Orient Paper Inc., Baoding, Hebei, China, a producer of diversified paper products in North China, this week announced that it has ramped up its renovated PM 1. The company also provided operation and market updates to shareholders and investors.

Orient Paper recently started commercial production of its newly renovated PM 1, producing corrugating medium-based packaging paper (CMP) with specification of 40 to 80 gsm. PM 1 successfully ramped up production in the month of June, achieving more than 3,500 metric tons of paper with specification of mostly 60 gsm, instead of the originally budgeted 1,000 metric tons. 

PM1's 40-80 gsm CMP products have a wide range of commercial applications. For example, they can be used to sandwich certain insulation materials as a construction material for wall and floor insulation and to manufacture moisture-proof packaging materials for transportation of books and magazines by the publishing industry in China. It can also be used as corrugating medium to make corrugated cardboard for packaging solutions where a customer requires lightweight boxes. 

 

The 40-80 gsm lightweight CMP is considered a niche product in the packaging paper market and enjoys a higher margin than the conventional CMP and steady demand from end-users, while the supply of this special-specification CMP is relatively limited. Essentially all of the company's PM 1 products are 60 gsm CMP used as packaging paper at the current stage. However, the company has begun selling 60 gsm CMP as insulation liner and may switch to other product specifications based on customer demand or changes in market condition.

 

While the average selling price (ASP) for the 60 gsm packaging paper is lower than that of the 40-50 gsm insulation liner, which was originally planned for the renovated PM 1, the annual production capacity of PM 1 is expected to increase from approximately 50,000 metric tons to at least 60,000 metric tons if the company continues to ramp up PM 1 for producing the 60 gsm CMP-based packaging paper. 

 

With the shift of products and the ramp up, the new PM 1 is now expected to contribute $9 million to $11 million to the company's annual revenue for 2014, instead of the previous estimated range of $7 million to $9 million.

 

Orient notes that since April 2014, there has been a downward pressure on the price of CMP in China due to weaker domestic demand. It is reported that in some regions, the market is seeing the price of CMP decrease by 200-350 yuan per metric ton. While the ASP of the company’s offset printing paper has held up reasonably well, it has reduced the ASP of its high-strength CMP produced by PM 6 during the second quarter of 2014 by approximately 4% and 5%, compared with the CMP ASP for the second quarter of 2013 and the previous quarter ended March 31, respectively. While Orient has not fully determined the effect of the ASP reduction in its cost of sales, it expects its gross profit margin for the quarter ended June 30 to be somewhat lower than the comparable period in the previous year (2013).  

 

Despite the lower CMP ASP, the monthly run rate of PM 6, which produces more than 60% of Orient’s total revenue, has been consistently held at about 75% throughout the second quarter of 2014. The company produced and sold more than 67,000 metric tons of high-strength CMP from PM 6 during the second quarter of 2014, representing a gain of 23% compared with 55,025 metric tons sold from PM 6 during the same period a year ago. Orient expects that the increase in quantities sold will compensate the lower gross profit margin and mitigate any substantial changes, if any, in quarterly gross profit and net income.

 

Some industry experts in China, which includes those quoted by SCI International, are optimistic that the price of CMP may recover in the second half of 2014, as the government-mandated closure of outdated paper mills are being carried out sequentially in different regions this year, with additional impact of new and stricter environmental regulations being launched that would further curb supply.

 

"We are monitoring the market closely," said Zhenyong Liu, chairman and CEO of Orient Paper. "In the meantime, we will continue to ramp up PM 1 production to generate increased revenues for the company. Nevertheless, we are reasonably confident that our 2014 financial guidance should remain unchanged, given our observation of the market situation and other factors such as stable raw material costs." 

Orient Paper produces and distributes packaging paper (corrugating medium paper-based), offset printing paper, and other paper products, including digital photo paper and household/tissue paper that the company is currently expanding. With production operations based in Baoding in North China's Hebei Province, Orient Paper is located strategically close to the Beijing and Tianjin region, home to a growing base of industrial and manufacturing activities and one of the largest markets for paper products consumption in the country. Orient Paper's production facilities are controlled and operated by its wholly owned subsidiary Shengde Holdings, Inc., which in turn controls and operates Baoding Shengde Paper Co. and Hebei Baoding Orient Paper Milling Co. for manufacturing digital photo, printing, and packaging paper.