HAWKINS WRIGHT

Pulp market outlook and the growing influence of the viscose sectorEUROPULP/UTIPULP, Barcelona, 14th September 2017

Hawkins Wright LTD

HAWKINS WRIGHT

• Some observations on the short-term cycle

• Growing influence of the viscose sector

Agenda

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Five peaks (and four troughs) since 2008

0

100

200

300

400

500

600

700

800

900

1,000

Q170 Q175 Q180 Q185 Q190 Q195 Q100 Q105 Q110 Q115

List

pric

es,U

S$/

tonn

e

Bretton Woodsdismantled

OPEC 2 Rising

energy costs

Economies boomNo new capacity

US dollar weakens

Weak US dollar

Rising wood costs

Dot com boom/bust,

emergence of Chinese market

Weak US dollar, rising fibre & energy costs, China growth

Financial stimulus,

production curtailment,

Chilean earthquake

OPEC 1 Nordic wood

costs rise

Energy & wood costs

fall.

Nordic devaluation

New low-costmills

Recession and start-up of new low cost millsExcess capacity

Wood costs fall Strengthening

US$

Financial crisis, stronger dollar,

recession

Euro crisis, stronger dollarChina slows

ECB commits to "whatever it takes",

QE3 in US

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Five peaks (and four troughs) since 2008

200250300350400450500550600650700750800850900

Euro

/tonn

e ci

f NW

Eur

ope

NBSK €/tonne

BHKP €/tonne

PIX indices for NBSK and BHKP, in €

Source: FOEX

Price cycles may be distorted by currency movements and discount creep

1

2

3

4 5

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Some headlines from early 2016

And from Ft.com…

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Six months later…

Walter Schalka, Suzano CEO, November 2016

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Fibria financials (operating results)

Source: Fibria quarterly statements, balances extracted by Hawkins Wright

0

100

200

300

400

500

600

700

800

US$

/tonn

e

Interest

Capex (mostlyplantation)SGA

Freight

Other

Energy

Maintenance

Chemicals

Wood

"all in" cash costs of $450/t

net revenue

$$

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HAWKINS WRIGHT

Volatility is the challenge/opportunity of all commodity playersPulp prices v commodity indices

0

50

100

150

200

250

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Inde

x, 2

005=

100

Economist commodity index

IMF commodity price index

NBSK price (CIF Europe) index

BEKP price (CIF Europe) index

Source: Hawkins Wright, IMF, The Economist

70

80

90

100

110

120

130

140

150

160

170

Jan-15 Jan-16 Jan-17

Inde

x, 2

005=

100

Source: Hawkins Wright, IMF, The Economist

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And yet…

The time span of an elephant’s memory: 100 years

The time span of a gold fish’s memory: 3 seconds

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Pierre’s predictions from a year ago…

-100

-50

0

50

100

150

200

0

100

200

300

400

500

600

700

800

900

1000

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

US$

/t de

liver

ed

Differential China NBSK China BEKP

• China economy expanding steadily, but is it sustainable?

• OKI project…multiple scenarios

• Pulp demand continues to grow strongly, but over 10 million tonnes of capacity due online…

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Led to the following assumptions for hardwood market in 2017…

-1200 -1000 -800 -600 -400 -200 0 200 400 600 800 1000 1200 1400

PUMA, Guaiba, others

APP

APRIL

Fibria TL

Other

Net supply increase

Shipments

Surplus/deficit

BHKP market balance 2017, assumption in December 2016

PUMA started Mar'16

PL2 Dec, PL1 April?

Integrations and conversions

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In addition, heavy maintenance schedules in Latam and Asia…

Revised assumptions…

-1200 -1000 -800 -600 -400 -200 0 200 400 600 800 1000 1200 1400

PUMA, Guaiba, others

APP

APRIL

CMPC Guaiba

Fibria TL

Fibria Aracruz

Net supply increase

Shipments

Surplus/deficit

2017 BHKP market balance - the reality

5 mths out in 2017 = 600k?

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World-20 BCP shipments to ChinaY-o-y growth

• Over six months from October to March, Chinese pulp demand increased by 1.6 million tonnes = 3.2 million tonnes annualised.

“Trend” growth is 1.2 million tpa

Demand boom preceded supply-side revisions

PPPC estimates growth slowed dramatically in Q2.

Shipments remain +9.2% (+0.7 million t) Jan-Jul

Impact from the latest buying spree has yet to be revealed (will not become evident until late October)

Source: PPPC

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

-200

-100

0

100

200

300

400

6 month ave, annualised

year

on

year

gro

wth

, (th

ousa

nd to

nnes

)

y-o-y growth

6-month ave; annualised

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HAWKINS WRIGHT

A major price-inventory cycle has taken place throughout the Chinese manufacturing sector

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Closing Inventory of Paper and Paper Board, Change over Beginning of the year (%)

Source: National Bureau of stats

But momentum has now eased…Chinese inventory of paper and board has increased +20% y-t-d

Other issues are now supporting Chinese pulp demand (currency, wastepaper imports, and obsolete capacity closures, seasonality, traders & pulp supply-restrictions…)

Underlying paper demand is not accelerating, and therefore the current rally is unlikely to last this time

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Fine paper prices

Source: Hawkins Wright

Uncoated woodfree prices as an index

Coated woodfree prices as an index

85

90

95

100

105

110

115

120

125

130

Janu

ary

2015

=100

China

N America

Europe

85

90

95

100

105

110

115

120

Janu

ary

2015

=100

China

North America

West Europe

Although China is seasonally strong, curtailment may be required to maintain paper prices.

Implies lower fibre consumption

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HAWKINS WRIGHT

Paper market strength may also impact supply-side…APP/OKI

0

1

2

3

4

5

6

7

8

9

APP Indonesia APP China

mill

ion

tonn

es

APP Paper and board production estimates, 2016

CWF

UWF

Tissue

White board

Containerboard

Paper mill operating rates are a key factor in determining fibre availability from APP

We estimate APP group P&B production >13.5 million tonnes!

Inventory movements, furnish adjustments, pulp production levels across all plants, purchasing requirements all play a role

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Bleached chemical market pulp capacity 2017-21:BSKP +2.2Mt, BHKP +3.8Mt = 6Mt

Source: Hawkins Wright

Includes: Äänekoski, Klabin, OKI, Fibria, Sodra, SCAExcludes: all projects that have not yet satisfied all of their preconditions (e.g. financing, final board room approval etc).

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Annual change in capacity (million tonnes)

Tota

l cap

acity

(mill

ion

tonn

es)

Annual change in BCP capacityBSKPBHKP

Illustration of supply growth based upon

existing capacity announcements

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Summary…

Short-term• Pulp prices will continue to go up and down in ways which are difficult to predict• Above trend capacity growth 2015-2019, not yet reflected in production • Exceptionally strong demand growth in China from Q4 2016, unlikely to be sustained

Longer-term• Market pulp demand drivers remain solid (emerging market growth, tissue, graphic

paper integration, declining RCF availability)• Although certain projects could follow by 2021, none is confirmed. Truly “low-cost”

projects are increasingly hard to find• Gathering momentum in viscose sector presents additional upside risk to commodity

pulp sector…

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Exciting times in the viscose sector

Cotton Linter Pulp: 99%

Dissolving wood pulp: 92-98%

Fluff Pulp: 88%

Paper Grade Pulp: 84-88%

INPUT COOKING PROCESS BLEACHING PROCESS OUTPUT

17 t of specialty cellulose

20 t of rayon grade cellulose

25 t of fluff pulpInorganics/Organics

Black liquor Waste Treatment 27 t of paper grade pulpOrganics - EnergyInorganics - Recovery

100 t of Green Wood

Lignin 20-28%

Water

Cellulose 43-45%Hemicellulose 27-30%

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Viscose competes with cotton and polyester

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Chinese staple fibre prices2007-2017

Source: Hawkins Wright, Emerging Textiles

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Yuan

/MT

PSF Cotton VSF

Preliminary estimates suggest that the Texas floods have destroyed approximately 300,000 bales of cotton; this shouldn’t be significant enough to impact the global market. Futures have gone up, but should settle down once the uncertainty diminishes.

Impact from Indian floods remains unknown.

• Viscose demand remains buoyant despite re-establishing a pricing premium over cotton

• Viscose is becoming increasingly valued as a blend with cotton and lower priced polyester

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Pulp prices vs. other commodities

Source: Hawkins Wright

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50

100

150

200

250

300

350

400

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Inde

x 20

05=1

00

The Economist Industrial Commodity(US$) Price IndexBEKP Market Pulp Price

Dissolving wood pulp price

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Chemical cellulose and paper grade pulp demandIndexed since 1990

50

100

150

200

250

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Inde

x 19

90=1

00

Mkt pulp

Chemical cellulose

FORECAST

Source: Hawkins Wright

Hawkins Wright LTD

HAWKINS WRIGHTSource: Hawkins Wright Estimates

DWP demand rises by 3 million tonnes in 10 years

-

2,000

4,000

6,000

8,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

000s

t

Other

Cotton linter pulp

Dissolving woodpulp

Rayon grade, 5,130

Acetate, 620

Ethers, 600

Others, 150

Other, 1,370

• China accounts for 52% of DWP demand in 2016, and 91% of growth

• Rising DWP demand and higher margins are encouraging conversions of kraft pulp mills

• APRIL/Sateri have especially ambitious plans

Chemical cellulose (including cotton linter)

World chemical cellulose demand, 2000-16Hawkins W

right LTD

HAWKINS WRIGHT

DWP demand +8% y-t-d (Jan-June 2017)Driven by China (+16%)

Source: Hawkins Wright

200

220

240

260

280

300

320

340

Q1-'13

Q2-'13

Q3-'13

Q4-'13

Q1-'14

Q2-'14

Q3-'14

Q4-'14

Q1-'15

Q2-'15

Q3-'15

Q4-'15

Q1-'16

Q2-'16

Q3-'16

Q4-'16

Q1-'17

Q2-'17

thou

sand

tonn

es

700

800

900

1,000

1,100

1,200

1,300

1,400

Q1-'13

Q2-'13

Q3-'13

Q4-'13

Q1-'14

Q2-'14

Q3-'14

Q4-'14

Q1-'15

Q2-'15

Q3-'15

Q4-'15

Q1-'16

Q2-'16

Q3-'16

Q4-'16

Q1-'17

Q2-'17

thou

sand

tonn

es

Commodity grade DWP shipments by quarter

Specialty grade DWP shipments by quarter

Dominant features:Commodity grade DWP• Resurgent VSF marketsSpecialty grade DWP• Consumer destocking coming to an end

2016 2017

North America 295 275 -7% -20

West Europe 415 415 +0% +0

Latin America 25 30 +20% +5

Japan 80 85 +6% +5

China 1,485 1,730 +16% +245

India 305 320 +5% +15

Indonesia 240 265 +10% +25

Thailand 70 65 -7% -5

Other 75 40 -47% -35

TOTAL 2,990 3,225 +8% +235

Of whichSpecialty 590 610 +3% +20Viscose 2,400 2,615 +9% +215

6 months % change Y-o-y

Growth in 000s t(000s tonnes)

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Chinese cotton linter pulp production2000-2016

Source: Hawkins Wright

0

200

400

600

800

1,000

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chi

nese

CLP

Pro

duct

ion

000s

tonn

es

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4 million t/y of paper grade pulp conversions committed, with more to come…

Year Company Mill CountryImpact on mkt pulp

Convertedfrom

Date of conversion

2019 Arauco Valdivia Chile -550 BSKP Q2 2019

Asia Symbol Rizhao China -300 BKP 2016

Riapulp Kerinci Indonesia -150 BHKP 2016-

2013 Buckeye Technologies Perry USA -40 Fluff Q1 2013

Schweighofer Group Hallein Austria -160 Sulphite Q1 2013

Lenzing Paskov Czech Rep -280 Sulphite Q1 2013

Jari Monte Dourado Brazil -420 BHKP Q1 2013

SAPPI Cloquet USA -450 BHKP Q2 2013

Rayonier Jesup USA -260 Fluff Q3 2013

SAPPI Ngodwana South Africa -235 BSKP Q3 2013

SCG Paper Nam Phong Thailand -110 BHKP Q4-2013

2012 Altri Caima Portugal -115 Sulphite Q1 2012

Sun Paper Yanzhou China -300 BHKP Q1 2012

Stora Enso Enocel Finland -200 BSKP Q1 2012

Sodra Cell Morrum Sweden -200 BHKP Q1 2012

2011 Fortress Paper Thurso Canada -250 BHKP Q4 2011

Fortress Lebel-sur-Quévillon Canada NBSK n/a

Paper Excellence Prince Albert Canada NBSK n/a

TOTAL 2011-2019 -4,020

Plus hybrid grades from other kraft pulp mills

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Net price differentialsBSKP and BHKP vs. DWP

Source: Hawkins Wright Estimates

0

50

100

150

200

250

300

350

400

450

500

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

US

$/t (

CIF

. Chi

na)

DWP premium vs. NBSK DWP premium vs. BEKP

Swing capacity may revert to kraft pulp when differentials fall…

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Price differentials also impact on demand side….Paper grade pulp used as an extender

Source: Hawkins Wright

Paper grade pulp usage as DP extender estimated at 0.4-0.5 Mt in 2016.

Yibin Heist, Fulida, Tangshan Sanyou imported 0.6Mt kraft pulp in 2016

0

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100

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200

250

300

350

400

450

500

2010 2011 2012 2013 2014 2015 2016

Pap

er g

rade

pul

p us

ed a

s an

ext

ende

r00

0s to

nnes

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HAWKINS WRIGHT

Viscose & DWP summary

• Textile demand underpinned by demographic and economic trends; few substitutes!• As viscose technology improves and gains market acceptance, so the economic and

sustainability case versus cotton and polyester grows…

• Nevertheless, market is competitive and supply and demand are price sensitive • Market potential is huge, but current demand is relatively small, so new supply must be

introduced carefully. Furthermore, Sateri accounts for ~50% of growth in viscose capacity

• Dependence on China presents a further risk, particularly in light of government interference in cotton and DWP trade policy

• The sector will continue to have a major impact on supply & demand for commodity grade pulps

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