HAWKINS The Outlook for Market Pulp Have we started a new ......• 2002-2008 average weighted costs of pulp production rose by more than 50-60% (mostly dollar driven). • Pulp prices

HAWKINS WRIGHT

The Outlook for Market PulpHave we started a new upcycle?

Confidential: Valmet Customer Days 2018Vienna, October 2018

Oliver Lansdell, DirectorHawkins Wright, London, [email protected]

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Agenda

• Current market situation• Long term outlook for supply and demand• Why is there not more investment in new capacity?

All data sourced from Hawkins Wright multi-client reports:

• Outlook service for market pulp• Defining the China market for pulp, paper and board• Outlook service for dissolving pulp• PulpwatchFor more information: www.hawkinswright.comEmail: [email protected]

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http://www.hawkinswright.com/

mailto:[email protected]

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Pulp prices and other commoditiesBEKP, NBSK (net, CIF China) vs other commodities

Source: Hawkins Wright

2016/17 most commodity prices reflated, supported by:• A weaker US dollar (dollar index -10%)• Supply controls• Resurgent global economic growth

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Market pulp demand growth by grade2017-2022 (high/low scenario)


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7.7-9.5Mt of demand growth

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Demand growth vs capacity growth2017-2022


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Confirmed additions

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DWP

Confirmed major additions include: APP OKI, Fibria TL2, Metsa Fibre Aanekoski, SCA Ostrand, Svetlogorsky, Vietracimex, Sun Paper Laos, Shandong Chenming Paper Huanggang, Arauco MAPA

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Demand growth vs capacity growthEmerging supply deficit?


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Speculative

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2Mt of potential capacity but 3-7 years lead time for greenfield/brownfield constructionPotential sources of new supply: NewCo (Fibria and Suzano), Eldorado, UPM, various Russian projects, various Finnish projects and others (including diversion of supply from integrated P&B mills)

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Emerging supply gapAll grades combined, 2010-2022


Includes all chemical pulps (BCP, UKP and dissolving wood pulp)

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Emerging supply defecit?

Illustration of supply & demand growth based upon existing capacity

announcements and demand forecast

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Fibre scarcity prompts Chinese acquisition spreeRecent Chinese acquisitions


Note: list is not exhaustive

Company Project/Target Location Grade Date

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

Strong demand for assets is inflating asset prices

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Why the hesitation to invest?

A few years ago investors perceived pulp and paper to be a sunset industry, being displaced by electronic media

• Financial crisis and technological innovation decimated demand for many paper grades

• Unloved by investors, targeted by NGOs

• Although China managed to support global output since 2010, sector plagued by over-investment & fragmentation, and supply-side inefficiencies

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• Capital intensive, especially greenfield mills. Preference for M&A. Market cyclicality. Recession in Brazil and Russia.

The reflation of pulp prices during the past 24 months has allowed debt-laden producers to repay loans and clean up their balance sheets. Should facilitate the next wave of investment.

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• Political risk (growing threat of trade duties, unstable governments)

HS codesChinese exports to US

US exports to China

Newsprint 4801 - 15

Tissue 4818, 4803 225 5

P&W 4802, 4810 165 165

Board 90 505

TOTAL 480 690 OCC 470710 - 5,520

ONP 470730 - 3,375

Office 470720 - 165

Mixed 470790 - 1,815

TOTAL - 10,875 BSKP 470321 - 1,600

BHKP 470329 - 265

TOTAL - 1,865

Pulp

2017 (thousand tonnes)

RCF

P&B

US-China trade of pulp, paper and board, 2017

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• Political risk (growing threat of trade duties, unstable governments)

• Environmental risk> permit availability

• Fibre availability risk

Increasingly difficult to have proprietary access to sustainably managed, low cost fibre.

Threats from:

I. Increased competition for fertile land from competing crops

II. Changing legislation governing plantations

III. Climate change, especially droughts

These issues present challenges to existing mills and new projects. All hint at a sustained period of cost inflation during the coming years

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The last time we had a sustained period of cost inflation: 2002-2008

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World weighted average production costs, CIF West Europe, 1994-2017


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BHKP and BSKP pulp price, CIF West Europe, 1994-2017


• 2002-2008 average weighted costs of pulp production rose by more than 50-60% (mostly dollar driven).

• Pulp prices increased by a corresponding amount.

• Even so, more than 4Mt of market pulp capacity closed as new capacity came to market.

• Will a renewed spate of cost inflation prompt more closures? Unlikely…

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BHKP cost curve, CIF China2022

4th quartile of curve to steepen?If so, prices will move higher and there will be more unforeseen outages as older assets continue to operate


Note: CHART IS ILLUSTRATIVE ONLY

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Have we started an upcycle?

• Supply and demand fundamentals are likely to be supportive of prices for several years.

• But that’s only one of the prerequisite conditions…macro fundamentals also need to be supportive, which at the moment they are, although their support is waning

Nothing is permanent in commodity markets and the current threats to global economic growth are multiple:

• Climate change

• Cyber attacks/terrorist attacks

• Geopolitical tensions

• Demographic and cultural divides

• Inflation (could choke the expansion by forcing central banks to tighten policy more than expected)

• Consumption might weaken under the growing burden of debt

• A rise in protectionism

In the longer term, higher pulp prices will need to be sustained to attract new investment in pulp capacity

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HAWKINS The Outlook for Market Pulp Have we started a new ......• 2002-2008 average weighted costs of pulp production rose by more than 50-60% (mostly dollar driven). • Pulp prices

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