Oji Paper Co. abandoned its bid to take over Hokuetsu Paper Mills Ltd. after an alliance was formed against it, forcing the company to change its strategy and giving rise to fears of a glut in the paper market.

“Other Japanese paper companies did not share our sense of crisis (about the industry). That may be the largest reason” for the failed bid, Oji President Kazuhisa Shinoda said at a news conference at the company’s head office in Tokyo’s Ginza district last week.

“Hokuetsu will create new machines at its Niigata factory, while this is time for our company to replace (old) machines,” he said, adding that Oji’s takeover bid aimed to move more production to Hokuetsu and scrap older facilities at Oji.

“It was the best choice to raise international competitiveness,” he said.

Shinoda acknowledged his company was thwarted by Hokuetsu’s desire to remain independent.

“The possibility has been closed for management consolidation in the near future,” he said.

And yet Shimoda appeared undaunted by the setback, telling reporters after the news conference, “We want to stand high over other companies.”

To strengthen its competitiveness now, Oji will boost investment in plant and equipment, company officials said. Its rivals are already preparing to respond.

Oji wanted to take over Hokuetsu to curb excess supply as industry players face a fight for survival. Now they are likely to boost production instead, making the competition even more cutthroat, industry analysts said.

The analysts said giving up on the takeover may not be bad for Oji because it frees the more than 80 billion yen it had set aside to purchase over half of Hokuetsu’s shares.

Oji now has enough money to invest in new capital, they said.

“We are ready to begin plans that we have already prepared,” an Oji executive said.

Oji’s goal is to increase production of enamel paper used in high-quality color printing for catalogs and magazines. While production of paper and cardboard was sluggish from 2000 to 2005 with annual increases of only 0.1 percent, production of enamel paper has grown faster, expanding by 1.2 percent annually.

Oji plans to spend 50 billion yen to 60 billion yen in the second half of fiscal 2008 on state-of-the-art equipment to produce enamel paper at its Tomioka plant in Anan, Tokushima Prefecture.

Daio Paper Corp., for its part, plans to open a new enamel paper production line at its Mishima plant in Shokoku-Chuo, Ehime Prefecture, next August. Nippon Paper Group Inc. will do the same at its Ishinomaki plant in Ishinomaki, Miyagi Prefecture, in November 2007.

Meanwhile, Hokuetsu will open a new 55 billion yen facility at its Niigata plant in Niigata Prefecture by the end of 2008.

The combined increase in enamel paper production capacity will reach 1.3 million tons annually, equal to 20 percent of last year’s entire output. Industry analysts are predicting an excess of enamel paper production, triggering fears of a price collapse and lower profits.

Skyrocketing crude oil prices are also squeezing profitability.

Nippon Paper, Daio and Chuetsu Pulp & Paper Co. plan to raise the prices of printing paper starting Sept. 21. Oji is expected to ask some of its clients for a price increase this fall.

But industry sources said many customers are reluctant to accept price hikes, anticipating a flood of new production.

Hokuetsu has concluded a business tieup with a major South Korean paper company, and one Hokuetsu executive said confidently, “We can strengthen our competitiveness in the East Asian market.”

However, one Oji executive is critical of Hokuetsu’s strategy, saying, “Exports are limited, but imports will increase. I wonder whether (Hokuetsu) can do business on its own.”

Of Oji’s failure to take over Hokuetsu, Kenichi Higashi, a equity strategist at Cosmo Securities Co., said Oji gave Hokuetsu too much time to consider a friendly merger.

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