Global Industry Outlook: A Platform for Innovation?...Industry Outlook Overview •World demand continues to grow Although limited by uneven economic performance And competition with

Global Industry Outlook:

A Platform for Innovation?

Jon Rager

SVP, RISI Analytics

2016 Annual Executive Conference

Renewable Bioproducts Institute

April 2016

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2

(RISI Analytics)


Agenda

• Global macro-economic snapshot

• (Abridged) industry outlook

• Perspectives on innovation

© Copyright 2016 RISI, Inc. | Proprietary Information 3

Global Economy Growing Moderately, with Heightened RisksAnnual Real GDP Growth

Source: IMF, RISI

2.4% 2.4% 2.6% 2.5%

14 15 16 17

USA 0.9% 1.5% 1.6% 1.3%

14 15 16 17

Euro Area

1.3% -0.4% 0.1% 1.8%

14 15 16 17

Latin America

7.3% 6.9% 6.4% 6.1%

14 15 16 17

China


5

Developed Economies Leading Global Growth…Global Real GDP* Growth

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

95 97 99 01 03 05 07 09 11 13 15 17

*Measured at purchasing power parity exchange rates

Source: IMF, RISI


6

…While Emerging Markets Have Slowed…Annual Real GDP Growth

-10%

-5%

0%

5%

10%

15%

20%

Brazil Russia

India China

South Africa

Source: IMF, RISI


-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

…As Commodities Have Fallen…Percentage Change Since July 2014


-60%

-50%

-40%

-30%

-20%

-10%

0%

…And Currencies Have CrumbledPercentage Change Since July 2014 Versus US Dollar


9

Oil Prices Staying Low on OversupplyBrent North Sea Crude Oil, Price per Barrel

0

10

20

30

40

50

60

70

80

90

100

110

120

130

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Brent € Brent $

Source: Energy Information Administration, RISI

© Copyright 2014 RISI, Inc. All rights reserved.


10

The US Economy

USA – “Oasis of Prosperity”?

• Partially decoupling from rest of world

• Domestic-based growth is healthy Employment and wage growth

Cheap energy

Housing

• Non-domestic side of economy struggling Manufacturing

Exports


-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

2015 Was Another Year of Healthy Job GrowthChange in US Total Payroll Employment, Millions

Source: Bureau of Labor Statistics


12

Eurozone Economy Growing, But Weakly Annual Real GDP Growth

Source: IMF, RISI

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Germany

France

Italy

UK

Eurozone


Hard Landing for China Is UnlikelyReal GDP Growth, Annual Percent Change

0%

2%

4%

6%

8%

10%

12%

14%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Source: NBS, RISI


Industry Outlook Overview

• World demand continues to grow Although limited by uneven economic performance

And competition with alternative products

• Producers reducing investment in new capacity Even in China as demand growth slows

Shift toward M&A, especially in North America

• Becoming less “green” but more “sustainable”? Recovered paper usage slowing

Wood pulp share of furnish stabilizing

China at the center of this shift


Further Slowdown in World Paper and Board Demand Growth

• Usage limited by a number of factors Sluggish performance of the general economy

Accelerating substitution by electronic alternatives

Pressure for lighter-weight grades

Shift in Chinese economy

• Global paper and board demand still rising But only about 1% per year

Translating into 4 million tonnes annually


World Paper and Board DemandMillion Tonnes


Most of the Growth in the Industry Is in Packaging—Modest Effect on Market Pulp

17© Copyright 2016 RISI, Inc. | Proprietary Information

0

50

100

150

200

250

300

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Packaging/Specialty

P&W

Tissue

News

0

20

40

60

80

100

120

140

160

180

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Tissue +P&W

Dramatic Slowdown in Chinese Paper and Board Demand

• Annual growth rate slowed to 2.2% in 2011-2014 From an average of 9.7% in 2001-2010

Slight uptick expected to 2.5% over next two years

Electronic substitution and shift in general economy

• Other developing regions will generate just as much growth as China Led by Asian countries such as India and Vietnam

• Developed world demand will drop 1.9 million tonnes Due to strong electronic competition


World Paper and Board Demand by Major RegionMillion Tonnes

0

100

200

300

400

500

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

China Developing Mature


Containerboard Will Remain the Largest Grade

• However, growth has slowed sharply Due mainly to a significant downshift in China

Along with light weighting around the world

• Other packaging and specialty grades maintain positive growth Increasing consumer packaging in developing world

Expansion of specialty markets

• Graphic grades continue to decline, led by newsprint While tissue leads in growth rate but remains small


World Paper and Board Demand by Major GradeMillion Tonnes

0

100

200

300

400

500

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Newsprint Tissue Other Printing and Writing Containerboard


Producers Throttling Back on Expansion Plans

• Even Chinese companies are spending less Although encouraged by forced closures of old mills

Poor profitability across the whole grade spectrum

Including tissue

• Producers in the developing world still adding capacity While keeping a wary eye on demand prospects

• Developed world still seeing some investment Conversion of graphic paper assets to packaging

Installing new tissue machines


World Paper and Board Capacity ExpansionMillion Tonnes

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17


Slowing Recovered Paper Usage

• Mainly due to deceleration in China Especially in the containerboard sector

Shift toward virgin boxboard for consumer packaging

New tissue capacity almost entirely virgin based

Drop in newsprint output

• Lower bulk recovered paper prices Encouraging new recycled containerboard capacity

Along with demand for lighter basis weights

Declining graphic paper usage supports high grades


World Usage of Recovered Paper and Wood PulpMillion Tonnes

100

125

150

175

200

225

250

275

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Wood Pulp Recovered Paper


North American RCP Domestic Demand

vs. Exports

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Mil

lio

n T

on

ne

s

Domestic ConsumptionNet ExportsRecovery Rate

Net export share

2000: 17%

2005: 27%

2008: 33%

2012: 41%

2013: 39%

2014: 39%

2015: 40%

26 © Copyright 2015 RISI, Inc. All rights reserved.

Bleached Hardwood Kraft Leading

Wood Pulp Demand Growth

• Major positive factors include High furnish shares in tissue and virgin boxboard

Substitution for other grades

Woodfree papers taking share from mechanical

• Bleached softwood kraft still growing slowly Strength required in many paper grades

Especially as basis weights drop

• Dissolving pulp slowing sharply Big drop in cotton prices and increased availability

Weak performance for acetate tow


World Wood Pulp Demand by Major GradeMillion Tonnes

0

40

80

120

160

200

240

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

DP BSK BHK Other Paper Grade


China Is Still Leading the Growth in

Wood Pulp Usage• Despite slowing paper and board output

Tissue and virgin boxboard production increasing

Closures of old capacity based on nonwood fiber

Rising quality standards

• Asian developing countries using more wood pulp But limited markets compared to China

Focus still on recycled packaging expansion

• Europe and North America sliding Decline of graphic paper

Highly penetrated tissue and virgin packaging markets


Wood Pulp Demand by Major RegionMillion Tonnes

0

40

80

120

160

200

240

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Latin America Other World Other Asia China Europe North America


Wood Pulp Production Will Continue

to Shift to the Southern Hemisphere• Brazil will be the epicenter of investment

Extensive availability of low-cost fiber

Weak currency and accommodative government

High prices for green energy

• New projects in Chile, although more roadblocks Indonesian industry will expand

Could Argentina finally develop?

• Softwood capacity will grow in Europe Older pulp mill closures release fiber

Growing inventories from sound forest management


Wood Pulp Production by Major RegionMillion Tonnes

0

40

80

120

160

200

240

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Latin America Other World Other Asia China Europe North America


What does it mean for innovation?


• Commodity: cost and operational leadership

• Commodity: industrial-sized customer strategy

• Consumer-driven product and business strategy

• Conventional and radical technology intervention

Key Takeaways

• Global economy growing but unevenly

• Industry also growing but:

Packaging gaining share

China slowdown is far-reaching

Other developing regions gaining relevance

• No shortage of opportunity for innovation

Conditions create different pathways,

Technology plays a key role in all of them

Thank you!© Copyright 2016 RISI, Inc. | Proprietary Information 34

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Global Industry Outlook: A Platform for Innovation?...Industry Outlook Overview •World demand continues to grow Although limited by uneven economic performance And competition with