i t a l replacement and o t h e r investment.

The r e l a t i v e m e r i t s of t a r i f f s and boun t i e s a s p r o t e c t i o n in s t rumen t s have been d i scussed by t h e I n d u s t r i e s Ass i s t ance Commission (IAC 1984) . A b r i e f summary of t h e economic arguments and conc lus ions is p resen ted he re and t h e imp l i ca t ions s p e c i f i c t o t h e pulp , paper and paperboard i n d u s t r y a r e drawn out .

Ass i s t ance t o A u s t r a l i a n i n d u s t r y a s a whole i n t h e form of boun t i e s has inc reased s u b s t a n t i a l l y i n r ecen t y e a r s from a smal l base (IAC 1984) . T a r i f f s and quo tas , however, remain t h e dominant modes o f a s s i s t a n c e . Because t h e s e l a t t e r measures r a i s e domestic p r i c e s above t h e l e v e l s t h a t would o therwise p r e v a i l and bounty a s s i s t a n c e does no t , i t is o f t e n suggested t h a t a bounty is p r e f e r a b l e t o a t a r i f f on t h e grounds of caus ing less d i s t o r t i o n t o consumption p a t t e r n s .

S ince boun t i e s appear a s d i r e c t government budgetary o u t l a y s , a swi t ch from t a r i f f s t o boun t i e s imp l i e s t h e need t o r a i s e a d d i t i o n a l government revenue i f an i n c r e a s e i n t h e budget d e f i c i t is t o be avoided. The c o s t of r a i s i n g t h e a d d i t i o n a l revenue w i l l reduce any g a i n s made by t h e swi tch from t a r i f f s t o boun t i e s (see Rose, Moir, Farquharson and Vanze t t i 1984).

An o v e r a l l replacement of t a r i f f s by boun t i e s would s u b j e c t A u s t r a l i a ' s p r o t e c t i o n po l i cy t o more p u b l i c s c r u t i n y through t h e budget.

T h i s cou ld l ead to a lowering of i ndus t ry a s s i s t a n c e l e v e l s i n t h e long run (IAC 1984) . However, whi le on ly i n d u s t r i e s a r e a s s i s t e d by boun t i e s , p u b l i c s c r u t i n y might even tua l ly r e s u l t i n a lowering of t h e i r l e v e l s of a s s i s t a n c e r e l a t i v e t o t h e i n d u s t r i e s whose a s s i s t a n c e is provided by means of (less v i s i b l e ) t a r i f f s .

S i n c e t h e pu lp , paper and paperboard i n d u s t r y r e c e i v e s g e n e r a l l y low l e v e l s of t a r i f f -boun ty a s s i s t a n c e , t h e replacement of t a r i f f s a p p l i c a b l e t o t h a t i n d u s t r y by boun t i e s would be l e s s burdensme o n t h e budget t h a n i n t h e c a s e of more h igh ly p r o t e c t e d i n d u s t r i e s . I n s o f a r a s a number o f pu lp and paper p roduc t s a r e i n p u t s i n o t h e r i n d u s t r i e s , boun t i e s a p p l i e d t o p u l p and paper p roduc t s would lower t h e c o s t s t r u c t u r e of t hose o t h e r i n d u s t r i e s compared w i t h t h e s i t u a t i o n where t a r i f f a s s i s t a n c e app l i ed . However, i f such replacement were piecemeal, t h u s widening t h e d i f f e r e n t i a l s between e f f e c t i v e r a t e s of p r o t e c t i o n a c r o s s p roduc t s and i n d u s t r i e s , t h e o v e r a l l r e s u l t could be a dec rease i n economic e f f i c i e n c y .

5.3 Anti-dumping L e g i s l a t i o n and Compensatory Ass i s t ance

The p r i c e s of pulp , paper and paperboard imported i n t o A u s t r a l i a d i d not rise i n p ropor t ion t o t h e d e p r e c i a t i o n of t h e A u s t r a l i a n d o l l a r du r ing 1985. T h i s l e d some A u s t r a l i a n manufacturers t o sugges t t h a t p roduc t s were being 'dumped' on t h e A u s t r a l i a n market. However, world p r i c e s f o r pu lp and paper p roduc t s have a l s o been f a l l i n g s i n c e t h e beginning of 1985. Thus t h e p r i c e of impor ts i n t o A u s t r a l i a is n o t s t r o n g evidence of dumping by ove r seas compet i tors .

'Dumping' is f r e q u e n t l y observed i n i n d u s t r i e s c h a r a c t e r i s e d by s i g n i f i c a n t economies of s c a l e and t h e lumpy na tu re of inves tment o p p o r t u n i t i e s (McGinnes 1985). Excess c a p a c i t y is a common f e a t u r e of such i n d u s t r i e s and r e s u l t s i n a c o n t i n u a t i o n of p roduc t ion even a t r e l a t i v e l y low p r i c e s s o long a s p r i c e s exceed v a r i a b l e c o s t s . The pulp , paper and paperboard i n d u s t r y does f i t i n t o t h i s ca t egory of i n d u s t r y and t h e r e does appear t o be excess c a p a c i t y ove r seas ( s e e s e c t i o n 2 ) . Furthermore, t h e l ack of supply responsiveness i n t h e s h o r t term, which c h a r a c t e r i s e s t h e A u s t r a l i a n i n d u s t r y ( a s concluded i n appendix E ) , means t h a t A u s t r a l i a n producers bear t h e f u l l b run t of any p r i c e f a l l s caused by dumping.

Gruen (1986) i n a r ecen t r e p o r t suggested t h a t anti-dumping a c t i o n and l e g i s l a t i o n should be more c l o s e l y i n t e g r a t e d wi th broader p r o t e c t i o n po l i cy . H e noted t h a t t h e r e should be no d i sc repancy between t h e concept of ' u n f a i r t r a d i n g p r a c t i c e s ' a s app l i ed w i t h i n A u s t r a l i a and a s a p p l i e d t o impor ts i n t o A u s t r a l i a . 'Low' p r i c e s i n themselves should no t c o n s t i t u t e grounds f o r anti-dumping a c t i o n s .

The o t h e r main recommendation i n t h e Gruen r e p o r t was t h a t t h e use of t he anti-dumping system a s a g e n e r a l s h i e l d f o r domestic p roduce r s from impor ts should be discouraged. The i n t e g r a t i o n of anti-dumping p r o v i s i o n s wi th longer run p r o t e c t i o n p o l i c y could be achieved by r e fe rence t o t h e I n d u s t r i e s Ass i s t ance Commission. That is, i n d u s t r i e s i n i t i a t i n g a n t i - dumping a c t i o n s should be s u b j e c t t o examination by t h e Commission i n t h e same manner a s i n d u s t r i e s seeking p r o t e c t i o n by o t h e r t r a d e b a r r i e r s .

I t is d i f f i c u l t t o argue a g a i n s t t h e s e conc lus ions , and t h e Gruen recommendations m e r i t s e r i o u s c o n s i d e r a t i o n a s p a r t of broader i n d u s t r y p o l i c y f o r t h e pulp , paper and paperboard indus t ry .

I t has sometimes been sugges ted t h a t p r o t e c t i o n l e v e l s should be ad jus t ed t o accord wi th a s s i s t a n c e l e v e l s provided by ove r seas compet i tors . However, t h e I n d u s t r i e s Ass i s t ance Commission has argued s t r o n g l y a g a i n s t any such compensatory forms o f p r o t e c t i o n (IAC 1982). The key arguments c a n be summarised a s fo l lows.

. The p r o v i s i o n of compensatory a s s i s t a n c e would l ead t o a m i s a l l o c a t i o n of resources , s i n c e t h e a d d i t i o n a l p r o t e c t i o n is l i k e l y t o a t t r a c t r e sources away from r e l a t i v e l y unprotec ted i n d u s t r i e s .

. The longer term compet i t iveness of an i n d u s t r y would be impaired by compensatory a s s i s t a n c e s i n c e t h e i n d u s t r y would be sh i e lded from under taking t h e adjus tments which a r e necessary f o r i t t o compete a g a i n s t a s s i s t e d e x p o r t s from ove r seas c o u n t r i e s . (The I n d u s t r i e s Ass i s t ance Commission has assumed he re t h a t long term a s s i s t a n c e p o l i c i e s a r e j u s t a s much a p a r t of t h e environment de termining an i n d u s t r y ' s comparative advantage a s n a t u r a l r e sources and o t h e r f a c t o r endowments.)

. I t is c l e a r l y i m p r a c t i c a l f o r a s s i s t a n c e t o be g i v e n t o A u s t r a l i a n i n d u s t r y t o n e u t r a l i s e t h e advantages enjoyed by a l l o r even a few ove r seas producers because of t h e i r d i f f e r e n t r a t e s of a s s i s t a n c e .

. Overseas a s s i s t a n c e dec reases t h e compe t i t i veness of A u s t r a l i a n i n d u s t r i e s which r e s u l t s i n a deva lua t ion of t h e A u s t r a l i a n d o l l a r u n t i l a l e v e l is reached where A u s t r a l i a n i n d u s t r i e s aga in become compet i t ive . F u r t h e r ove r seas a s s i s t a n c e may then be provided, r e s u l t i n g i n f u r t h e r deva lua t ion i n A u s t r a l i a , s o t h a t t h e r e is no long term b e n e f i t to anyone.

Such arguments sugges t ( i n accordance wi th t h e e a r l i e r I n d u s t r i e s Ass i s t ance Commission r e p o r t ) t h a t t h e concept of matching expor t i n c e n t i v e s wi th t h o s e provided i n o t h e r c o u n t r i e s is no t a sound p r i n c i p l e on which t o base longer term i n d u s t r y p o l i c i e s .

5.4 O v e r a l l Level of Ass i s t ance

In t h e c a s e of a s s i s t a n c e t o t h e pulp , paper and paperboard indus t ry , t h e r e l evan t economic p o l i c y i s s u e is whether s o c i e t y w i l l b e n e f i t from an expansion o r c o n t r a c t i o n of product ion i n t h e i n d u s t r y brought about by government po l i cy . For a s s i s t a n c e t o be economically j u s t i f i e d , t h e b e n e f i t s from expanded product ion must exceed the c o s t s of providing a s s i s t a n c e .

The r e a l l o c a t i o n of resources , a s a r e s u l t of a s s i s t a n c e , would cause a reduct ion i n n a t i o n a l income, i f r e sources were d i v e r t e d from more economically e f f i c i e n t s e c t o r s of t he economy i n o r d e r t o provide more pulp , paper and paperboard. On t h e o t h e r hand, a s h i f t of resources i n t o pu lp and paper product ion would inc rease n a t i o n a l income i f t he r e sources were t r a n s f e r r e d from l e s s e f f i c i e n t s e c t o r s of t h e economy. The o r i g i n of r e sources t r a n s f e r r e d i n t o t h e pulp, paper and paperboard indus t ry a s a r e s u l t of a s s i s t a n c e measures can be found on ly by t r a c i n g t h e f u l l e f f e c t s of a s s i s t a n c e throughout t h e economy. Such a s tudy is o u t s i d e t h e scope of t h i s submission, s o no judgment can be made he re about t h e most a p p r o p r i a t e o v e r a l l l e v e l of a s s i s t a n c e .

A s t h e pulp , paper and paperboard i n d u s t r y is r e l a t i v e l y l i g h t l y p r o t e c t e d and domestic demand is p r o j e c t e d t o con t inue growing i n t h e long

term, an immediate r educ t ion i n t a r i f f l e v e l s may n o t be appropr i a t e . Furthermore, it would no t be a p p r o p r i a t e , from an economic viewpoint , t o reduce p r o t e c t i o n a f fo rded t o t h e r e l a t i v e l y l i g h t l y a s s i s t e d pulp , paper and paperboard i n d u s t r y before e v a l u a t i n g whether o r n o t such a c t i o n would r e s u l t i n a movement of r e sources t o h ighe r c o s t a c t i v i t i e s elsewhere i n t h e economy.

The r e s u l t s of an econometric s tudy p resen ted i n appendix E i n d i c a t e t h a t changes i n p r o t e c t i o n f o r t h e A u s t r a l i a n pulp , paper and paperboard i n d u s t r y would r e s u l t i n on ly a sma l l o u t p u t change i n t h e s h o r t term. The r educ t ion of bounty payments o r t a r i f f l e v e l s would a f f e c t e x i s t i n g producers , wi thout inducing any s i g n i f i c a n t dec rease i n t h e q u a n t i t y supp l i ed . Thus t h e r e would be l i t t l e 'dampening' o f any t a r i f f - r e l a t e d p r i c e dec rease through a consequent domestic supply decrease , a t l e a s t i n t h e s h o r t term. S i m i l a r l y , lower bounty payments would no t induce any s u b s t a n t i a l s h o r t term supply decrease . While t a r i f f and bounty d e c r e a s e s would t h e r e f o r e n o t be e f f e c t i v e p o l i c y t o o l s f o r b r ing ing about s h o r t run i n c r e a s e s i n ou tpu t , they. would be e f f e c t i v e i n t r a n s f e r r i n g income from p roduce r s to t axpaye r s ( through bounty r educ t ions ) o r consumers ( th rough t a r i f f reduct ions) .

No empi r i ca l informat ion is a v a i l a b l e about t h e responsiveness of long run supply and demand. C lea r ly it would be s u b s t a n t i a l l y g r e a t e r t h a n i n t h e s h o r t run, bu t probably lower than f o r most o t h e r manufacturing s e c t o r s (because of h igh c a p i t a l i n t e n s i v e n e s s , s p e c i a l i s e d equipment and t h e l a c k of responsiveness of raw p roduc t supp ly ) .

5.5 Ass i s t ance t o t h e F o r e s t r y S e c t o r

( a ) P r i c e

Wood is t h e b a s i c raw m a t e r i a l i n t h e p roduc t ion of pulp, paper and paperboard. Because t h e pu lp and paper p roduc t ion p r o c e s s is h igh ly c a p i t a l i n t e n s i v e , t h e r e is a degree of r i s k i n s e t t i n g up a new p l a n t i n t h e absence of an a s su red supply of wood. To reduce t h i s r i s k , pu lp and paper companies ma in ta in t h e i r own p l a n t a t i o n s o r c o n t r a c t w i th p r i v a t e growers f o r t h e supply of wood. Never the less , over 70 p e r c e n t of supply is from p l a n t a t i o n s c o n t r o l l e d by S t a t e f o r e s t r y s e r v i c e s ( F o r e s t r y and F o r e s t Products Indus t ry Council 1985a).

The markets f o r pulpwood i n A u s t r a l i a a r e b i l a t e r a l monopolies between t h e S t a t e s and t h e pu lp and paper companies (Byron and Douglas 1981). The consequences of b i l a t e r a l monopolies f o r p r i c e s a r e u n c e r t a i n a s p r i c e s a r e determined on t h e b a s i s o f r e l a t i v e market power and n e g o t i a t i n g s k i l l s r a t h e r t han t r u e oppor tun i ty c o s t s . There is some i n d i c a t i o n (Byron and Douglas) t h a t t h e oppor tun i ty c o s t of pulpwood is above t h e a c t u a l p r i c e charged by S t a t e f o r e s t s e r v i c e s . However, i n s o f a r a s f o r e s t r y is c h a r a c t e r i s e d by j o i n t p roduc t s (sawlogs, pulpwood, r e c r e a t i o n a l s e r v i c e s , e tc . ) , an a c c u r a t e de t e rmina t ion of t h e oppor tun i ty c o s t is d i f f i c u l t .

The p r i c i n g o f pulpwood is n e v e r t h e l e s s a n a r e a worthy of r e s e a r c h a t t e n t i o n . A s t h e p r i c e of wood c o n s t i t u t e s 5-20 p e r c e n t of t o t a l p roduc t ion c o s t s (depending on t h e p r o d u c t ) , if t h e p u l p and paper companies a r e being i m p l i c i t l y subs id i sed v i a ' low' pulpwood p r i c e s , t h e n t h e pe rcep t ion t h a t t h e indus t ry is l i g h t l y a s s i s t e d could change. While t h e a b i l i t y t o import t h e raw m a t e r i a l concep tua l ly de termines t h e upper

bound t o t h e l e v e l of s u b s i d i s a t i o n f o r g iven supp l i e s , it is not easy t o use t h i s concept t o e s t i m a t e t h e e x t e n t of s u b s i d i s a t i o n , i f any. Imports a r e g e n e r a l l y no t i n raw form, n e c e s s i t a t i n g t h e use of a r b i t r a r y convers ion f a c t o r s and judgments about t h e s t r u c t u r e of t h e o r i g i n a l l o g s used i n t h e manufacturing p rocess . The n a t u r e of t h e comprehensive b i l a t e r a l agreements between S t a t e f o r e s t s e r v i c e s and p r i v a t e companies and t h e a l l o c a t i o n of r i g h t s ove r f o r e s t r e sources a l s o make it d i f f i c u l t t o form a judgment about g e n e r a l i s e d roya l ty r a t e s and t h e p r i c i n g of logs .

I n p r a c t i c e , adminis tered log p r i c e s tend p a r t l y t o r e f l e c t c o s t s of product ion , wi th v a r i o u s indexing procedures used t o mainta in p r i c e s over t ime i n r e a l terms. Some unresolved i s s u e s i n t h i s regard a r e t h e degree t o which account ing systems f o r log p r i c i n g a r e market o r i e n t e d ; what t h e c o s t s of product ion a r e , g iven j o i n t p roduc t ion of v a r i o u s wood p roduc t s from i n d i v i d u a l s t ands ; t h e v a l i d i t y of some of t h e indexing mechanisms used; and t h e pe rvas ive ways i n which t a x a t i o n arrangements a f f e c t t h e p r i c e of logs . These i s s u e s c a n only be resolved through comprehensive, i n t e r i n d u s t r y a n a l y s i s which t r a c e s t h e f low of l o g s through t h e manufacturing p r o c e s s t o f i n a l s a l e i n compet i t ion wi th imports . That t h e i n d u s t r y s e e s t h i s a s an impor tant i s s u e is r e f l e c t e d i n t h e d e l i b e r a t i o n s of t h e Standing Committee on F o r e s t r y , which i n 1986 formed a working group t o o u t l i n e c u r r e n t p r a c t i c e s i n r e l a t i o n t o wood p r i c i n g , a s we l l a s t o de termine a p p r o p r i a t e p r i c i n g o b j e c t i v e s and po l i cy . I t appears t h a t t h i s a r e a w i l l r ece ive a d d i t i o n a l r e sea rch a t t e n t i o n i n t h e f u t u r e .

(b ) Taxat ion

The main i s s u e s concerning t a x a t i o n of f o r e s t r y e n t e r p r i s e s have been f r e q u e n t l y d i scussed - most r e c e n t l y by Ferguson (1985) . F o r e s t r y o p e r a t i o n s a r e c l a s s i f i e d a s primary p roduc t ion under Commonwealth income t a x a t i o n l e g i s l a t i o n . Therefore, f o r e s t r y comes under t h e ausp ices of income averaging p rov i s ions which a r e based on a f ive-year pe r iod and a r e des igned t o minimise t h e adverse e f f e c t s of v a r i a b l e incomes on t h e amount of t a x payable. However, i n f o r e s t r y t h e long time between p l a n t i n g and h a r v e s t and t h e abnormally h igh income y e a r s when s t a n d s of t r e e s a r e harves ted mean t h a t t h e c u r r e n t income averaging p r o v i s i o n s do no t s i g n i f i c a n t l y ame l io ra t e t h e ' pe r iod i n e q u i t y ' e f f e c t . While it is t h e o r e t i c a l l y p o s s i b l e f o r some t axpaye r s t o a r r ange t h e i r a f f a i r s i n such a way t o minimise t h i s e f f e c t , some growers w i l l no t be a b l e t o do t h i s . Thus t h e long l a g time between p l a n t i n g and ha rves t t e n d s t o lead t o underinvestment i n f o r e s t r y compared wi th o t h e r i n d u s t r i e s , through t h e workings of t he income t a x system. Since companies pay f l a t r a t e s of t ax , pe r iod inequ i ty on ly h inde r s p r i v a t e i n d i v i d u a l investment i n f o r e s t r y . Poss ib ly a s a r e s u l t of t h i s , t he p r i v a t e (non-company) s e c t o r is a r e l a t i v e l y smal l s u p p l i e r of wood t o t h e pulp , paper and paperboard indus t ry . I n t h e absence of t a x a t i o n d i s i n c e n t i v e s , p r i v a t e growers may become s u b s t a n t i a l s u p p l i e r s of wood.

Environmental i s s u e s such a s land degrada t ion a r e of concern t o t h e Government (Department of A r t s , Her i tage and Environment 19851, and p a l l i a t i v e p r i v a t e t r e e p l a n t i n g is being a c t i v e l y a s s i s t e d by government and by f i n a n c i a l and o t h e r means. To t h e e x t e n t t h a t t h e t a x a t i o n system is biased a g a i n s t p r i v a t e f o r e s t r y , t h e promotion of tree growing f o r overcoming environmental problems w i l l be adve r se ly a f f e c t e d . Such an anomaly could b e s t be redressed by removing any t a x a t i o n d i s i n c e n t i v e t o p r i v a t e (non-company) growers.

5.'6 Research and Development

D i r e c t a s s i s t a n c e from t h e Commonwealth Government t o t h e pulp , paper and paperboard i n d u s t r y f o r r e sea rch and development is provided mainly through t h e CSIRO Div i s ion of Chemical and Wood Technology. T h i s D iv i s ion spen t approximately $2.5m on pu lp and paper p roduc t s r e sea rch i n 1983-84. Commonwealth funding f o r r e sea rch on f o r e s t growing is channel led through t h e CSIRO Div i s ion of F o r e s t Research. Because t h e p u l p and paper manufacturers a r e v e r t i c a l l y i n t e g r a t e d ( t r e e s they grow account f o r approximately a t h i r d of t h e i r wood supp ly ) , t h i s l a t t e r r e sea rch can a l s o be regarded a s a s s i s t a n c e t o t h e pulp , paper and paperboard indus t ry . I n o r d e r t o promote p r i v a t e r e sea rch and development expendi ture , t h e r e is c u r r e n t l y t a x a t i o n l e g i s l a t i o n al lowing f o r 150 p e r c e n t deduct ion of such expendi ture a g a i n s t t a x a b l e income.

The pulp , paper and paperboard indus t ry does not posses s t h e c h a r a c t e r i s t i c s a s s o c i a t e d wi th a s t rong c a s e f o r government a s s i s t a n c e through r e sea rch (Samuel, Kingma and C r e l l i n 1983) . The c a s e f o r government i n t e r v e n t i o n i n r e sea rch r e s t s on t h e i n a b i l i t y of an i n d u s t r y t o a p p r o p r i a t e t h e b e n e f i t s of i t s own re sea rch expendi ture . However, i n an indus t ry c h a r a c t e r i s e d by a smal l number of f i r m s and f a i r l y c l e a r market segmentation, f i r m s a r e i n a r e l a t i v e l y good p o s i t i o n t o a p p r o p r i a t e t h e b e n e f i t s of t h e i r own re sea rch spending.

Both t h e F o r e s t r y and F o r e s t Products Indus t ry Counci l (1985b) and t h e Standing Committee on F o r e s t r y have suggested t h a t t h e r e should be b e t t e r co-ordinat ion of r e sea rch funding and a b e t t e r s e t t i n g of r e s e a r c h p r i o r i t i e s . No n a t i o n a l system e x i s t s f o r s e t t i n g p r i o r i t i e s o r f o r r a t i o n a l i s i n g t h e r e sea rch e f f o r t a c r o s s t h e v a r i o u s agencies . The c u r r e n t way of d e l i v e r i n g r e sea rch appears t o be inadequate. These m a t t e r s a r e being reviewed by t h e Standing Committee on Fores t ry .

5.7 Indus t ry Po l i cy - Need f o r Co-ordination

The t a x a t i o n impl i ca t ions of t h e long l ead times requ i r ed f o r r e t u r n on investment i n f o r e s t r y , and t h e h igh c a p i t a l investment requi rements f o r pu lp and paper manufacture combined wi th t h e r i s k s a s s o c i a t e d wi th wood p r i c e f l u c t u a t i o n s and t h e a v a i l a b i l i t y of wood supply, sugges t t h a t co-ordinat ion of government a s s i s t a n c e measures is necessary. There is a need f o r co-ordinat ion both between t h e v a r i o u s groups r e spons ib l e f o r p o l i c y and between those groups and t h e pulp, paper and paperboard indus t ry , e s p e c i a l l y g i v e n t h e lumpy n a t u r e of investment i n new p l a n t . While t h e r e is no evidence t h a t a major r e s t r u c t u r i n g of t h e i n d u s t r y is requi red a s i n t h e motor veh ic l e and s t e e l i n d u s t r i e s , t h e no t ion of a n o v e r a l l framework f o r p o l i c y f o r t h e i n d u s t r y has some appeal i n l i m i t i n g piecemeal, p o s s i b l y i n c o n s i s t e n t , p o l i c i e s i n d i f f e r e n t a r e a s of t h e indus t ry .

The F o r e s t r y and F o r e s t Products Indus t ry Counci l is an a p p r o p r i a t e body f o r government, i n d u s t r y and union c o n s u l t a t i o n s on f o r e s t i n d u s t r i e s . A c l e a r l y de f ined s e t of o b j e c t i v e s t o be m e t over t i m e is a key component of an o v e r a l l i n d u s t r y s t r a t e g y and t h e Council has de f ined a set of medium term t a r g e t s f o r import replacement t o be achieved by 1990 (Fores t ry and F o r e s t Products Indus t ry Council 1985b). The Council has argued t h a t 95 p e r c e n t s e l f - s u f f i c i e n c y i n pu lp and 78 p e r c e n t s e l f - s u f f i c i e n c y i n paper a r e f e a s i b l e g o a l s and c o n s i s t e n t w i th long term

competitiveness. These goals may prove somewhat optimistic but they nevertheless form a useful s tar t ing point for development of an appropriate strategy. Most other elements of the Council's ' s t ra tegic plan' re la te more t o general industry policy than t o the pulp, paper and paperboard industry in particular. The exceptions re la te t o wood supply, where rel iable information on State government wood supplies, the removal of any taxation disincentives t o the private forestry sector and the set t ing of appropriate research goals are requested. A l l three elements are supported in t h i s submission.

Appendix A

TERMS OF REFERENCE AND ITEMS COVERED BY THE REFERENCE ON PULP, PAPER, PAPER PRODUCTS AND PRINTING INDUSTRIES

A l . Terms of Reference

The te rms of r e f e r e n c e f o r t h e i nqu i ry , a s i s s u e d by t h e M i n i s t e r f o r Indus t ry , Technology and Commerce on 25 November 1985 were a s fo l lows.

' I , JOHN NORMAN BUTTON, M i n i s t e r f o r Indus t ry , Technology and Commerce, i n pursuance of my power under S e c t i o n 23(1) of t h e I n d u s t r i e s ~ s s i s t a n c e Commission A c t 1973

(1) r e f e r t h e pulp , paper , paper p r o d u c t s and p r i n t i n g i n d u s t r i e s t o t h e I n d u s t r i e s Ass i s t ance Commission f o r i n q u i r y and r e p o r t w i t h i n 1 5 months of t h e d a t e of r e c e i p t of t h i s r e f e r e n c e

(2) s p e c i f y t h a t t h e Commission's i n q u i r y and r e p o r t i n c l u d e goods o f a kind which, i f imported, would f a l l w i t h i n t h e i t ems o r p a r t s of items i n Schedule 3 of t h e Customs T a r i f f A c t 1982 l i s t e d i n t h e Attachment t o t h i s r e f e r e n c e [ s e c t i o n A. 2 below]

( 3 ) r e q u e s t t h e Commission t o r e p o r t on t h e p o t e n t i a l f o r development of t h e pu lp , paper , paper p r o d u c t s and p r i n t i n g i n d u s t r i e s i n A u s t r a l i a , i n p a r t i c u l a r :

( a ) i d e n t i f y and r e p o r t on s i g n i f i c a n t f a c t o r s t h a t may a f f e c t t h e s t r u c t u r e , compe t i t i venes s , e f f i c i e n c y and growth of t h e i n d u s t r i e s , i nc lud ing :

(i) i n t e g r a t i o n wi th o t h e r f o r e s t p r o d u c t s

(ii) t h e c o s t of i n p u t s i n A u s t r a l i a compared wi th t h e c o s t s i n major e x p o r t i n g c o u n t r i e s

(iii) p o l i c i e s and r e g u l a t i o n s of t h e Commonwealth and S t a t e Governments

(b) i d e n t i f y and e v a l u a t e o p t i o n s a v a i l a b l e t o t h e Government and t h e i n d u s t r i e s t o improve t h e i r s t r u c t u r e , compe t i t i venes s , expor t performance and e f f i c i e n c y o r i n o t h e r ways enhance t h e i r c o n t r i b u t i o n t o t h e economy, having r ega rd t o :

( i) t h e i r r e g i o n a l s i g n i f i c a n c e

(ii) t h e paper p roduc t s and p r i n t i n g i n d u s t r i e s r e l a t i o n s h i p w i th t h e p u l p and paper i n d u s t r y

(iii) A u s t r a l i a ' s i n t e r n a t i o n a l commitments, i n p a r t i c u l a r t h e s p e c i a l a r rangements on p u l p and c e r t a i n pape r s which a r e i nco rpo ra t ed i n t h e Closer Economic R e l a t i o n s Trade Agreement w i th N e w Zealand

(4) r eques t t h e Commission t o r e p o r t on whether concess iona l impor ta t ion arrangements be provided f o r :

( a ) goods c u r r e n t l y p re sc r ibed w i t h i n paragraph 47.01.11 and sub-items 48.01.1 and 48.07.1 i n Schedule 3 of t h e Customs T a r i f f A c t 1982 and covered by P a r t V of t h e Schedule of Concessional Ins t ruments

(b) goods f a l l i n g w i t h i n t h e scope of t h i s r e fe rence which p r i o r t o 30 June 1985 q u a l i f i e d f o r concess iona l e n t r y but which a r e no longe r e l i g i b l e f o r such e n t r y a s a r e s u l t of t h e i n t r o d u c t i o n of t h e Commercial T a r i f f Concession System.

(5) s p e c i f y t h a t t h e Commission is f r e e t o r e v i s e o r modify i ts advice i n response t o t h e r e fe rence da ted 27 February 1985 on book product ion .

(6) s p e c i f y t h a t , i n conduct ing its i n q u i r y and p r e s e n t i n g i ts r e p o r t , t h e Commission should have regard t o :

( a ) t h e a d m i n i s t r a t i v e imp l i ca t ions of t h e o p t i o n s i d e n t i f i e d

(b) t h e d e s i r e of t h e Government n o t t o impede by t a r i f f s o r quo ta r e s t r i c t i o n s t h e impor ta t ion i n t o A u s t r a l i a of t hose goods l i s t e d i n Annex A t o t h e United Nat ions Agreement on t h e Impor ta t ion of Educat ional , S c i e n t i f i c and C u l t u r a l M a t e r i a l s which a r e c u r r e n t l y admiss ib l e i n t o A u s t r a l i a f r e e of customs duty.

(7) s p e c i f y t h a t t h e Commission be f r e e t o t ake evidence and where necessary , t o make recommendations on any m a t t e r s r e l e v a n t t o its i n q u i r y under t h i s r e fe rence . '

A2. I tems Covered by t h e Reference on Pulp, Paper, Paper Products and P r i n t i n g I n d u s t r i e s

I t e m Type of goods under r e fe rence - 37.03 S e n s i t i s e d paper , paperboard and c l o t h , unexposed o r exposed but

not developed

47.01 Pulp de r ived by mechanical o r chemical means from any f i b r o u s vegetable m a t e r i a l

47.02 Waste paper and paperboard; s c r a p a r t i c l e s of paper o r o f paperboard, f i t on ly f o r use i n paper-making

48.01 Paper and paperboard ( i n c l ~ d i n g c e l l u l o s e wadding) , i n r o l l s o r s h e e t s

48.03 Parchment paper and paperboard and greaseproof paper and paperboard, and i m i t a t i o n s t h e r e o f , and g l azed t r a n s p a r e n t paper , i n r o l l s o r s h e e t s

48.04 Composite paper and paperboard (made by s t i c k i n g f l a t l a y e r s t o g e t h e r wi th an adhes ive ) , n o t surface-coated o r impregnated, whether o r n o t i n t e r n a l l y r e in fo rced , i n r o l l s o r s h e e t s

Paper and paperboard, corrugated (with or without f l a t surface sheets) , creped, crinkled, embossed or perforated, in ro l l s or sheets

'paper and paperboard, impregnated, coated, surface-coloured, surface-decorated or printed (not constituting printed matter fa l l ing within Chapter 491, in ro l l s or sheets

F i l t e r blocks, slabs and plates, of paper pulp

Cigarette paper, cut t o size, whether or not in the form of booklets or tubes

Wallpaper and lincrusta; window transparencies of paper

Floor coverings prepared on a base of paper or of paperboard, whether or not cut t o size, with or without a coating of linoleum compound

Carbon and other copying papers (including duplicator stencils) and transfer papers, cut to size, whether or not put up in boxes

Writing blocks, envelopes, l e t t e r cards, plain postcards and correspondence cards of paper and paperboard; boxes, pouches, wallets and writing compendiums, of paper or paperboard, containing only an assortment of paper stationery

Other paper and paperboard, cut t o size or shape

Boxes and bags of paper or paperboard ; other packaging containers of paper or paperboard; box f i l e s , l e t t e r trays and similar a r t i c l e s , of paper or paperboard, of a kind commonly used in off ices, shops and the l ike

Registers, exercise books, note books, memorandum blocks, order books, receipt books, d iar ies , blotting-pads, binders (whether loose-leaf or o ther) , f i l e covers and other stationery of paper or paperboard; sample and other albums and book covers, of paper or paperboard

Paper or paperboard labels, whether or not printed or gummed

Bobbins, spools, cops and similar supports of paper pulp, paper or paperboard (whether or not perforated or hardened)

Other goods made of paper pulp, paper, paperboard or cellulose wadding

Printed books, brochures, l ea f l e t s and similar printed matter, whether or not in single sheets

Newspapers, journals and periodicals, whether or not i l lus t ra ted

Children's picture books and painting books

Music, printed or in manuscript, whether or not bound or i l lus t ra ted

Maps and hydrographic and similar charts of a l l kinds, including at lases, wall maps and topographical plans, printed; printed globes ( t e r r e s t r i a l or ce les t ia l )

Plans and drawings, for industrial , architectural , engineering, commercial or similar purposes, whether original or reproductions on sensitised paper; manuscripts and typescripts

Unused postage, revenue and similar stamps of Australia, of current or new issue; stamp-impressed paper; banknotes; stock, share and bond ce r t i f i ca tes and similar documents of t i t l e ; cheque books Transfers (decalcomanias)

Picture postcards and pic tor ia l greeting cards, printed by any process, with or without trimmings

Calendars (including calendar blocks) of paper or paperboard

Other printed matter, including printed pictures and photographs

Books

Paper products

Appendix B

CHARACTERISTICS OF WORLD PRODUCTION AND TRADE OF PULP, PAPER AND PAPERBOARD

I n t h i s appendix, t h e c h a r a c t e r i s t i c s of t h e world market f o r pulp , paper and paperboard a r e cons idered . S p e c i f i c a t t e n t i o n is focused on world t r e n d s i n product ion , t r a d e and p r i c e s and on ove r seas a s s i s t a n c e measures which in f luence t h e compet i t iveness of t h e A u s t r a l i a n indus t ry .

B1. World Market Trends

World consumption of paper i nc reased from 14 M t i n 1913 t o 40 M t i n 1950 and t o 170 M t i n 1984. World average p e r person consumption of paper i nc reased from 25 kg i n 1960 t o 39 kg i n 1984 (FAO 1986) . T o t a l world t r a d e i n pu lp and paper i n 1984 was valued a t ~ S $ 3 0 b , r ep resen t ing 1 .5 p e r c e n t of t h e world merchandise expor t s . Most of t h e t r a d e i s between developed c o u n t r i e s .

The p r i n c i p a l t y p e s of pulp, paper and paperboard produced and t r aded i n t h e world market a r e shown i n t a b l e B1. Newsprint, p r i n t i n g and w r i t i n g paper , and wrapping and packaging paper a r e t h e main paper g rades t r aded . Chemical wood pu lp accounts f o r a lmost 70 p e r c e n t of t o t a l p u l p product ion and 86 p e r c e n t of world pu lp expor t s .

Major e x p o r t e r s of pulp , paper and paperboard inc lude Canada, t h e United S t a t e s , F in land, Sweden and EC c o u n t r i e s , which toge the r account f o r some 80 p e r c e n t of world e x p o r t s ( t a b l e B2). The key impor ters a r e t h e United S t a t e s , Asian and EC c o u n t r i e s ( t a b l e B3). A l a r g e p ropor t ion of t r a d e is i n t r a r e g i o n a l , p a r t i c u l a r l y i n Europe and North America. For example, Canadian e x p o r t s of pulp, paper and paperboard t o t h e United S t a t e s i n 1984 accounted f o r some 1 9 p e r c e n t of t o t a l world expor t s , while Canadian e x p o r t s of newsprint t o t h e United S t a t e s made up 50 p e r c e n t of t o t a l world expor t s . A u s t r a l i a t a k e s a r e l a t i v e l y sma l l s h a r e of imports , accounting f o r 863 k t o r 1.4 p e r c e n t of t o t a l world impor ts i n 1984. The major e x p o r t e r s t o A u s t r a l i a i nc lude N e w Zealand and Finland which toge the r account f o r a lmost 50 p e r c e n t of A u s t r a l i a n impor ts of pulp , paper and paperboard (see BAE 1985).

The product mix i n world t r a d e of pulp , paper and paperboard has changed s u b s t a n t i a l l y . In 1954, two- th i rds of t h e volume t r aded was newsprint , bu t by 1984 newspr in t was on ly one- th i rd of t h e t o t a l . For a l l major i tems except newsprint , less than 20 pe r c e n t of t h e volume produced is t r aded ( t a b l e B4). With s e v e r a l excep t ions , t h e s e p r o p o r t i o n s have no t changed much ove r t h e p a s t twenty yea r s . The r e s i d u a l n a t u r e of t h e world market f o r most c a t e g o r i e s of pulp , paper and paperboard has meant t h a t changes i n p roduc t ion i n major producing c o u n t r i e s have had a s u b s t a n t i a l impact on t h e volumes t r a d e d and on t h e p r i c e s f o r most pulp , paper and paperboard p roduc t s ( t a b l e B4). F l u c t u a t i o n s i n e x p o r t s and p r i c e s have been up t o t h r e e t imes t h e s i z e of t hose i n product ion . Consequently, p r i c e v a r i a b i l i t y of impor ts is an impor tant i s s u e , p a r t i c u l a r l y i n d e c i s i o n s concerning t h e t iming of c a p a c i t y expansions.

Table B1: WORLD EXPORTS, PRODUCTION AND PRICES OF PULP, PAPER AND PAPERBOARD

Product

Real Exports Product ion prices (a) Exports as

Annual Annual Annual proportion of Quantity trend rate (b) Quantity trend rate (b) trend rate (b) production in 1984 1965-84 in 1984 1965-84 1965-84 in 1984

Mechanical wood pulp 1 384 -0.6ns 29 925 1.3** 1.8** 4.6 Semi-chemical wood pulp 119 0.2ns 7 200 1.4* 1.7** 1.7 Chemical wood pulp 18 483 3.2** 93 957 3.0** 1.3** 19.7 Dissolving wood pulp 1 388 -1.3** 4 269 -0.3ns 1.8'" 32.5 Total wood pulp 21 375 2.4** 135 350 2.4** na 15.8

Newsprint 13 265 1.6** 28 916 2.3** 1.5** 45.9 Printing and writing paper 9 897 8.3"" 48 835 4.3** 0.311s 20.3 Other paper and paperboard(c) 16 628 5.2** 109 932 2.8** 0.411s 15.1 - household and sanitary 465 na 10 218 na na 4.6 - wrapping and packaging 11 367 na 78 031 na na 14.6 - other paper and paperboard nei 4 584 na 9 049 na na 50.7 Total paper and paperboard 39 789 4.2** 187 683 3.1** na 21.2

Pulp, paper and paperboard 61 164 3.5** 323 033 2.8** na 19.1

(a) Average world export unit value from FAO (1985a) deflated by the index of export unit values of manufactured goods (United Nations 1986). (b) Annual trend figures were obtained by fitting the following logarithmic trend line by regression: log yt = a + bt + et, where yt is the variable being considered and t is time, a is the intercept, bt is the trend growth rate and e is the error term. (c) Information incomplete since exports and production for some countries were not estimated by the Food and Agriculture Organization. ** Significant at the 1 per cent level. * Significant at the 5 per cent level. ns, Not significant. na, Not available. nei. Not elsewhere included.

Source: FAO (1985a, 1986).

Table B2: EXPORTS OF PULP, PAPER AND PAPERBOARD IN 1984: BY REGION AND COUNTRY I Paper and paperboard T o t a l Pe r cen t age P r i n t i n g and Other paper p u l p Sha re o f change i n

w r i t i n g and and wor ld e x p o r t s Region o r c o u n t r y Wood p u l p Newsprint paper paperboard T o t a l .paper e x p o r t s 1980-84

A f r i c a 550 135 8 South A f r i c a ( a ) 3 68 1 3 5 7

North and C e n t r a l America (b) 1 0 256 8 410 1 1 0 3 4 102 1 3 616 39.0 -2.1 23 872

Canada 7 040 8 133 8 26 1 127 1 0 086 1 7 126 28.1 1.9 Uni ted states 3 215 278 274 2 936 3 488 6 703 11 .0 -10.7

South America 1 468 1 2 3 353 460 935 2 403 3.9 44.8 B r a z i l 976 3 3 24 376 703 1 679 2.7 54.3

As ia 7 6 92 369 67 2 1 1 3 3 1 209 2.0 -11.4

Europe 7 667 4 017 8 001 1 0 590 22 608 30 275 49.5 19.7 F in land 1 561 1 675 2 548 1 839 6 062 7 623 12.5 12.0 Sweden 3 271 1 217 71 6 3 227 5 160 8 431 13.8 9.8 Norway 574 673 2 34 307 1 214 1 788 2.9 13.4 EC-12 (b) 1 634 335 3 431 3 994 7 760 9 394 15.4 36.8

Oceania 471 147 1 8 1 8 1 346 817 1.3 -8.5 New Zealand 471 144 2 ( a ) 1 4 3 ( a ) 288 ( a ) 7 5 9 f a ) 1.2 -4.9

USSR ( a ) 888 341 45 600 986 1 874 3.1 1 .0

World 21 375 1 3 265 9 897 1 6 628 39 789 61 164 100.0 9.6

( a ) FAO e s t i m a t e . (b) I n c l u d e s i n t e r c o u n t r y t r a d e . Source : FAO (1986).

Table B3: IMPORTS OF PULP, PAPER AND PAPERBOARD IN 1984: BY REGION AND COUNTRY

Paper and paperboard Total Percentage Printing and Other paper pulp Share of change in writing and and world imports

Country or region Wood pulp Newsprint paper paperboard Total paper imports 1980-84

Africa 445 186 24 5 534 965 1 410 2.3 13.2

North and Central America 4 522 7 351 2 469 1 617 11 437 15 959 26.2 18.8 United States 4 044 7 161 2 010 678 9 849 13 893 22.8 20.7

South America 4 27 518 155 308 981 1 408 2.3 -14.1

Asia 4 137 1 434 769 2 509 4 711 8 848 14.5 12.0 China (a) 753 187 10 340 537 1 290 2.1 20.2 Japan 2 149 298 94 4 23 81 5 2 964 4.9 3.6

Europe 11 378 3 834 5 808 10 054 19 696 31 074 51.1 11.7 France 1 611 323 877 1 362 2 562 4 173 6.9 8.0 Germany, F.R. 2 781 872 1 402 2 155 4 429 7 210 11.9 16.8 Italy 1 695 177 308 919 1 404 3 099 5.1 18.2 Netherlands 601 303 530 855 1 688 2 289 3.8 9.7 United Kingdom 1 737 1 257 1 331 1 934 4 522 6 259 10.3 16.6 EC-12 (b) 9 473 3 535 5 159 8 626 17 319 26 792 44.1 14.2

Oceania 238 211 219 263 693 931 1.5 -11.2 Australia 230 194 200 239 633 863 1.4 -12.5

USSR (a) 222 33 305 630 9 68 1 190 2.0 5.7

World 21 369 13 567 9 969 15 915 39 451 60 820 100.0 12.2

(a) FAO estimate. (b) Includes intercountry trade. Source: FAO (1986).

Tab le B4: VARIABILITY OF WORLD PRODUCTION, TRADE AND PRICES OF PULP, PAPER AND PAPERBOARD(a)

Product

Expor ts a s C o e f f i c i e n t o f v a r i a t i o n p ropor t ion of f o r t h e pe r iod 1965-84(b) p roduc t ion i n Volume o f Volume of Rea l

1984 p roduc t ion e x p o r t s p r i c e s (c)

Mechanical wood pu lp 4.6 4.8 10.7 13 .3 Semi-chemical wood pu lp 1.7 12.7 21.9 12.1 Chemical wood pu lp 19.7 4.6 7.8 11.6 Dissolv ing wood pu lp 19.7 6.9 7.4 9.5

Newsprint 45.9 4.3 6.2 6.6 P r i n t i n g and w r i t i n g paper 20.3 5.7 9.3 6.2 Other paper and paperboard 15.1 5.1 8.4 5.8

( a ) De-trended d a t a were used f o r c a l c u l a t i n g t h e c o e f f i c i e n t of v a r i a t i o n of product ion , volume of e x p o r t s and r e a l p r i c e s . The d a t a were de-trended

* - * i n t h e fo l lowing manner: Y = Y - ( ( a + b t ) - Yt) where Y is t h e de-trended t t t v a r i a b l e , Y t is t h e v a r i a b l e being cons idered , a and b a r e t h e i n t e r c e p t and t r end c o e f f i c i e n t s r e s p e c t i v e l y ob ta ined from t h e o r d i n a r y l e a s t

squa res r e g r e s s i o n (Yt = a + b t + et) , t is a t ime v a r i a b l e and ? is t h e t mean value of Y t . ( b ) C o e f f i c i e n t of v a r i a t i o n is de f ined a s t h e s t anda rd d e v i a t i o n d iv ided by t h e mean value. (c) Average world expor t u n i t va lue from FAO (1985a) d e f l a t e d by t h e index o f expor t u n i t va lues of manufactured goods (United Nat ions 1986) .

For most pulp , paper and paperboard p roduc t s t h e r e has been an upward t r e n d i n both p roduc t ion and t r a d e over t h e p a s t twenty y e a r s ( t a b l e B1, f i g u r e s B1 and B2). For i n s t a n c e , over t h i s pe r iod , p roduc t ion of paper and paperboard inc reased by 3.1 p e r c e n t a yea r and p roduc t ion of woodpulp rose by 2.4 p e r c e n t a year . F igu re B1 i l l u s t r a t e s t h a t t h e r a t e of growth i n world p roduc t ion of pu lp and paper h a s slowed s i n c e t h e mid-1970s.

Although t h e r a t e of i n c r e a s e i n t o t a l pu lp e x p o r t s h a s followed t h e growth i n world product ion of pu lp c l o s e l y , f i g u r e s B1 and B2 i n d i c a t e t h a t expor t s o f paper and paperboard have been growing a t a f a s t e r r a t e t h a n corresponding world p roduc t ion l e v e l s , p a r t i c u l a r l y s i n c e t h e mid-1970s. Th i s corresponds t o growth i n demand f o r paper and paperboard i n major importing coun t r i e s . T h i s growth could be expected t o have a p o s i t i v e impact on r e a l p r i c e s i n t h e longe r term. However, d e s p i t e c y c l i c a l movements, t h e r e i s no s i g n i f i c a n t long term t r e n d i n r e a l p r i c e s of p u l p and paperboard o v e r a l l . T h i s is due t o a number of f a c t o r s such a s changes i n technology o f f s e t t i n g long term p r i c e r i s e s and f a c t o r s such a s growth i n excess capac i ty , which a r e l i k e l y t o p u t downward p r e s s u r e on world p r i c e s . For example, between 1965 and 1984, r e a l p r i c e s f o r pu lp p roduc t s and newsprint i nc reased by between 1 per c e n t and 2 pe r c e n t a y e a r , r e spec t ive ly . There has been no i d e n t i f i a b l e t r e n d over t i m e i n r e a l p r i c e s f o r p r i n t i n g and w r i t i n g paper and o t h e r paper and paperboard (see f i g u r e s B3 and B4 and t a b l e B1) . Since 1984, however, p r i c e s f o r most

F i g u r e B2: WORLD EXPORTS O F PULP, PAPER AND PAPERBOARD

40 8

F i g u r e B 1 : WORLD PRODUCTION OF PULP, PAPER AND PAPERBOARD

200

180 /

160

P a p e r and p a p e r b o a r d

140

120

100

8 0

T o t a l wood pulp

6 0

M t

Data source: FAO (1986).

BAE chart

1 I l I

M t

1965 1970 1975 1980

Data source: FAO (1986).

BAE chart

I I I l

F i g u r e B 4 : REAL WORLD PRICES FOR PAPER AND PAPERBOARD (a)

F i g u r e 8 3 : REAL WORLD PRICES FOR PULP ( a )

140 Base: 1980 = 100

130

M e c h a n i c a l p u l p 120

110

100

9 0 A \v // /

' c h e m i c a l p u l p 7 0

index BAE c h a r t

I I I

index

1965 1970 1975 1980

(a) Average world u n i t v a l u e s from FAO (1985) d e f l a t e d by t h e index of e x p o r t u n i t v a l u e s of manufactured goods (United Nat ions 1986).

BAE c h a r t

l I I 1965 1970 1975 1980

( a ) Average world u n i t v a l u e s from FAO (1985) d e f l a t e d by t h e index of e x p o r t u n i t v a l u e s of manufactured goods (United Nat ions 1986) .

categories of pulp, paper and paperboard have declined due to world oversupply and stagnant world demand (see subsection 2.2).

B2. Assistance t o Pulp and Paper Producers i n Major Exporting Countries

One factor which may encourage excess world capacity and oversupply, part icularly for printing and writing paper and other paper and paperboard, i s the provision of assistance measures t o the pulp, paper and paperboard industry in major exporting countries. A detailed list of specific assistance measures given to major exporters of pulp and paper products in recent years is provided in table B5, while table B6 provides a summary of the forms of assistance provided.

From table B6, it is evident that a wide range of measures providing different degrees of assistance have been offered by exporting countries, although thei r overall impact on world trade and prices is d i f f i cu l t t o ascertain. The most common forms of assistance are tax concessions, including the exemption or p a r t i a l exemption of export earnings from taxes and State charges, and the tax deductibility of export market promotion, development expenditure or value added of exports. Other forms of assistance include grants or loans a t concessional interest rates for export promotion and surplus production, and di rec t export subsidies including export rest i tut ions under the Common Agricultural Policy of the European Community. Such measures, by encouraging excess capacity and oversupply, may lead to lower world prices.

Table B5: ASSISTANCE MEASURES TO PULP AND PAPER PRODUCERS I N AUSTRALIA AND MAJOR EXPORTING COUNTRIES

Country Nature of assistance (a)

Australia Some remission of import duty i n the form of bounties payable on imported materials used in manufacture of goods for export

Austria VAT exemption on goods for export

Concessional interest on loans for investment in new plant and equipment provided in a l l cases where creation of new jobs can be demonstrated

Belgium VAT exemption on goods for export

Export credi t and exchange risk insurance

Concessional interest rates on finance of capital goods for export

Common Agricultural Policy export rest i tut ions

Concessional freight rates available on national carr iers

Subsidies for some export promotions

(Continued on next page)

Table B5 (cont inued)

Country Nature of a s s i s t a n c e ( a )

Belgium Subs id i sed loans f o r market r e sea rch , employment of e x p o r t (cont inued) c o n s u l t a n t s , p a r t i c i p a t i o n a t i n t e r n a t i o n a l s p e c i a l i s e d

f a i r s , t r a i n i n g f o r e i g n r e c r u i t s , funding of r e s e a r c h and development and a p p l i c a t i o n of new t echno log ie s and v i s i t s t o Belgium by key f o r e i g n bus iness people

B r a z i l

Canada

Regional a s s i s t a n c e f o r i n d u s t r y i n remote a r e a s , i nc lud ing low p r i c e d land, long-term f i n a n c i n g a t concess iona l r a t e s of i n t e r e s t , a c c e l e r a t e d d e p r e c i a t i o n o f equipment

Concessional l o a n s f o r expor t product ion , depending on t h e type of product ion and degree of manufacture

Export ea rn ings exempt from t a x e s and S t a t e cha rges Tax r e b a t e s on e x p o r t s

Crawling peg system of deva lua t ion

Concessional i n t e r e s t r a t e s f o r f i n a n c e used f o r f o r e i g n promotion

Reduced d u t i e s on imported c a p i t a l equipment where companies commit themselves t o a s p e c i f i e d e x p o r t program

Grants t o suppor t i n i t i a t i v e s t aken by e x p o r t e r s o p e r a t i n g e i t h e r i n d i v i d u a l l y o r c o l l e c t i v e l y i n f o r e i g n markets. Gran t s repayable i f an e x p o r t c o n t r a c t is s u c c e s s f u l l y nego t i a t ed . Grants cover up t o 50 p e r c e n t of t h e c o s t s o f c e r t a i n personnel , i n t e r n a t i o n a l t r a v e l and s p e c i a l s e r v i c e s

A range of insurance , gua ran tee and f inanc ing s e r v i c e s ( a t i n t e r n a t i o n a l l y compet i t ive r a t e s ) a r e a v a i l a b l e f o r e x p o r t e r s

Over Can$700m i n g r a n t s and low i n t e r e s t l oans g iven t o t h e Canadian Pulp and Paper Indus t ry by Fede ra l and P r o v i n c i a l Canadian Governments s i n c e 1979 t o a i d r e s t r u c t u r i n g , modernisa t ion and expor t o r i e n t a t i o n

- n o t e i n t e r e s t f r e e loan o f Can$l50m and cash g r a n t of Can$Zlm provided i n 1985 f o r modernisa t ion of major company expor t ing bus iness , copying and o t h e r f i n e pape r s

Chi le VAT exemption on goods f o r e x p o r t (20 p e r c e n t i n Chi le)

F i n a n c i a l a s s i s t a n c e (50-80 p e r c e n t of t h e c o s t s ) provided t o Chi lean f i r m s p a r t i c i p a t i n g i n i n t e r n a t i o n a l t r a d e f a i r s

A du ty drawback concess ion a v a i l a b l e f o r e x p o r t s

(Continued on nex t page)

Table B5 (continued)

Country Nature of ass i s tance(a)

Germany, F.R. VAT exemption on goods fo r export

Common Agricul tural Policy export r e s t i t u t i o n s

Export market promotion expenditure tax deductable

Subsidy ava i l ab l e ' f o r up t o 75 per cent of outs ide consul tants ' f e e s

Finland Subsidies of about US$8m a year t o fo r e s t indus t r ies i n remote development areas

France VAT exemption on goods for export

Tax deductions allowed t o exporters f o r c o s t s of establ ishing overseas o f f i ce s

Tax concessions avai lable f o r jo in t export development programs conducted by small and medium sized firms

Low i n t e r e s t loans avai lable t o increase f i rm ' s export capac i t ies

Common Agricul tural Policy export r e s t i t u t i ons

I t a l y

Japan

VAT exemption on goods for export

Repayment of manufacturing tax on ce r t a in exports

Common Agricul tural Policy export r e s t i t u t i ons

Commodity tax on some export items exempted o r refunded

Tax concessions f o r export of technology

Deferral of tax l i a b i l i t y f o r market development expenses.

- The amount deferred depends on the s i z e of the f i rm 's paid up c a p i t a l (which must be l e s s than Y1000m) and the l eve l of previous exports

- Suppliers t o exporters may a l so defer tax payments but a t a higher ra te . The deferred amount must be returned t o taxable income equally over f i ve years

Netherlands VAT exemption on goods for export

Government subsidies fo r t rade f a i r s and development of new markets

(Continued on next page)

Table B 5 (continued)

Country Nature of assistance (a)

Netherlands (continued)

New Zealand

Norway

South Africa

Sweden

Subsidies to a ss i s t the financing of exports t o developing countries

Common Agricultural Policy export rest i tut ions

Remission of import duty, provided on imported materials or components used in manufacture of goods for export. Similar exemptions apply to sa les tax paid on materials or components used for export production

Export Program Grants Scheme provides for payments in advance of a loan of 40 per cent of e l ig ible promotional expenditure - designed to support specific exports in specific target markets

Tax credit of 67.5 per cent granted for each New Zealand dollar spent overseas on New Zealand goods and services

Loans up t o a maximum of 40 per cent of qualifying capi ta l costs of an export oriented project a t commercial rates of interest (with loans being converted t o grant if a specified export target i s met)

Exporters receive a tax credit (or refund) on a specified percentage of the domestic value added of qualifying exports

Grants and concessional loans for e l ig ible projects i n regional development pr ior i ty regions

There do not appear t o be any di rec t government assistance measures which enhance the competitiveness of pulp and paper exports

Automatic compensation for exporters who pay more than the prevailing world price for raw materials and other intermediate inputs

A uniform and across the board fixed percentage subsidy on domestic value added by the exporter

Discretionary cash assistance confined to a i r freight

Automatic across the board assistance for export marketing expenditure

Special tax deductions for market development expenditures

Government subsidies of about US$600m to some five companies t o prevent m i l l closures

(Continued on next page)

Table B5 (cont inued)

Country Nature of a s s i s t a n c e ( a )

United S t a t e s Tax exempt i n d u s t r i a l bonds

A US c o r p o r a t i o n t h a t has income from f o r e i g n sources (such a s from branch o p e r a t i o n s o r through f o r e i g n s u b s i d i a r i e s ) may e i t h e r deduct t h e f o r e i g n t a x e s p a i d a s an expense o r use them a s a c r e d i t a g a i n s t US income t a x

US e x p o r t e r s a r e pe rmi t t ed t o e s t a b l i s h f o r e i g n s a l e s c o r p o r a t i o n s o u t s i d e t h e United S t a t e s and thereby o b t a i n exemption from c e r t a i n t a x a b l e income earned from economic a c t i v i t i e s occur ing o u t s i d e t h e United S t a t e s

The expor t import bank of t h e United S t a t e s p rov ides expor t c r e d i t gua ran tees , expor t c r e d i t insurance and f inanc ing of up t o one ha l f of t h e funds needed f o r f o r e i g n purchases of us goods

D i r e c t l oans and 1,oan g u a r a n t e e s a r e a v a i l a b l e t o US i n v e s t o r s i n developing c o u n t r i e s f o r p r o j e c t s t h a t have p r o f i t p o t e n t i a l and c o n t r i b u t e t o t h e c o u n t r y ' s economic and s o c i a l development

USSR No d e t a i l s c u r r e n t l y a v a i l a b l e

( a ) A s t h e r e is no g e n e r a l l y accepted d e f i n i t i o n o f what c o n s t i t u t e s expor t i n c e n t i v e s and because many c o u n t r i e s provide a s s i s t a n c e t o f i r m s which expor t i n ways which a r e not r e a d i l y i d e n t i f i a b l e i n p u b l i c documents, t h i s should no t be regarded a s a d e f i n i t i v e list of a l l expor t i n c e n t i v e s o p e r a t i n g i n t h e s e c o u n t r i e s .

Sources: The informat ion has been ga the red from v a r i o u s sou rces inc lud ing IAC (19821, Na t iona l Export Marketing S t r a t e g y Panel (1985) , A u s t r a l i a n Trade Commissioners abroad, B. Kyrklund, Food and A g r i c u l t u r e Organiza t ion (pe r sona l communication, A p r i l 1985) , and m a t e r i a l supp l i ed by t h e Pulp and Paper Manufacturers Fede ra t ion of A u s t r a l i a .

Table B6: SUMMARY OF ASSISTANCE MEASURES PROVIDED TO PULP AND PAPER PRODUCERS I N AUSTRALIA AND MAJOR EXPORTING COUNTRIES

Nature of a s s i s t a n c e ( a )

Country 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2

A u s t r a l i a A u s t r i a Belgium B r a z i l Canada Ch i l e F in land France Germany, F.R. I t a l y Japan Ne the r l ands New Zealand Norway South A f r i c a Sweden Uni ted S t a t e s

X

X X

X X X X X X X

X X X X X X

X X X X

X X X

X

X X X

X X

X X

X

X X X

X X X X X

( a ) Coun t r i e s p rov id ing s p e c i f i e d forms of a s s i s t a n c e a r e marked w i t h a c r o s s i n t h e body of t h e t a b l e . The codes used f o r t h e forms of a s s i s t a n c e a r e a s fo l lows :

(l) Direct e x p o r t s u b s i d i e s (2) Regional s u b s i d i e s (3 ) Gran t s and/or l o a n s f o r i n d u s t r y r e s t r u c t u r i n g and/or modernisa t ion , (4) Concess ional l o a n s and/or g r a n t s f o r e x p o r t p roduc t ion (5) Tax conces s ions (6 ) Exchange r a t e r e s t r u c t u r i n g (7) Expor t promotion a s s i s t a n c e ( g r a n t s and loans ) (8) Remission of import du ty on imported m a t e r i a l s used i n manufacture of

goods f o r e x p o r t (9) Inpu t s u b s i d i e s ( f o r example, c a p i t a l and labour)

(10) Concess ional f r e i g h t r a t e s (11) F r e e o r c o n c e s s i o n a l e x p o r t o r exchange r a t e i n su rance (12) Concess ional l o a n s t o import ing c o u n t r i e s

For f u r t h e r d e t a i l s ( i n c l u d i n g sou rce of informat ion) see t a b l e B5.

Appendix C

ASSISTANCE TO THE PULP, PAPER AND PAPERBOARD INDUSTRY I N AUSTRALIA

In th i s appendix, de ta i l s of operative rates of assistance currently applicable t o the items covered in the submission are presented. The assistance is mainly in the form of t a r i f f s , bounties and by-laws (commercial t a r i f f concessions) . Assistance measures provided to pulp, waste paper and paperboard used in paper making are presented i n table C l , and table C2 shows the operative rates of duty currently applicable t o selected uncoated and coated papers and paperboards, in ro l l s or in sheets taken from subchapter 1 of chapter 48 of the Australian customs regulations.

Table C l : ASSISTANCE MEASURES FOR PULP, WASTE PAPER AND PAPERBOARD USED IN PAPER MAKING I N 1986

Tar if f item Description

Tariff rates Other General Special assistance

47.01 Pulp derived by mechanical or chemical means from any fibrous vegetable material

47.01.1 . Softwood pulp - as prescribed by by-law 2 % DC:£ ree

- other 15% -

. Other - wood pulp 2 % DC:£ ree

Waste paper and paperboard; scrap a r t i c l e s of paper or of paperboard, f i t only for use in paper- making 2 % DC:£ ree

Note: DC = developing countries.

Source: Department of Industry, Technology and Commerce (1986).

Table C2: ASSISTANCE MEASURES FOR SELECTED UNCOATED AND COATED PAPERS AND PAPERBOARDS I N ROLLS OR SHEETS: 1986

Tar i f f i t e m Desc r ip t ion

T a r i f f r a t e s Other General S p e c i a l a s s i s t a n c e

48.01 Paper and paperboard ( inc lud ing c e l l u l o s wadding), i n r o l l s o r s h e e t s

48.01.1 . A s p re sc r ibed by by-law ( p o l i c y by-law f o r uncoated mechanicals f o r p r i n t e d p roduc t s ) (1) con ta in ing more t h a n 10% but less t h a n 60% mechanical pulp , (2) con ta in ing 60% o r more but less t h a n 70% mechanical pulp , and (3) o t h e r

48.01.2 . A s p re sc r ibed by by-law ( p r i n t i n g and w r i t i n g paper wrapping anding packaging paper , o t h e r paper and paperboard)

48.01.3 . Newsprint i n r o l l s o r i n s h e e t s

48.01.4 . C i g a r e t t e paper and c i g a r e t t e p lug wrap; f e l t paper ; ' f e r r o - p r u s s i t e ' paper and paperboard; hand-made paper and pape rboard

48.01.5 . Dyeline base paper and paperboard.

48.01.6 . P l a i n copying paper of a kind used i n p l a i n paper c o p i e r s , being of less t h a n 30 c m i n width; and i n r o l l s of l e s s t han 38 c m

Free

F ree

- Bounty

$70/t

DC:£ r e e

DC:£ r ee

F1:free DC: 20% Can: 25% less $3/ t

i n d iameter .

48.01.7 . F i l t e r paper and paperboard

- con ta in ing a s b e s t o s 20% DC:10% -

- o t h e r (subs tance no t 20% DC:£ ree - exceeding 205 GSM) F1 : f r e e

(Continued on nex t page)

Table C2 (cont inued)

Tar i f f i t e m Desc r ip t ion

T a r i f f r a t e s Other General S p e c i a l a s s i s t a n c e

48.01.8 . Machine g lazed paper , NSA

48.01.9 . Other ( i n c l u d e s p r i n t i n g and w r i t i n g s , wrapping and packaging ( k r a f t ) ; t i s s u e ; and o t h e r paper and paper- boards ( i n d u s t r i a l etc) . - having a subs tance

exceeding 22 GSM and not exceeding 205 GSM

- o t h e r ( t h a t is, less than 22 GSM and g r e a t e r t han 205 GSM)

Parchment paper and paper board and greaseproof paper and paperboard, and i m i t a t i o n s t h e r e o f , and g l azed t r a n s p a r e n t pape r s , i n r o l l s o r s h e e t s

20% FI:f r ee Can : 20% less $3/t

30% o r FI:f r e e i f lower DC:$40/t $50/t Can: 30%

less $10/t , o r i f lower $40/t

2% DC:£ ree

48.04 Composite paper and paper boards i n r o l l s and s h e e t s

48.04.1 . A s p r e s c r i b e d by by-law, 2% DC:free - subs t ance not exceeding 205 GSM

48.04.9 . Other , subs tance n o t $50/t F1:free - exceeding 205 GSM Can:$4O/t

48.05 Paper and paperboard, co r ruga ted (wi th o r wi thout f l a t s u r f a c e s h e e t s ) c reped, c r i n k l e d , embossed o r p e r f o r a t e d , i n r o l l s o r s h e e t s

48.05.1 . A s p r e s c r i b e d by by-law 2% DC:£ r e e - creped on c r i n k l e d , whether o r no t embossed o r p e r f o r a t e d

(Continued on next page)

Table C2 (cont inued)

Tar i f f i t e m Desc r ip t ion

T a r i f f r a t e s Other General S p e c i a l a s s i s t a n c e

48.05.2 . Embossed o r p e r f o r a t e d 20% F1:free having a subs tance exceeding Can: 20% 22 GSM bu t no t exceeding less $4/ t 205 GSM

48.05.9 . Other

Paper and paperboard, impregnated, coated , s u r f a c e decora ted o r p r i n t e d ( n o t f a l l i n g i n ch.49) i n r o l l s o r s h e e t s

48.07.1 . A s p r e s c r i b e d by by-law Free c l a y coa ted

48.07.2 . A s p re sc r ibed by by-law 2% paper and p a p e r h a r d , t a r r e d b i tuminised o r a spha l t ed , paper and paperboard, ru l ed , l i n e d o r squared bu t n o t o the rwise p r i n t e d . P r i n t i n g and w r i t i n g paper, NSA, o t h e r

48.07.3 . Enamelled b l o t t i n g , f l o c k 2% coated , i n d i c a t o r , parchment, grease-proof, g lazed t r a n s p a r e n t and sub l ima t ion t r a n s p e r p r i n t i n g pape r s and paperboard

48.07.4 . Unsens i t i s ed prepared p o s i t i v e t r a n s f e r media of t h e kind used f o r t h e photocopying of documents by t h e image-transf e r p rocess

- I n s h e e t s o r s t r i p s , each 15% of which does no t exceed 2500 CM

DC:£ r ee

DC:£ r e e

Bounty $90/t

- Other 10% DC:free - 48.07.5 . Wrapping paper , NSA $50/t F1 : f r e e ..

(Continued on nex t page)

Table C2 (cont inued)

T a r i f f i t e m Desc r ip t ion

T a r i f f r a t e s Other General S p e c i a l a s s i s t a n c e

48.07.6 . Clay coated having a 20% F1 : f r e e - subs t ance not exceeding 205 GSM ( i n c l u d e s p r i n t i n g and w r i t i n g )

48.07.7 . Coated paper , NSA, having a 22.5% F1:f ree - subs tance no t exceeding DC:10% 205 GSM and i n c l u d e s c a r b o n l e s s copying papers

48.07.9 . Other , t h a t is, 205 GSM 22.5% F1 : f r e e - i nc lud ing a l l uncoated DC:10% p r i n t e d , ru l ed , l i n e d e t c .

48.16 Boxes and bags of paper o r 2 5% F1 : f r e e - paperboard ; o t h e r packaging DC:15% c o n t a i n e r s of paper o r paper- board, box f i l e s , le t ter t r a y s and s i m i l a r a r t i c l e s , of paper or paperboard, o f a kind commonly used i n o f f i c e s , shops and t h e l i k e Bags and sacks Boxes and c a r t o n s P r i n t e d gramophones Record c o v e r s Other

Note: DC = developing c o u n t r i e s . F1 = forum i s l a n d c o u n t r i e s : Can = Canada; GSM = grams p e r squa re metre; NSA = no t s p e c i f i e d above.

Source: Department o f Indus t ry , Technology and Commerce (1986).

Appendix D

LONG TERM CONSUMPTION PROJECTIONS OF PULP, PAPER AND PAPERBOARD IN AUSTRALIA

I n t h i s appendix t h e long term consumption p r o j e c t i o n s f o r pulp , pape r and paperboard o u t l i n e d i n s e c t i o n 4 a r e d e t a i l e d . P a s t BAE p r o j e c t i o n s of pape r and paperboard consumption (Edqu i s t and Mor r i s 1985) a r e r e v i s e d wi th high, medium and low p r o j e c t i o n s provided f o r 1990, 2000, 2010 and 2020. T h i s work i s used t o p r o j e c t p u l p consumption t o t h e y e a r 2000.

D1. S p e c i f i c a t i o n of t h e Paper Models

I n t h i s s e c t i o n t h e t h e o r e t i c a l background and s p e c i f i c a t i o n of t h e pape r models p re sen ted by Edquis t and Mor r i s a r e updated t o p r o v i d e r e v i s e d parameter e s t i m a t e s .

D l . 1 T h e o r e t i c a l background

The b a s i s of t h e p r o j e c t i o n s is t h e p roduc t l i f e c y c l e theory . Under t h i s theory it is p o s t u l a t e d t h a t t h e h i s t o r i c a l p a t t e r n of consumption of a p roduc t fo l lows a n S-shaped t r e n d (see t h e l e f t hand side of f i g u r e D l ) . Over a longer t ime span, a bel l-shaped cu rve may r e s u l t . I n t h e s h o r t term, however, t h e s e t r e n d s a r e s u b j e c t t o d i s t u r b a n c e by exogenous demand f a c t o r s such a s own and s u b s t i t u t e p r i c e s . Thus, it is neces sa ry t o t a k e i n t o account t h e s e f a c t o r s i n o r d e r t o e s t a b l i s h t h e t r u e unde r ly ing t r end .

F igure D1: IDEALISED LONG TERM PATTERN OF CONSUMPTION OF A

PRODUCT Ceiling of consumption

Consumption

- P - -

Point of inflection Time

BAE chart

The product l i f e c y c l e concept can be r ep resen ted q u a n t i t a t i v e l y by t h e l o g i s t i c equat ion:

where

C = consumption K = consumption f l o o r S = consumption c e i l i n g X = t h e d r i v i n g v a r i a b l e of t h e l o g i s t i c f u n c t i o n a , b = parameters

For p o s i t i v e b t h e curve i n c r e a s e s wi th inc reas ing va lues of X; f o r negat ive b t h e curve dec reases w i t h inc reas ing va lues of X. The p o i n t o f i n f l e c t i o n occur s a t X = a/b, a t which p o i n t C = (S + K)/2.

The d r i v i n g v a r i a b l e , X , may i t s e l f be a f u n c t i o n of o t h e r v a r i a b l e s . I n t h e equa t ions f o r consumption p resen ted below, X was taken t o be a l i n e a r f u n c t i o n of t ime, p r i c e and consumer income. Fur the r , both X and t h e c e i l i n g l e v e l , S, may be a f f e c t e d by t e c h n o l o g i c a l innovat ions which may cause marked breaks i n t r e n d s and c r e a t e new c e i l i n g l e v e l s .

The consumption f l o o r of t h e l o g i s t i c f u n c t i o n was taken to be ze ro i n a l l ca ses , except f o r wrapping and packaging paper. S t a t i s t i c a l d i f f i c u l t i e s prevented the e s t i m a t i o n of t h e consumption c e i l i n g i n t h e c a s e s of newsprint and paperboard. I n both t h e s e cases , consumption p e r d o l l a r of g r o s s domest ic product h a s been d e c l i n i n g , t h u s making c e i l i n g l e v e l s somewhat i r r e l e v a n t . I n t h e s e c a s e s t h e t a i l of t h e l o g i s t i c f u n c t i o n was approximated by a nega t ive exponen t i a l funct ion .

D1.2 S p e c i f i c a t i o n and e s t ima t ion

The s i x c a t e g o r i e s chosen f o r a n a l y s i s a r e paperboard, newsprint , p r i n t i n g and w r i t i n g paper , k r a f t wrapping and packaging paper, household and s a n i t a r y t i s s u e s , and miscel laneous paper. The f a c t o r s a f f e c t i n g t h e consumption of each of t h e s e c a t e g o r i e s and t h e es t imated equa t ions f o r each a r e o u t l i n e d below.

( a ) Paperboard

The major end use f o r t h i s ca t egory is i n d u s t r i a l packaging and t h e a p p r o p r i a t e u n i t of consumption is consumption p e r thousand d o l l a r s of g r o s s domestic product . S u b s t i t u t e s i nc lude v a r i o u s t y p e s of p l a s t i c and o t h e r packaging m a t e r i a l s . The cho ice of m a t e r i a l by t h e packager depends no t only on t h e p r i c e of t h e m a t e r i a l but a l s o on i ts p r o p e r t i e s , such a s s t r e n g t h , water r e s i s t a n c e and p r i n t a b i l i t y . Improvements i n paperboard mean t h a t l e s s is requi red f o r each package, while improvements i n s u b s t i t u t e s reduce t h e demand f o r paperboard. These f a c t o r s have l e d t o a d e c l i n i n g t r end i n paperboard consumption p e r thousand d o l l a r s of g r o s s domestic product .

The model chosen t o e s t i m a t e long term consumption t r e n d s f o r paperboard was a negat ive exponen t i a l f u n c t i o n of p r i c e and t i m e . S i g n i f i c a n t f i r s t - o r d e r s e r i a l c o r r e l a t i o n was found t o be p r e s e n t . A

f i r s t - o r d e r a u t o r e g r e s s i v e p r o c e s s i n t h e r e s i d u a l s was al lowed f o r by reformula t ing t h e equa t ion and e s t i m a t i n g d i r e c t l y , by non-l inear l e a s t s q u a r e s , t h e a u t o r e g r e s s i v e component. M u l t i c o l l i n e a r i t y between t h e lagged dependent v a r i a b l e and t i m e l e d t o t h i s v a r i a b l e being dropped from t h e equa t ion ( t h i s c a n be p a r t l y j u s t i f i e d by t h e f a c t t h a t t h e a u t o r e g r e s s i v e parameter i s n o t s i g n i f i c a n t l y d i f f e r e n t from one ) .

The model was e s t ima ted f o r t h e pe r iod 1963-64 t o 1984-85. R e s u l t s a r e p re sen ted below, wi th s t anda rd e r r o r s g iven i n pa ren theses .

where

LCPPGDPt = logar i thm of consumption o f paperboard p e r thousand d o l l a r s of r e a l g r a s s domestic product i n yea r t

LPRICEt = l oga r i thm of r e a l p r i c e of paperboard i n y e a r t ($ '000 p e r tonne)

(b) Newsprint

The major end use f o r newspr in t paper is newspapers. While t h e r e a r e no d i r e c t s u b s t i t u t e s f o r newsprint , consumption is a f f e c t e d by s u b s t i t u t e s f o r newspapers such a s d i r e c t ma i l a d v e r t i s i n g and t h e v a r i o u s e l e c t r o n i c media. Because t h e l e v e l of a d v e r t i s i n g v a r i e s d i r e c t l y wi th economic a c t i v i t y , t h e measure chosen f o r e s t i m a t i o n was newspr in t paper consumption p e r thousand d o l l a r s o f g r o s s domest ic product .

There is some doubt about t h e s i g n i f i c a n c e o f p r i c e a s an i n f l u e n c e i n t h e demand f o r newspr in t i n A u s t r a l i a ( s ee , f o r example, Bigsby 1985) . P r i c e is probably o f l i m i t e d s i g n i f i c a n c e , g iven t h a t t h e p r i c e o f newspr in t is a minor f a c t o r i n t h e t o t a l c o s t o f producing a newspaper and t h a t t h e r e a r e no d i r e c t s u b s t i t u t e s f o r newsprint . When t h e f u n c t i o n a l form considered t o be t h e o r e t i c a l l y t h e most a p p r o p r i a t e was e s t ima ted , p r i c e was found t o be i n s i g n i f i c a n t and was dropped from t h e equat ion .

The model chosen f o r e s t i m a t i n g t h e t r e n d i n newspr in t consumption was a nega t ive exponen t i a l i n time. T h i s r e f l e c t s t h e long term d e c l i n e i n consumption p e r thousand d o l l a r s o f g r o s s domest ic product . The model was e s t ima ted f o r t h e pe r iod 1954-55 t o 1984-85, w i th a dummy v a r i a b l e i n s e r t e d f o r t h e yea r 1984-85, due t o a break i n t r e n d i n t h a t year . R e s u l t s a r e p re sen ted below, wi th s t anda rd e r r o r s g iven i n pa ren theses .

where

LCNPGDPt = l oga r i thm of consumption of newspr in t pe r thousand d o l l a r s of g r o s s domestic product i n yea r t (kg/$1000)

D8St = dummy, equa l t o ze ro p r i o r t o 1984-85 and equa l t o one i n 1984-85.

( C ) P r i n t i n g and w r i t i n g paper

T h i s is a heterogeneous ca t egory , w i th end uses i n books, magazines, o f f i c e s t a t i o n e r y and ca t a logue and d i r e c t ma i l a d v e r t i s i n g . Consumption was measured i n te rms of consumption p e r person.

S o c i a l t r e n d s which have l e d t o a long term r i s i n g t r e n d i n consumption p e r person inc lude r i s i n g educat ion l e v e l s apd a r i s e i n t h e importance of t e r t i a r y i n d u s t r i e s i n economic a c t i v i t y . S ince t h e mid-1970s t h e r a t e of i n c r e a s e i n worldwide consumption has a c c e l e r a t e d markedly. This has a l s o been t h e c a s e i n A u s t r a l i a . The a c c e l e r a t e d r a t e of change is a s s o c i a t e d wi th a number of t echno log ica l innovat ions , i nc lud ing t h e i n t r o d u c t i o n of computer t y p e s e t t i n g f o r book and magazine product ion , t h e spread of computers i n o f f i c e s g e n e r a l l y , and increased use of ca t a logue and d i r e c t ma i l a d v e r t i s i n g . However, t h e r e was a l a r g e f a l l i n consumption i n 1982-83, which caused a break i n t h e long term t r end and reduced t h e c e i l i n g l e v e l of consumption t o approximately 40 kg pe r person. T h i s l e v e l is l i k e l y t o be a t t a i n e d j u s t a f t e r t h e yea r 2000.

The model chosen f o r e s t i m a t i o n of long term t r e n d s i n consumption o f p r i n t i n g and w r i t i n g paper was a l o g i s t i c f u n c t i o n of consumer income, wi th p r o v i s i o n f o r t h e breaks i n t r end i n t h e mid-1970s and i n 1982-83. The model was e s t ima ted f o r t h e pe r iod 1954-55 t o 1984-85. R e s u l t s a r e p re sen ted below, wi th s tandard e r r o r s g iven i n parentheses .

where

CWPPOPt = consumption of p r i n t i n g and w r i t i n g paper pe r person i n yea r t

GDPPOPt = r e a l g r o s s domestic product pe r pe r son i n yea r t

D76t = dummy, equa l t o ze ro p r i o r t o 1975-76 and equa l t o one i n and a f t e r 1975-76

D83t = dummy, equa l t o z e r o p r i o r t o 1982-83 and equa l t o one i n and a f t e r 1982-83.

(d ) K r a f t wrapping and packaging paper

These pape r s a r e used mainly a t t h e r e t a i l l e v e l , a l t hough some a r e used f o r i n d u s t r i a l purposes. Consumption was measured i n te rms of consumption p e r person. S u b s t i t u t e s a r e o t h e r packaging m a t e r i a l s , mainly p l a s t i c . P r i c e is a n impor tant f a c t o r i n t h e cho ice of packaging m a t e r i a l , bu t m a t e r i a l p r o p e r t i e s and package d e s i g n a l s o i n f l u e n c e t h e c h o i c e of m a t e r i a l .

Consumption p e r pe r son of t h e s e p a p e r s has been fo l lowing a r i s i n g t r end . Th i s is l a r g e l y due t o t h e e f f e c t s of r i s i n g consumer income on r e t a i l s a l e s i n t h e s h o r t run and changes i n r e t a i l i n g technology i n t h e long run. The spread of c e n t r a l i s e d r e t a i l c h a i n s h a s f o s t e r e d t h e achievement of economies of s i z e i n packaging; however, t h e a s s o c i a t e d c e n t r a l i s a t i o n of d e c i s i o n making can l e a d t o s h a r p changes i n consumption. For example, t h e i n t r o d u c t i o n of h igh - s t r eng th p l a s t i c bags and t h e i r widespread adopt ion by major r e t a i l c h a i n s i n 1982-83 l e d t o a sha rp f a l l i n t h e consumption of wrapping and packaging pape r s , from 400 k t i n 1981-82 t o 325 k t i n 1982-83.

The e s t ima ted c e i l i n g t o consumption is 59 kg p e r person, which is probably t h e c e i l i n g of t h e r e t a i l packaging sector a s a whole. Consumption is t h e r e f o r e u n l i k e l y t o a t t a i n t h i s l e v e l .

Long term consumption of wrapping and packaging paper was modelled a s a l o g i s t i c f u n c t i o n of paper p r i c e and consumer income. The model was e s t ima ted over t h e p e r i o d 1962-63 t o 1984-85. R e s u l t s a r e p re sen ted below, w i th s t anda rd e r r o r s g iven i n pa ren theses .

CKWPOPt = 5.84 + 53.38/[1 + exp(-0.51 - 0.31 HDIPOP (5.20) (1.57) (0.66) (0.06)

t

where

CKWPOPt = consumption of wrapping paper p e r pe r son i n yea r t

HDIPOPt = r e a l household d i s p o s a b l e income p e r person i n y e a r t

P r i c e t = r e a l p r i c e of k r a f t wrapping paper i n yea r t

D83t = dummy, e q u a l t o ze ro p r i o r t o 1982-83 and e q u a l t o one i n and a f t e r 1982-83.

(e) Household and s a n i t a r y t i s s u e s

The a p p r o p r i a t e measure f o r t i s s u e s i s consumption p e r person. While p r i c e compe t i t i on is impor tant between brands , p r i c e is u n l i k e l y t o have a s i g n i f i c a n t e f f e c t on t h e o v e r a l l consumption of t h e s e products . S o c i a l t r e n d s and pe rce ived convenience a r e l i k e l y t o be t h e impor t an t f a c t o r s i n

t h e long term development of t h i s product . These s o c i a l t r e n d s a r e s t r o n g l y c o r r e l a t e d t o consumer income.

The model chosen f o r e s t i m a t i n g long term t r e n d s i n t i s s u e consumption was a l o g i s t i c f u n c t i o n i n consumer income. The e s t ima ted c e i l i n g is 8.3 kg p e r person, which i n d i c a t e s t h a t consumption is c u r r e n t l y c l o s e t o c e i l i n g l e v e l s . The model was es t imated f o r t h e pe r iod 1961-62 t o 1984-85. R e s u l t s a r e p re sen ted below, wi th s t anda rd e r r o r s g iven i n parentheses .

where

CHSPOPt = consumption of household and s a n i t a r y t i s s u e s pe r person i n yea r t

GDPWPt = r e a l g r o s s domestic product p e r person i n y e a r t.

( f) Miscel laneous

T h i s is a heterogeneous ca t egory of s p e c i a l i t y g r a d e s wi th a wide range of end uses. Average consumption p e r thousand d o l l a r s of g r o s s domestic product over t h e pe r iod is p resen ted below, wi th t h e s tandard d e v i a t i o n of consumption g iven i n parentheses .

where

CMCGDPt = consumption of misce l laneous paper pe r thousand d o l l a r s of g r o s s domestic p roduc t i n y e a r t.

D1.3 R e s u l t s

An a n a l y s i s of t he r e s u l t s i n d i c a t e s t h a t newsprint and paperboard a r e ' overmature ' p roduc t s i n t h e sense t h a t consumption of t h e s e p roduc t s pe r d o l l a r of g r o s s domestic product is dec l in ing . The c e i l i n g s t o consumption of t h e s e p roduc t s a r e unknown but t h e t r e n d s i n d i c a t e t h a t t h e c e i l i n g s a r e i r r e l e v a n t . The household and s a n i t a r y t i s s u e s ca tegory is 'approaching ma tu r i ty ' and, on c u r r e n t t r ends , l i t t l e i nc rease i n consumption pe r person is expected. Consumption pe r pe r son of p r i n t i n g and w r i t i n g paper is inc reas ing r ap id ly a t p re sen t , and c u r r e n t t r e n d s i n d i c a t e t h a t a c e i l i n g t o consumption o f about 40 kg pe r person may be reached by j u s t a f t e r t h e t u r n of t h e cen tu ry . Developments i n r e t a i l i n g have s t imu la t ed t h e packaging market and t h e r e seems t o be p l e n t y of room f o r growth i n demand f o r wrapping and packaging paper . However, t h e packaging market is highly compet i t ive and t h e c e i l i n g es t imated is p o s s i b l y t h a t of t h e r e t a i l s e c t o r a s a whole. Thus t h e f u t u r e market s h a r e taken by paper a s opposed t o p l a s t i c s i s unce r t a in and dependent on t h e marketing a c t i v i t i e s of t h e compe t i to r s i n t h e market.

D2. P r o j e c t i o n s o f Cur r en t Trends

P r o j e c t i o n s based on t h e c o n t i n u a t i o n o f c u r r e n t t r e n d s a r e s e t o u t i n f i g u r e D2 and t a b l e D 1 . The ' low' , 'medium' and ' h igh ' p r o j e c t i o n s i n t h e t a b l e r e f l e c t t h e u n c e r t a i n t y a s s o c i a t e d w i t h f u t u r e growth i n p o p u l a t i o n and g r o s s domest ic product .

D2.1 P r o j e c t i o n s o f p o p u l a t i o n and income

Three p r o j e c t i o n s o f p o p u l a t i o n were cons ide red . The low, medium and h igh p r o j e c t i o n s a r e t h e A u s t r a l i a n Bureau of S t a t i s t i c s s e r i e s A, C and D, r e s p e c t i v e l y (ABS 1985) . These p r o j e c t i o n s have annua l growth r a t e s f o r p o p u l a t i o n f a l l i n g from 1.23 i n 1990 t o 0.69 i n 2020 f o r s e r i e s A, from 1.31 to 0.82 f o r s e r i e s C and from 1.32 t o 0.95 f o r s e r i e s D. These r a t e s a r e marg ina l l y h ighe r t h a n t h o s e p r epa red by t h e Department of Immigra t ion and E t h n i c A f f a i r s (1986) .

Three p r o j e c t i o n s o f income p e r pe r son were a l s o cons ide red . These were based on p a s t growth i n GDP p e r person , which has shown c o n s i d e r a b l e f l u c t u a t i o n over t i m e . The p r o j e c t i o n s of growth r a t e s were:

- 1.75 p e r c e n t a y e a r - low pro jec t ion , ;

- 2.00 p e r c e n t a y e a r - medium p r o j e c t i o n ; and

- 2.25 p e r c e n t a y e a r - high p r o j e c t i o n .

P r o j e c t i o n s of t o t a l g r o s s domest ic p roduc t were produced by combining t h e low, medium and h igh p r o j e c t i o n s f o r p o p u l a t i o n w i t h t h e low, medium and h igh p r o j e c t i o n s f o r g r o s s domest ic p roduc t p e r pe r son , r e s p e c t i v e l y .

F igu re D2: PROJECTIONS OF PAPER CONSUMPTION TO 2020

6 -

5 -

4 -

3 -

2 -

1 -

M t

High

,' I' 0

,,'* / / ~ e d i u m ,,' .

I /

,,, ,' , /cow ,' '0' 0

I . I ,,;H / -5' /

,&,'

BAE c h a r t

l I I I I I I I I I I l l 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Tab le D1: PROJECTIONS OF CURRENT TRENDS I N PAPER AND PAPERBOARD CONSUMPTION

Produc t group 1984-85 1990 2000 2010 2020 ( a c t u a l )

Paper board Low Med i urn High

Newsprint Low Medium High

P r i n t i n g and w r i t i n q Low Med i urn High

Wrapping and packaging Low Med i urn High

Household and s a n i t a r y LOW Med i urn High

Misce l l aneous LOW Med i urn High

T o t a l Low Med i urn High

D2.2 Es t ima t ion of p r i c e t r e n d s

P r i c e s were p r o j e c t e d on t h e assumption t h a t no f u t u r e o i l c r i s e s o r s i m i l a r exogenous shocks would occur and t h a t p r i c e s would con t inue t o f o l l o w t h e i r long run unde r ly ing t r ends .

P r i c e s were modelled as n e g a t i v e e x p o n e n t i a l f u n c t i o n s of t ime, w i t h a dummy v a r i a b l e t o r e p r e s e n t t h e e f f e c t s of t h e o i l c r i s i s . Es t ima t ion was by o r d i n a r y l e a s t squa re s , f o r t h e p e r i o d 1962-63 t o 1984-85, w i th t h e l oga r i t hm of p r i c e a s t h e dependent v a r i a b l e .

The r e s u l t s of t h e e s t i m a t i o n s were t h a t t h e o i l c r i s i s was r e s p o n s i b l e f o r a 1 6 p e r c e n t r i s e i n t h e p r i c e of paperboard and a 1 3 p e r

cent r i se in the price of kraft wrapping paper. The underlying rate of decline in the price of paperboard was 2.7 per cent a year, while the underlying ra te of decline in the price of wrapping and packaging paper was 1.8 per cent a year.

D2.3 Results of current trend projections

The projections indicate that if current trends were t o continue, annual domestic consumption of paper and paperboard would r i se from the 1984-85 level of 2.3 M t t o between 3.3 M t and 3.5 M t by 2000 and t o between 4.4 M t and 5.3 M t by 2020, depending on future population and income growth. This represents a downward revision t o the projections presented by Edquist and Morris (1985). However, t h i s revision is not large and the new medium consumption projection for t o t a l paper and paperboard remains within one standard error of the corresponding projection presented in that paper. Projections for individual products are within two standard errors.

D3. Pulp Projections to 2000

Three scenarios for pulp consumption t o the year 2000 were developed. Scenarios 1 and 3 represent two extremes based, respectively, on no increase in paper production and on an increase in paper production t o meet t o t a l paper consumption. In scenario 3, projected pulp consumption was based on the medium paper and paperboard consumption projections. Scenario 2 represents the most l ikely situation, where paper production capacity i s assumed to r i s e t o the levels shown in table D2. Capacity data t o 1990 are based on industry sources, while the figures for 2000 are based on an assumed continuation of trend.

Conversion rates of pulp and wastepaper to paper. are shown in table D3. The t o t a l conversion factors for each category are based on his tor ica l averages. The conversion rate assumed for printing and writing paper i s 0.88 t of f ibre ( that i s , pulp plus wastepaper) t o l t of paper ( t h i s ar ises due t o the use of f i l l e r s ) . The conversion factor of 1.1 t of f ib re t o 1 t of other paper and paperboard i s due t o the waste associated with converting wastepaper t o paper. The conversion rate assumed for newsprint and household and sanitary t issues is l t of f ibre t o l t of paper .

Pulp consumption projections are l i s ted in table D4 under the three scenarios outlined ea r l i e r , while l ikely trends in pulp capacity are shown i n table D5. Capacity figures t o 1990 are based on industry sources, while those t o 2000 assume the trend continues. Comparing figures i n these two tables reveals that i f trends in capacity expansion continue, chemical pulp capacity, for example, w i l l continue t o f a l l short of demand under a l l scenarios. Chemical pulp capacity as a proportion of projected demand w i l l , under scenario 2, f a l l from 76 per cent in 1985 to 58 per cent in 2000.

Table D2: ASSUMPTIONS BEHIND SCENARIO 2: UTILISATION OF PRODUCTION CAPACITY

Product Capacity Production Use Capacity production Use Capacity Production Use

.l o Newsprint 365 364 100 4 30 4 30 100 600 600 100

Printing and writing

paper 291 278 9 6 384 365 95 505 480 9 5

Household and sanitary tissues 136 119 9 2 142 135 95 166 158 95

Other paper and paperboard 9 24 818 89 937 843 9 0 975 925 9 5

Total 1 716 1 585 9 2 1 893 1 773 94 2 246 2 163 9 6

Tab le D3: ASSUMPTIONS BEHIND PULP PROJECTIONS: COMPOSITION OF PAPER AND PAPERJ30ARD

Product

Newsprint ( 1 t f i b r e = 1 t pape r ) Mechanical 24.2 Thermomechanical Chemical Semi-chemical

P r i n t i n g and w r i t i n g pape r (0.88 t f i b r e = 1 t pape r ) Mechanical 3.7 4 Chemical Semi-chemical Of £ e r Wastepaper

Household and s a n i t a r y t i s s u e s ( 1 t f i b r e s = 1 t pape r ) Thermomechanical 16.7 1 7 Chemical 62.5 62 Semi-chemical 20.8 21

O the r pa pe r and paperboard (1 .1 t f i b r e = 1 t pape r ) Mechanical 3.0 2 Chemical 30.5 30 Semi-chemical 11 .5 l1 Wastepaper 55.0 57

(S) Es t ima t ed a c t u a l . ( f ) Fo reca s t .

Tab l e D4: PULP CONSUMPTION PROJECTIONS

Product

Mechanical 129 114 1 3 1 205 114 175 244 Thermomechanical 231 244 281 436 244 387 49 4 Chemical 51 9 504 599 876 504 715 1 157 Semi-chemical 21 7 214 243 358 186 267 402 Wastepaper 514 537 548 786 565 636 1 175 O the r 11 8 1 3 21 8 1 7 27

T o t a l 1 621 1 621 1 815 2 682 1 621 2 197 3 499

S c e n a r i o 1 = no i n c r e a s e i n pape r p r o d u c t i o n assumed; S c e n a r i o 2 = l i k e l y t r e n d i n pape r p r o d u c t i o n assumed; S c e n a r i o 3 = pape r p r o d u c t i o n e q u a l s pape r consumption.

T a b l e D5: PULP CAPACITY PROJECTIONS

P r o d u c t 1 9 8 5 1 9 9 0 2 0 0 0

k t k t k t

M e c h a n i c a l

T h e r m o m e c h a n i c a l

C h e m i c a l

S e m i - c h e m i c a l

T o t a l p u l p c a p a c i t y

Append i x E

IMPORT DEMAND FOR PRINTING AND WRITING PAPER

El . I n t r o d u c t i o n

I n t h i s appendix t h e a n a l y s i s l ead ing t o t h e conc lus ions made i n subsec t ion 4 . 2 is d e t a i l e d . The f a c t o r s de termining t h e s h o r t run demand and supply of p r i n t i n g and w r i t i n g papers a r e cons idered , w i th emphasis g iven t o t h e r e l a t i o n s h i p between domestic supply and impor ts . Also analysed is t h e impact of government a s s i s t a n c e on import demand and domestic production.

The demand f o r impor ts can be viewed i n g e n e r a l a s a f u n c t i o n of income, p r i c e s and r e l e v a n t demand s h i f t e r s . I n t h e paper i n d u s t r y , t h e demand s h i f t e r s a r e l i k e l y t o be in f luenced by government i n t e r v e n t i o n aimed a t i nc reas ing t h e domestic market s h a r e of l o c a l producers o r mainta in ing t h e i r h i s t o r i c a l market share . I n t e r v e n t i o n is g e n e r a l l y i n t h e form of t a r i f f s , non- tar i f f b a r r i e r s , boun t i e s and b i l a t e r a l t r a d e agreements.

To examine import demand f o r s u b s t i t u t e commodities ( h e r e s u b s t i t u t e means import s u b s t i t u t e ) , a framework of t h e s i n g l e commodity import demand model is developed. Imports of v a r i o u s paper commodities a r e not always d i r e c t s u b s t i t u t e s f o r domes t i ca l ly produced p roduc t s f o r a number of reasons. These inc lude q u a l i t y d i f f e r e n c e s , which o f t e n e x i s t between those commodities which do compete, a s we l l a s t h e ex i s t ence of ' c ap tu red ' market sha re , whereby l o c a l producers c a p t u r e market s h a r e on t h e b a s i s of i n t e g r a t i o n and consumer l o y a l t y . Unfor tunate ly , t h e aggregate n a t u r e of t h e d a t a s t u d i e d does not a l low f u l l y f o r t h e c a l c u l a t i o n of t h e p ropor t ion of imports which do not compete d i r e c t l y wi th domes t i ca l ly produced paper. Consequently, t h e degree of s u b s t i t u t a b i l i t y of p roduc t s could no t be inco rpora t ed i n t h e a n a l y s i s . The major i n f l u e n c e s on A u s t r a l i a n impor ts of paper i nc lude p roduc t ion and t r a d e p o l i c i e s and o t h e r arrangements (such a s c l o s e r economic r e l a t i o n s wi th New Zealand) pursued and adopted by t h e A u s t r a l i a n Government.

I n t h e l i g h t of t h e above obse rva t ions , t h e o b j e c t i v e s of t h i s appendix a r e t o i d e n t i f y and q u a n t i f y the f a c t o r s which i n f l u e n c e t h e s i z e and growth of A u s t r a l i a n paper impor ts i n t h e s h o r t run and t o de termine t h e s h o r t run e f f e c t s of s e l e c t e d p o l i c y dec i s ions .

E2. T h e o r e t i c a l Framework

The t h e o r e t i c a l approach i s based on t h a t used by M i t c h e l l (1985) i n a World Bank paper. Some mod i f i ca t ions have been in t roduced, s i n c e p a r t s of t h e method used a r e i n a p p r o p r i a t e f o r t h e p r e s e n t s tudy.

Under t h i s method, it is assumed t h a t t h e importing coun t ry i s ' s m a l l ' , s o t h a t i t s d e c i s i o n s d o no t a f f e c t world p r i c e s . And, based on t h e assumptions t h a t imports and domestic goods a r e c l o s e t o p e r f e c t s u b s t i t u t e s , t h a t no t r a d e b a r r i e r s e x i s t and t h a t t h e supply of impor ts is p e r f e c t l y e l a s t i c a t a g iven p r i c e , t h e demand f o r impor ts can be t aken a s an excess demand schedule. The i m p l i c a t i o n of t h e t h r e e demand assumptions is t h a t domestic p r i c e s must equa l world p r i c e s f o r domest ic producers t o survive . T h i s i s shown g r a p h i c a l l y i n f i g u r e E l .

Figure E l : IMPORT DEMAND WITH PERFECT SUBSTITUTABILITY AND FREE TRADE A: Domestic demand and supply B: Import demand

P r i c e P r i c e

0

Q u a n t i t y Q u a n t i t y

BAE c h a r t

I n t h e absence of p o l i c y i n t e r v e n t i o n , t h e domestic demand and supply schedules a r e shown i n f i g u r e E l a s D and S, r e spec t ive ly . 'The d i f f e r e n c e between D and S below P1 is t h e excess demand schedule, ED i n F igu re [ E l l , o r , equ iva len t ly , t h e demand f o r imports . A t a p r i c e below PI, domestic demand exceeds domestic supply and ED shows t h e impor ts r equ i r ed t o s a t i s f y domestic demand. ' (Mi tche l l 1985, p. 8 ) . The excess demand curve w i l l s h i f t i n response t o p o l i c y i n t e r v e n t i o n a s w e l l a s any changes i n t h e domestic demand and supply curves .

The A u s t r a l i a n sha re of world imports of d i f f e r e n t t ypes of paper is r e l a t i v e l y smal l . I n A u s t r a l i a , import demand f o r some p roduc t s is inf luenced by government import r e s t r i c t i o n s . The t r a d e r e s t r i c t i o n s imposed by t h e Government inc lude both t a r i f f and non- t a r i f f b a r r i e r s . A u s t r a l i a is a n e t impor ter of a l l t he p roduc t s cons idered i n t h i s submission.

I n t h i s appendix, only t h e n e t import demand f o r p r i n t i n g and wr i t i ng paper i s considered . This approach has advantages because imported and domestic goods a r e s u b s t i t u t e s . I n o t h e r words, i f t h e imported good is not a s u b s t i t u t e f o r t h e domes t i ca l ly produced good, no amount of change i n domestic product ion w i l l a£ f e c t t he demand f o r imports . A l t e r n a t i v e l y , i f t h e imported and domestic goods a r e i d e n t i c a l , domestic and imported goods a r e p e r f e c t s u b s t i t u t e s and a u n i t of imported good w i l l e x a c t l y o f f s e t a u n i t of domes t i ca l ly produced good (Mi tche l l 1985) .

The above framework needs t o be modified f o r t h e s p e c i f i c market c o n d i t i o n s faced by paper producers. I n p a r t i c u l a r , because domestic p r i c e s d e v i a t e from world p r i c e s , a s t h e p roduc t s cons idered a r e no t p e r f e c t s u b s t i t u t e s f o r each o t h e r , a s p e c i f i c demand curve f o r

domes t i ca l ly produced goods can be devised . T h i s curve i n t e r a c t s w i th t h e domestic supply curve t o de termine domestic p r i c e s . Import demand becomes somewhat more exogenous t o t h e system. The t o t a l domestic demand curve d i scussed above now becomes on ly a t h e o r e t i c a l concept based on t h e s i t u a t i o n where world and domestic p r i c e s a r e equal . However, t h e imported and domestic p roduc t s a r e still t o some e x t e n t s u b s t i t u t a b l e , SO t h a t i n c r e a s e s i n world p r i c e s w i l l l e ad t o inc reased demand f o r domes t i ca l ly produced goods, o t h e r exogenous f a c t o r s being he ld cons t an t . T h i s can be represented by an upward s h i f t i n t h e 'demand f o r domest ic product ion ' curve. Where t h i s curve i n t e r a c t s w i th t h e domestic supply cu rve , a new equ i l ib r ium domestic p r i c e w i l l be e s t a b l i s h e d a t a l e v e l h igher t h a n p rev ious ly . This b a s i c a l l y o u t l i n e s t h e p a r t i a l equ i l ib r ium s i t u a t i o n ( n o t a l lowing f o r wider e f f e c t s ) .

Given t h i s s i t u a t i o n it is p o s s i b l e t o d e r i v e a set of equa t ions a s fo l lows:

Domestic supply :

Domestic demand :

Domestic equ i l ib r ium:

Imports:

d l d2 $3 Md4 (E4) Mt = e

P ~ t W t t-l

where

St = domestic supply i n yea r t (endogenous)

P = d e f l a t e d domestic p r i c e i n yea r t (endogenous) Dt

C = c o s t s i n yea r t t

D = demand f o r domestic p roduc t ion i n yea r t (endogenous) t

P = d e f l a t e d world p r i c e i n yea r t W t

Qt = equ i l ib r ium q u a n t i t y on t h e domestic market i n y e a r t

Mt = impor ts i n yea r t (endogenous).

I n t h e equat ions , a , b, c, d and e a r e a p p r o p r i a t e parameters .

Equat ion (E l ) expres ses domestic supply a s a f u n c t i o n of domestic p r i c e and domestic c o s t s of product ion . Equation (E2) expres ses demand f o r domestic product ion a s a f u n c t i o n of domestic p r i c e and world p r i c e . Equation (E3) is t h e domestic equ i l ib r ium d e f i n i t i o n t h a t domestic supply e q u a l s demand f o r domestic product ion . F i n a l l y , equa t ion (E4) s p e c i f i e s t h e demand f o r impor ts a s a f u n c t i o n of domest ic p r i c e , world p r i c e and lagged import demand.

I n t h i s s i t u a t i o n , where domestic and world p r i c e s d ive rge , t h e p a r t i a l e f f e c t s of changes i n government p o l i c y can be analysed. The imposi t ion of a t a r i f f w i l l d i r e c t l y i n c r e a s e import p r i c e s (PWt) and reduce import demand ( M t ) , o t h e r t h i n g s being equal . However, i nc reased import p r i c e s w i l l s h i f t t h e demand curve f o r domes t i ca l ly produced paper upward. Th i s i n c r e a s e i n demand w i l l i n c r e a s e domestic p r i c e s , which w i l l f low through t o an i n c r e a s e i n import demand. The theo ry p rov ides l i t t l e answer t o what t h e o v e r a l l change i n import demand w i l l be a s a consequence of t h e s e two oppos i t e f o r c e s and t h e r e f o r e some e s t i m a t i o n of r e l e v a n t parameters is requi red .

I n t h e long run t h e imposi t ion of a bounty w i l l l ead t o a downward s h i f t of t h e supply curve s ince , f o r a g iven p r i c e , producers w i l l be w i l l i n g t o i n c r e a s e supply. A l t e r n a t i v e l y , producers w i l l be w i l l i n g t o supply t h e same amount a t a lower p r i c e . But, w i th a lower domestic p r i c e , t h e r e w i l l be a consequent r i s e i n t h e q u a n t i t y of domest ica l ly produced paper demanded. With world p r i c e s he ld c o n s t a n t , t h e demand f o r impor ts w i l l f a l l . Again some es t ima t ion of parameters is needed t o de termine t h e s e e f f e c t s .

E3. Model S p e c i f i c a t i o n

A model was s p e c i f i e d f o r t h e p r i n t i n g and w r i t i n g paper market. T h i s was taken t o be t h e most r e l e v a n t market f o r t h i s a n a l y s i s because of inc idence of both t a r i E f s and boun t i e s i n t h i s market.

The newsprint market was of less i n t e r e s t t o t h i s a n a l y s i s , because of t h e ownership s t r u c t u r e of domestic newsprint production. Newsprint is produced a t t h e h i g h e s t u t i l i s a t i o n of c a p a c i t y p o s s i b l e and s o l d a t t h e going market p r i c e t o a guaranteed market. Imported newsprint makes up t h e s h o r t f a l l . Demand f o r newsprint is i n e l a s t i c wi th r e spec t t o p r i c e a s t h e c o s t of newsprint is a r e l a t i v e l y smal l p ropor t ion of t h e c o s t s of producing a newspaper (Edquist and Morr is 1985). Therefore , import s u b s t i t u t i o n f o r domestic p roduc t ion does not occur t o any l a r g e e x t e n t .

The household and s a n i t a r y t i s s u e s market was not cons idered i n t h e a n a l y s i s because t h e r e a r e only a minor l e v e l of imports of t h i s product . And, due t o t i m e c o n s t r a i n t s , t h e wrapping and packaging paper and paperboard markets were no t cons idered i n t h i s a n a l y s i s .

The model s p e c i f i e d is s h o r t term and t h u s sugges t s impacts of t h e v a r i o u s exogenous v a r i a b l e s i n t h e s h o r t run. Furthermore, t h e aggregate na tu re of t h e d a t a used means t h a t some c a r e i s requ i r ed when i n t e r p r e t i n g t h e r e s u l t s obta ined. I n p a r t i c u l a r , s i n c e impor ts do not compete d i r e c t l y wi th domes t i ca l ly produced papers , it might be expected t h a t t h e r e would be some d i f f e r e n c e s between t h e p r i c e e f f e c t s on domestic supply and t h e e f f e c t s on t h e imported supply of t h e s e commodities.

In the short run, cost factors were found to be of greater importance t o domestic supply than price factors. The effect of real price was found t o be insignificant and with an incorrect sign a f t e r simultaneous estimation. Therefore, supply was assumed to be perfectly inelast ic i n the short run with respect t o domestic price and was estimated independently as a function of real costs, as shown in equation (E5). The inelas t ic i ty of supply with respect t o price in the short run can be attributed t o the large proportion of fixed costs in producers' t o t a l costs. In the long run, supply i s expected t o be less inelast ic with respect t o price.

The demand equation, equation (E6), was specified as a function of domestic price and layged world price. Using the equilibrium conditions, a reduced equation was estimated (equation E8) with price a s the endogenous variable and as a function of the exogenous variables in the system. This system allows parameters i n the demand equation t o be uniquely identified, given estimated parameters from the supply equation. Import demand was specified ( in equation E9) as a function of domestic price, lagged world price, and import demand lagged one period.

Domestic supply :

Domestic demand :

Domestic equilibrium:

Domestic price:

Import demand:

The estimated parameters of the equations (ES, E8 and E9) are presented in table E l , along with estimates of structural parameters of the demand equation.

E4. Results

The equations were estimated using quarterly data for the period 1975-76 to 1984-85. Table El summarises the results obtained for printing and writing papers. General comments on these results are given below.

Table El: IMPORT DEMAND FOR PRINTING AND WRITING PAPER IN THE SHORT RUN

Import Impo r t Estimation Dependent price Domestic quantity period and variable Intercept Cost (lagged) price (lagged) ii2 DW or h procedure

4 a3

Price

Demand (a) 14.78 - 0.93 -1.60 1978 (1) -85 (4)

Import demand 2.29 - -1.43 1.62 0.66 0.71 1.32(h) 1978 (1) -85 (4) OLS (3.30) (-0.54) (0.73) (0.10)

(a) Coefficient derived from price and supply equations.

Note: Figures in parentheses are standard errors.

. In the import demand equation, a l l variables except the constant aresignificant, while i n the price and supply equations a l l variables are significant. The supply equation shows that the supply of printing and writing paper i s significantly dependent on the cost of production over time.

- 2 . The corrected coefficient of determination (R ) for each equation shows a sat isfactory f i t of the estimated equations t o the actual data; however, autocorrelation may be present. Attempts t o remove t h i s were not successful.

The results indicate that a t a r i f f increase of, say, 1 0 per cent w i l l have an impact on import demand in two ways. F i r s t , the d i rec t ef fec t i s a reduction in import demand of 14.3 per cent. The second effect occurs via a 5.8 per cent increase in domestic prices, which resul ts from the increase in domestic demand. This w i l l lead t o a 9.4 per cent r i se in imports. Overall, the short run effect on imports is a decline of 4.9 per cent. Note that these figures provide only a short run pa r t i a l consideration of the factors involved ahd should be regarded as only a broad indication of the ef fects considered.

. The insignificance of supply response t o price fluctuations i n the short run has two major implications.

- Increased t a r i f f levels w i l l be borne to ta l ly by consumers through increased import prices as well as increased domestic prices. Suppliers w i l l benefit through short run increased domestic prices when supply does not change.

- Increases in or the imposition of bounties flow straight into p ro f i t s in the short term, with no effect on domestic prices or quantities.

. The short term welfare ef fects of t a r i f f s and bounties in t h i s case suggests efficiency gains may result from the use of bounties rather than t a r i f f s . However, taxes raised to fund bounties may lead t o distort ions in other parts of the economy.

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- (1982), Export I n c e n t i v e s , Report No. 300, AGPS, Canberra.

(1984), Bounty Ass i s t ance t o A u s t r a l i a n Indus t ry , AGPS, Canberra.

- (1985a) , Ass i s t ance t o Manufacturing I n d u s t r i e s : 1977-78 t o 1982-83, Informat ion Paper, AGPS, Canberra.

- (1985b3, Book Product ion , Report No. 377, AGPS, Canberra.

McGinnes, J. (1985), Dumping theory and anti-dumping p r a c t i c e . Monash U n i v e r s i t y Department of Economics Seminar Paper 6/85, Melbourne (unpublished) .

M i t c h e l l , D.0. (1985) , Import demand f o r g r a i n s : imp l i ca t ions f o r US a g r i c u l t u r a l p o l i c y , World Bank Div i s ion Working Paper No. 1985-5, Washingtol~, D.C. , December (unpublished) .

Nat iona l Expor t Marketing S t r a t e g y Panel (1985), L i f t i n g ~ u s t r a l i a ' s Performance a s an Expor ter of Manufacturers and S e r v i c e s , AGPS, Canberra.

Parsons, S.A. (1982), Developments i n Forest-Based I n d u s t r i e s o f Indones ia , Malaysia and t h e Ph i l ipp ines : Impl i ca t ions f o r A u s t r a l i a , BAE Occas ional Paper No. 67, AGPS, Canberra.

Pulp and Paper I n t e r n a t i o n a l (1985). Pulp and Paper I n t e r n a t i o n a l Annual Review d r u s s e l s , August. -'

Rose, R.N., Moir, R.G., Farquharson, R.J . and Vanze t t i , D.M. (19841, Ass i s t ance f o r t h e Consumption and Product ion of F e r t i l i s e r s , A BAE Submission t o t h e IAC, November 1984, AGPS, Canberra.

Samuel, S.N., Kingma, O.T. and C r e l l i n , I.R. (1983) , Government I n t e r v e n t i o n i n Rura l Research: Some Economic Aspects of t h e Commonwealth's Role, BAE Occas ional Paper N o . 76, AGPS, Canberra.

Sena te Standing Committee on Trade and Commerce (1981), A u s t r a l i a ' s F o r e s t r y and F o r e s t Products I n d u s t r i e s , AGPS, Canberra.

Sena te Standing Committee on Indus t ry and Trade (1985) , The Development of Closer Economic R e l a t i o n s Between A u s t r a l i a and New Zealand, Third Report , AGPS, Canberra.

d e So la Pool, I. (1983) , 'Tracking t h e f low of informat ion ' , Sc ience 221 (4611) , 609-13.

United Nat ions (1986), Monthly B u l l e t i n of S t a t i s t i c s , New York, 40(3) (and p rev ious i s s u e s ) .

OTHER READING

Department of Industry and Commerce (1983), Review of Australia's Anti-Dumping and Countervailing Legislation, Discussion Paper, AGPS, Canberra.

IAC (Industries Assistance Commission) (1978), Timber and Timber Products and Plywood and Veneer, Report No. 168, AGPS, Canberra.

- (1981), Wood and Articles of Wood, Report No. 275, AGPS, Canberra. Parsons, S., Wallace, M. and Bruce, I. (1982), Assistance to the Australian Plywood and Veneer Manufacturing Industries: A Review of Issues, BAE Occasional Paper No. 64, AGPS, Canberra.

Wardana-Wije, D. (1984), 'From NAFTA to CEK: Trans-Tasman Trade in Forest Products', New Zealand Journal of Forestry 29(1) , 201-24.

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