The pulp and paper industry is still stagnant this year because economic growth in the largest markets, the US and Japan, has not yet recovered. The International Monetary Fund (IMF) has cut its forecast for the world economic growth to 3.1 percent from 3.8 percent at the beginning of this year. According to the IMF forecast, economic growth for the US and Japan is estimated at 2.2 percent and 0.3 percent, respectively. The amount of pulp and paper exports to the US was 12 percent of total exports in 2015 and 11 percent for Japan.

The Indonesian pulp and paper industry contributes to the growth of the industry in the national economy. It is still growing, although overshadowed by falling demand due to the increasing role of electronic media and internet technology. The consumption of paper in the world has a growth of 2 to 3 percent per year.

The pulp and paper industry still grows every year. The growth in the first half of 2016 is 2.3 percent compared to the first half of 2015. The main driver of growth is the growing market in the paper and printing industry in Indonesia. Note that paper consumption per capita per year in Indonesia is still low, 32.6 kilograms. This number is much lower than other countries’ paper consumption per capita each year, such as Malaysia with 100 kg and Japan at 242 kg.

Paper consumption, especially in ASEAN countries and the US, is a great opportunity for Indonesia to increase paper exports to these countries, considering that Indonesia is currently the ninth largest pulp producer in the world and the sixth largest for paper. The industry has high competitive advantages and has the potential to dominate the world market.

Another factor providing a positive climate for the pulp and paper industry is that pulp prices tend to be flat in the world market because demand is relatively weak. This condition has a positive impact on domestic paper mills because the pulp products will not be exported but instead go to the domestic market. The construction of two factories for pulp and paper in South Sumatra and Riau, which will begin production next year, will benefit from this market condition.

An important risk factor that threatens the pulp and paper industry is the limited Industrial Plantation Forest (HTI) to supply resources to the industry. Based on data from the Environment and Forestry Ministry, in the first quarter of 2015, HTI land area in Indonesia reached 10.54 million hectares. However, the HTI land currently in use is only 4.9 million ha. The remainder has been converted into various businesses, primarily palm oil plantations. The area of palm oil plantations is estimated at 10 million to 13 million ha. The pulp and paper industry has almost the same size area, but the area of productive land is less than half.

Note that the cost of raw materials in the paper industry is up by 60 percent. Failure to keep the ideal amount of productive HTI land has led to an unsustainable raw material supply and an increase in production costs.

The impact of forest fires last year led to a reduction of HTI land area. Some permits for land production are still frozen following the forest fire. License suspension and prohibition regulation shutdowns are not only applicable in the areas burned but also throughout the area of operations.

Another risk factor is the potential imposition of an anti-dumping policy by export countries. US anti-dumping authorities suspect dumping of uncoated paper made by the Indonesian paper industry.

The price of gas is another risk factor. Rising gas prices can affect the cost of production because gas purchase in the industry is the second largest after the cost of raw fiber materials.

Production capacity is also important in determining the performance of the pulp and paper industry. Installed capacity of pulp production to date reached 8 million tons. In the next four years, pulp production capacity is expected to increase to 10 million tons. Meanwhile, the paper production capacity would also increase to 17 million tons in 2017. At the end of 2014, the installed capacity of industrial production was about 10 million tons of paper. The larger the installed production capacity is, the larger the resulting production will be as well. This may encourage the fulfillment of domestic demand and increase exports of pulp and paper.

Another consideration is the potential for Indonesia to become the largest pulp and paper producer in the world.  Indonesia has a number of advantages, such as an abundance of available area and natural resources (SDA). The potential of natural resources will be value-added products that have broad spillovers, especially in creating jobs with a large multiplier effect.

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The writer is an economist at Bank Mandiri