The Changing Structure of the Global Pulp and Paper Industries · But the changing location of production promotes market pulp demand over integrated • Since 2007… Paper production

HAWKINS WRIGHT

“This time it’s different”Changes in global pulp markets

AIAC, 16th May 2019

Pierre BACHM: +33 6 15 76 86 66E: [email protected]

www.hawkinswright.com

HAWKINS WRIGHT

We’re going to talk about…

• Cycles, and how this one is different• Marginal cost reversion• Producer stocks• Consolidation

• Demand drivers• China’s one-off price-inventory cycle• Price sensitivity of pulp and paper demand• National Sword

• The big picture is shifting• Integrated vs non-integrated paper production• Macro-economic headwinds• Fibre is king


HAWKINS WRIGHT

0

200

400

600

800

1000

1200

1400

US$

/t

Benchmark pulp prices, CIF West Europe

NBSK

BEKP

• These price cycles have ensured that the supply-demand ratio is restored to 91-92% over time

• In short-term, prices are driven by inventory movements and expectations

• Prices invariably over-shoots in both directions

No cycle is the same, but we can learn from history

1

23 4

5


HAWKINS WRIGHT

BHKP net price v marginal cost

And yet prices remain ~$100/t higher than marginal cost

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100

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US$

/tonn

e

PriceMarginal cost

USACanada USA/China

12

3

4

5


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W-20 producer stocks increased by ~1.8Mt since June 2018

15

25

35

45

55

65

75

Wor

ld-2

0 pr

oduc

er s

tock

s

BSKP

BHKP

Source: PPPC

World-20 Producer inventories, days of supply

12

3 45


HAWKINS WRIGHT

30%

35%

40%

45%

50%

55%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Mar

ket s

hare

top

ten

prod

ucer

s

Market share of the top ten market pulp producers (BCP, UKP and BCTMP combined)

Consolidation is playing a major role…www.hawkinswright.com

HAWKINS WRIGHT

But supply glut is arguably more important…

• And production “normalised”, with no strike, no boiler problems, fires, extreme weather, or excessive maintenance…

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

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0

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45 Annual change in capacity (million tonnes)

Tota

l cap

acity

(mill

ion

tonn

es)

Annual change in BCP capacity (RHS)BSKPBHKP

Record capacity growth 2015-2018 finally reaches its potential:

• Hardwood supply growth from Tres Lagoas II, APP OKI, Guaibarecovers, other incremental

• Softwood from SCA Ostrand, Metsa Aanekoski, Sodra Varo, and even Svetlogorsk starts to ramp up, other incremental (e.g. Skutskar, Steti)

• Less maintenance


HAWKINS WRIGHT

…while price-sensitivity of pulp (and paper!) demand is being put to the test!

-500

-400

-300

-200

-100

0

100

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300

400

Y-o-

Y gr

owth

, (00

0s t)

China

Rest of the World

-3

-2

-1

1

2

3

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Mill

ion

tonn

es

China 10yr avg: +1.2Mt/yr

ROW 10yr avg: -0.1Mt/y

Tota

l BC

P de

man

dW

orld

-20

sam

ple


HAWKINS WRIGHT

CWF and UWF paper prices, as an Index (Jan-15 = 100)

Testing the price sensitivity of paper demand?

Price inflation leads to re-stocking….leads to strong paper demand and production, leads to strong pulp demand

Chinese P&B producers hoped that a high pulp price would support paper prices, but ultimately paper price relates to supply and demand, not pulp price

Paper demand has fallen sharply due to price sensitivity of paper demand and slowing economy. Q1 2019 figures show

P&W (del) Tissue (prod)NA -13% -1%Europe -7% -3%

250

300

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450

500

'12 '13 '14 '15 '16 '17 '18 '19

€pe

r ton

ne o

f pap

er

European converting margin: CWF

300

400

500

600

'12 '13 '14 '15 '16 '17 '18 '19

UWF

859095

100105110115120125130135140

Janu

ary

2015

=100

ChinaNorth AmericaEurope

UWF/CWF average index


HAWKINS WRIGHT

Combined impact of National Sword and the inventory cycle

• P&B production falls by ~5 million tonnes in 2018

• Net exports of P&B fall by a similar amount…

-10%

-5%

0%

5%

10%

15%

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Chinese output of machine made P&BY-o-y % change (3 month moving average)

Source: National Bureau of Stats

2016: +3.4%

2017: +4.8%2015:

-1.7%2018: -5.8%

-2

-1

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 2015 2016 2017 2018

Mill

ion

tonn

es

Chinese trade of unconverted P&B

Exports Imports Net exports


HAWKINS WRIGHT

China is no longer the low-cost production base

• RCF imports have fallen by 12 million tonnes Total ban by 1st Jan 2021?

• Much of the RCF gas been diverted to other Asian countries (see below)

• US exports actually increased in 2018!

• RCF prices in USA and Europe have fallen, also promoting investment in packaging capacity

• Bottom line is that producing paper in China has become more costly! Chinese now investing in Malaysia, Vietnam, Taiwan, etc

US exports of RCF (full year 2018 v 2017)

0

500

1,000

1,500

2,000

2,500

3,000

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Office

ONP

Mixed

OCC

Chinese RCF imports (3mma)

-31%

+73%

+166% +95% +66%+27% +7%

+56%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Mill

ions

of t

onne

s

2017

2018


HAWKINS WRIGHT

And capital starts to move offshore too Overseas investment from Chinese paper companies

Source: Hawkins Wright

Note: list is not exhaustive

Company Project/Target Location Grade Date

Nine Dragons Old Town ME, USA BHKP Oct-18

Paper Excellence Crofton, Alberni, Powell River Vancouver, Can NBSK Oct-18

Nine Dragons Fairmont WV, USA DIP Aug-18

Cheng Loong New PM Vietnam Linerboard Oct-18

Shanying Wickliffe KY, USA kraft pulp, packaging Aug-18

Shanying WPT Netherlands RCP Jul-18

RGE/APRIL Lwarcel SP, Brazil BEKP Jun-18

APRIL MNI Malaysia Newsprint Jun-18

Nine Dragons Rumford WI, USA kraft pulp, paper May-18

Nine Dragons Biron ME, USA fine paper May-18

Hengan Greenfield, Finnpulp Kuopio, Finland kraft pulp May-18

Shanying/CAMC/Silvi Brownfield, Boreal Bioref Kemijarvi, Finland Bio-refinery Apr-18

Sun Paper Greenfield Laos BHKP/DWP Mar-18

Paper Excellence Eldorado MGS, Brazil BEKP Sep-17

Nine Dragons New PMs Vietnam Linerboard Aug-17

Shanying Nordic Paper Sweden, Norway Packaging Jul-17

Lee & Man New PM Vietnam Linerboard Mar-17

Sun Paper Greenfield AR, USA fluff/DP/Liner? Apr-16

Tranlin Greenfield VA, USA Straw Jun-14

• Long Chen has cancelled some expansions in China

• Non-Chinese companies also investing heavily in renewable packaging through machine conversions (Stora Enso, Sappi, Metsa Board, Burgo, APP Indonesia) and new machines (Klabin, Ilim, West Rock)

• These will be integrated with pulp or recovered fibre


HAWKINS WRIGHT

A crossroads for the Chinese paper industry?

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120

thou

sand

tonn

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"New" China

"Old" China

CPA estimates

21.0 21.5

10.1 10.72.8 3.0

25.717.0

29.030.4

0

20

40

60

80

100

120

2017 2018

mill

ion

tonn

es

Localwaste

Importedwaste

Non-wood

Local pulp

Importedpulp


HAWKINS WRIGHT

0

50

100

150

200

250

300

350

400

Mill

ion

tonn

es

North America CEPI

Japan East Europe

Middle East & Africa Latin America

Other Far East China

Global P&P output has been fairly stagnant for 10 years

Source: Paper Industry Associations & Hawkins Wright China model

Global paper and board production Global pulp production

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160

180

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0

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70

80

90

1990 1995 2000 2005 2010 2015

mill

ion

tonn

es

Total (right scale) North AmericaCEPI JapanChina & Indonesia LatamOther


HAWKINS WRIGHT

But the changing location of production promotes market pulp demand over integrated

• Since 2007… Paper production falls in NA, Japan, Europe (integrated) And rises in China and other non-integrated countries

• This trend appears to be reversing, posing a threat to market pulp demand

Pulp production Pulp consumption

85%

57%76% 83% 64%

62% 34%0

10

20

30

40

50

60

70

NorthAmerica

CEPI Japan EastEurope

LatinAmerica

Asia China

milli

on to

nnes

72%

64%83% 64% 23%

83% 94%0

10

20

30

40

50

60

70

NorthAmerica

CEPI Japan EastEurope

LatinAmerica

Asia China

mill

ion

tonn

es

Integrated (inc. nonwood)

Market


HAWKINS WRIGHT

It’s the economy…

• The price of most commodities rose through 2016 and 2017 as global economic growth accelerated and some emerging markets emerged from recession

• USD strength = EUR, RMB weakness on the buy-side (less purchasing power) & CAD, BRL, IDR, etc. on the sell-side (lower production costs)

• Softwood prices clearly over-shot and were always due a correction• Now further headwinds are emerging from US-China trade talks…

0

50

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Inde

x, 2

005=

100

Pulp prices versus other commodities (index)

Economist commodity-price index

NBSK price (net cif China) index

BEKP price (net cif China) index

DWP price (CIF China) index

Source: Hawkins Wright, The Economist

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

ChinaExchange rate: RMB/USD


HAWKINS WRIGHT

How sustainable is the Asian pulp wood trade?

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Milli

ons

of B

DM

T

Other BrazilChile VietnamThailand South AfricaIndonesia Australia

Hardwood chip exporters to Asia Pacific Rim (i.e. China, Japan, Taiwan, Korea)

• From 2020 chip exports from Chile and Australia will fall• Limited potential for growth elsewhere, meaning Asian pulp wood costs will rise further• At the same time, Indonesia becomes a net importer of wood chips…


HAWKINS WRIGHT

What do we conclude?

• Cycles, and how this one is different• Marginal cost reversion• Producer stocks• Consolidation

• Demand drivers• China’s one-off price-inventory cycle• Price sensitivity of pulp and paper demand• National Sword

• The big picture is shifting• Integrated vs non-integrated paper production• Macro-economic headwinds• Fibre is king

• Inventory overhang will require time to clear, and although consolidation does increase scope for disciplined approach to supply, it should not overpower market forces!

• Demand is cyclical and price-sensitive!• Can we realistically expect another bumper year?

• The Chinese price-inventory cycle and National Sword program have accelerated a tectonic shift in global fibre flows and paper production.

• Macro-economic drivers are weakening, and are exacerbating pressure on prices due to near-term supply/demand fundamentals – macro drivers will continue to dominate.

• The hunt for fibre is on, in a world where reliable sources of good quality and affordable wood are getting rarer!


Documents

The Changing Structure of the Global Pulp and Paper Industries · But the changing location of production promotes market pulp demand over integrated • Since 2007… Paper production