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Global Research 25 June 2015
Global Paper & Forest Products Can Global Pulp Pricing
Remain Immune to the Accelerating Pace of Supply Growth?
We expect industry's ability to absorb supply to become severely
challenged Over the next few years pulp capacity growth is set to
accelerate from an already high level potentially 2.5x faster than
historic trend. We expect this to exert pressure on global pulp
pricing later in 2015-through 2017. We expect hardwood prices to
fall about 25% from current levels and softwood to decline about
12.5%. We estimate about 80% of planned capacity growth is
hardwood, though there is some softwood coming on, particularly
over the next year or so. Near-term we expect softwood to show
relatively better trends than hardwood as markets make adjustments
to the very narrow softwood premium. Over the long-term we expect
hardwood/softwood to trade on their own supply/demand dynamics and
the softwood premium to widen.
Shift from nonwood pulp in China was a big help absorbing recent
supply While we would not characterize markets as strong, we
acknowledge that pulp markets have held up better than we had
expected over the past year or so. We attribute this to a steep
contraction in nonwood pulp consumption in China-off 40%+ (~5.5mm
tonnes) since 2010. We also believe some Chinese wood pulp
producers have opted to purchase pulp in lieu of own production
(price of purchased pulp less than their own production costs). We
caution against extrapolating 2014/early 2015 experience to the
future. The rate of pending supply growth is even greater than
recent past. And we do not believe these factors in China will
prove as helpful with the coming wave of new supply. We do not
expect Chinese nonwood pulp demand to fall to zero (rate of decline
slowed in 2014). Some of this demand could be price sensitive; some
Chinese pulp lines could restart in the event of sufficient pulp
price recovery.
Underlying demand not likely too supportivesome risks to our
forecast Global paper demand growth has slowed, impacting pulp
consumption. While tissue remains a relative bright spot, tissue
demand growth has not been enough to offset the decline in printing
and writing demand. Key risks to our negative forecast include pulp
expansion projects being delayed/cancelled, offsetting capacity
closures, a surge in demand growth from emerging markets such as
India, a sharp decline in the US dollar.
Select global producers: Fibria (Sell), CMPC (Neutral), Klabin
(Buy), Domtar (NR), International Paper (Buy), Weyerhaeuser (Sell),
UPM (Sell), Stora Enso (Sell)
Equities
Global
Paper Products
Global Paper Team 212-713-3486
Gail S. Glazerman, CFA Analyst
[email protected] +1-212-713 3486
Andreas Bokkenheuser Analyst
[email protected] +1-212-713 9516
David Hallden Analyst
[email protected] +46-8-453 7330
Nishal Ramloutan, CFA Analyst
[email protected] +27-11-322 7414
Edwin Chen Analyst
[email protected] +852-2971 8007
-
Global Paper & Forest Products 25 June 2015
2
While not strong, pulp markets have held up better than we had
expected the past 1-2 years given material new supply that has
entered the market. We caution against extrapolating that success
to the market's ability to absorb the brewing virtual tsunami of
new supply that appears to be poised to hit in 2016-18.
Our medium term outlook for global pulp remains cautious,
predominantly based on the sheer magnitude of planned capacity
growth. We estimate close to 80% of expected incremental supply is
hardwood. That said, over the next year or so there is a reasonable
amount of softwood capacity coming on line as well.
Nearer term, we expect softwood trends to improve modestly,
somewhat at the expense of hardwood. We believe some of the
relative weakness in softwood in 2015 reflects a delayed response
to the outsized price premium which had built in mid 2014. With the
softwood/hardwood gap in China having narrowed to a very thin level
we expect some paper mills to increase softwood consumption and
lower hardwood usage. Even in lieu of lost demand to softwood -
CMPC's new 1.3 million tonne line started in May and will likely
exert pressure on the hardwood market in the second half.
In this report we outline our new global pulp price forecasts,
try to explain why the markets have been able to absorb recent
capacity additions, and outline the pending flow of new supply and
expected impacts.
We expect hardwood pulp prices to fall about 25% by 2017. We
forecast a more moderate 12.5% erosion in softwood prices over this
period. This would restore about a $100 per tonne softwood premium.
Longer term, given divergent supply dynamics we expect the
hardwood/softwood markets to decouple, favoring softwood given much
lower planned supply growth.
Our primary concern is the outlook for pulp capacity growth into
2018 (and potentially beyond). We expect annual pulp capacity
growth to accelerate through that period with average annual growth
of about 3.7 million tonnes, more than 2.5x the historic growth
rate.
We believe this rate of supply growth is well in excess of
demand growth (closer to 1.2 million tonnes per year). While global
tissue demand is growing, the tissue market is relatively small and
this growth has not been enough to offset declines in the much
larger printing and writing paper markets. Barring material
capacity closures or project delays/cancellations we expect pulp
operating rates to fall to low levels-in the mid 80s.
It appears consumption changes in China have been a big help for
paper grade wood pulp the past few years. But we believe future
benefits from this trend may be more muted. Since 2010 Chinese
production/consumption of nonwood pulp has declined 5.4 million
tonnes, or 42%. Over the same period, Chinese consumption of wood
pulp has grown 6.8 million tonnes (36.5%). This likely absorbed
much of the new global wood pulp capacity that was added 2013-14.
According to the local trade association the rate of decline in
Chinese nonwood pulp demand moderated sharply in 2014. We do not
expect nonwood pulp production in China to completely disappear so
we see this opportunity as finite. The rate of growth in Chinese
paper/board consumption has slowed over time (the trade association
actually estimates a moderate decline in 2014). Additionally, there
is risk that some of that swing from nonwood to wood pulp was
opportunistic with buyers taking advantage of low cost purchased
pulp in lieu of their own production. If so, this could reverse
in
-
Global Paper & Forest Products 25 June 2015
3
a higher pulp price environment with Chinese mills returning to
own-production.
The strong US dollar has not been supportive of market pulp
recently. Even as US dollar denominated prices have declined,
realizations for producers in Russia and Brazil are attractive/high
in local currency terms.
We have elected to base our forecast on published prices into
China. We note that list into China approximates spot transaction
pricing in North America. In contrast the gap between spot and list
pricing in North America is distended, sitting near record highs.
We do not believe list is reflective of economics in the North
American pulp markets.
Key risks to our forecast include continued substitution of
purchased pulp for own production in China, substantial closures of
capacity (both integrated/nonintegrated) in other parts of the
world and a surge in paper demand, especially from countries like
India.
Forecast update We are launching new pulp price forecasts. Our
forecast is based on NBSK and eucalyptus pulp delivered to China.
Previously we forecasted pulp prices delivered to North America.
But, as we will discuss later, we believe North American list
pricing has become too far removed from economic reality. We
believe Chinese prices are a closer approximation of mill nets.
We are quite cautious on market pulp, predominantly based on our
supply outlook with announced projects looking to keep the pulp
capacity growth rate at a multiple of historic trend well into
2018.
We expect pressure to mount, particularly on hardwood pulp, in
the second half of this year and accelerate through late 2017.
We expect NBSK prices to fall 9.3% in 2015, 3.3% in 2016 and
nearly 9% in 2017. We expect eucalyptus prices to rise 5.5% in
2015, fall 8.5% next year and fall nearly 15% in 2017. While we
expect average hardwood prices to rise in 2015 we believe hardwood
prices are near peak and expect them to come off moving through the
second half.
The softwood pulp premium has narrowed to only about $15 in
China. By 2017 we expect this to return closer to $100 per
tonne.
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Global Paper & Forest Products 25 June 2015
4
Figure 1: NBSK pulp price, delivered China, US$/t Figure 2:
Eucalyptus pulp price, delivered China, US$/t
Source: RISI and UBS estimates Source: RISI and UBS
estimates
Figure 3: Pulp price ($/t) delivered to China
NBSK BEK
1Q14 757 637
2Q14 730 588
3Q14 728 575
4Q14 715 600
1Q15 663 627
2Q15E 670 650
3Q15E 670 640
4Q15E 665 615
1Q16E 660 605
2Q16E 650 590
3Q16E 635 570
4Q16E 625 550
2017E 585 495 Source: Source: RISI and UBS estimates
Figure 4: Global paper grade chemical pulp supply & demand,
000 tonnes
Figure 5: Global paper grade chemical pulp op rate
Source: RISI, PPPC, industry sources and UBS estimates Source:
RISI, PPPC, industry sources and UBS estimates
450
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1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15E1Q16E4Q16E
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1987 1991 1995 1999 2003 2007 2011 2015ecapacity consumption
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100%
1987 1991 1995 1999 2003 2007 2011 2015e
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Global Paper & Forest Products 25 June 2015
5
Pricing a bit weaker than appears on surface - look to China or
spot to understand pricing dynamics Over the past few years
published pulp list prices have become more and more detached from
actual mill nets as discounts off list have swelled. This situation
is most acute in North America, but exists to a lesser degree in
other regions as well. This dynamic is more evident in softwood
than hardwood.
In China we believe reported prices are more reflective of the
actual market and represent the best barometer of market
trends.
As can be seen in the charts below, published US NBSK list
prices are $355 or 57% higher than reported spot. These are about
double the 10-year averages. And these averages are driven up
sharply by recent extremes. The current gap represents a record
level. We believe a large portion of this disconnect reflects
rising contractual discounts. That said, at least some of the gap
is attributable to market dynamics/balance. Historically, spot/list
pricing converge in tight markets.
Since March 2014 peak US list prices have declined $50 (5%)
while spot prices have contracted $165 per tonne, a 21%
decline.
Current US spot prices are 8.5% below the 10-year average while
current list is still 13% higher than the long-term trend.
Buyers appear to be taking advantage of this disconnect. There
have been trade reports of contractual buyers limiting purchases to
the bare minimum, substituting spot for contractual tonnage. This
should exacerbate the challenge since pulp mills will end up with
fewer sales of contractual tonnes and be forced to sell more pulp
on the spot market.
We believe some buyers reduced contractual commitments to allow
flexibility to take advantage of cheaper spot pricing. But buyers
will need to make sure they meet whatever commitments they have in
place which may force them to reduce spot purchases in favor of
contractual orders at some point later in the year.
Figure 6: US NBSK list and spot price, US$/tonne Figure 7: US
NBSK List-Spot pricing, $/t
Source: RISI Source: RISI
Interestingly, US spot pricing has been tracking quite closely
with reported Chinese 'list' prices, supporting our view that
Chinese transaction prices are more reflective of economic
reality.
400
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700
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1,000
1,100
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
US list US spot
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List-Spot, $/t-lhs list premium vs spot-rhs
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Global Paper & Forest Products 25 June 2015
6
The recent, albeit slight, pickup in Chinese NBSK could be a
precursor of a broader global recovery in the short term.
Figure 8: NBSK price delivered to China, US spot price
(US$/t)
Source: RISI
Softwood versus hardwood we expect the pendulum to start to
swing in favor of softwood Given divergent supply dynamics we
expect hardwood and softwood pulp markets to eventually decouple.
However we do not feel we are there yet; we believe the industry
still has some capacity to adjust to market disconnects.
Paper mills cannot change pulp furnish that quickly so the
adjustments take time and can be hard to observe. We believe these
grade swings are under-appreciated in the markets
Figure 9: Europe/N America NBSK less Eucalyptus price, $/t
Figure 10: China NBSK less Eucalyptus price, $/t
Source: RISI Source: RISI
When the price gap becomes pronounced certain paper mills can
consume more hardwood in place of softwood and vice versa. These
swings are regulated by the impact on final product quality as well
as production equipment; some older machinery would have issues
processing the weaker hardwood fiber. Such mills may lose operating
efficiency if they alter the
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950
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N America China
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Global Paper & Forest Products 25 June 2015
7
furnish, having to run slower to use the weaker hardwood fiber.
In some cases these adjustments can involve a blend of multiple
fibers, for instance, using a mix of recycled fibers plus softwood
in place of hardwood.
Some pulp mills can swing between hardwood and softwood
production. If the price gap is wide enough mills can justify the
incremental cost to pull in a different type of wood from forests
that are a further distance from their mill.
Between summer 2013 and summer 2014 the softwood premium over
hardwood in both Western Europe and North America surged from
$30-40 to a record $210-215 per tonne. The historic average is a
$55 softwood premium (and that average is inflated by recent
trends).
In China the softwood premium rose to $155 in September from a
$10 softwood discount back in summer 2013. The 10-year average
premium is $70 and the peak was $220 (realized back in 2011).
We believe these exaggerated price gaps eventually encouraged
market adjustments with paper mills consuming more hardwood and
pulp mills producing more softwood.
As a result, the hardwood/softwood price gap has narrowed
sharply, particularly in China.
In China, via a combination of hardwood price increases and
softwood price erosion, the gap has narrowed to only $15, the
lowest in about 20 months and a fraction of the historic
average.
We believe markets are starting to compensate for the relatively
more attractive softwood as buyers who had compromised product
quality/operating efficiency to capitalize on cheap hardwood move
back towards softwood.
The benefits may not be immediately apparent, though the recent
Chinese softwood price increases may be an early indicator of this
occurring.
There is risk buyers may hesitate to shift back to softwood if
they expect the recent hardwood rally to be short lived. With the
recent start of CMPC's new 1.3 million tonne line buyers may assume
the hardwood markets will come under incremental pressure once
those tonnes enter the market later this year.
Demand We believe growth in market pulp volumes has outpaced the
underlying consumption of pulp from tissue, printing and writing
and paperboard markets.
Global market pulp shipments rose 2% in 2014. This follows 2.5%
growth in 2013. 2014 growth equated to about 1.1 million tonnes.
This is consistent with the long term average.
Pulp producers often point to tissue as the key source of market
pulp demand growth. But building paper machines is not the same as
producing finished goods (and consuming raw materials such as
pulp). Tissue production growth has been healthy, but not nearly as
strong as suggested by headline capacity expansion. The global
tissue market grew 2% last year or about 700,000 tonnes. Most, but
not all, new tissue lines would be pulp driven (about half existing
global tissue capacity is waste-based though recent growth has been
weighted towards pulp-based tissue capacity).
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Global Paper & Forest Products 25 June 2015
8
But the global tissue market is much smaller than printing and
writing. The demand decline in printing and writing more than
offset the growth in tissue. Global printing and writing demand
fell 1.2% last year-or just over 1.1 million tonnes.
Some consumer paperboard mills also use market pulp. We do not
have strong data on this specific market segment, but assuming 2%
demand growth this may have added 400,000-800,000 tonnes of pulp
demand.
Over the past 4 years printing and writing demand has declined
5.3 million tonnes while tissue demand is up about 3.8 million
tonnes. Global market pulp shipments are up nearly 6 million tonnes
over this period.
Therefore, combined tissue/printing and writing demand has
declined 1.5 million tonnes since 2011 while global pulp shipments
are up nearly 6 million tonnes. We are not convinced paperboard
demand alone can bridge this gap.
Figure 11: Global apparent consumption, 000 tonnes Figure 12:
Global annual demand growth tissue + printing & writing vs
market pulp, 000 tonnes
Source: RISI Source: RISI
China remains an important but opaque driver China has been the
driving force behind global pulp market growth for the past 15
years.
Since 2010 Chinese pulp volumes have increased on average 75,000
tonnes per month. Over this same timeframe monthly demand in the
rest of the world has grown an average of 15,000 tonnes.
Data suggest that underlying Chinese paper/board demand growth
has moderated significantly in recent years. In fact, the Chinese
industry trade association reports that total Chinese paper/board
consumption fell 3% in 2014. Admittedly this decline was primarily
driven by newsprint, a non pulp-consuming product.
Tissue demand growth is healthy (though well shy of the rate of
tissue supply growth) but this has not been enough to fully offset
slower growth, or even declines, in other product areas.
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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Printing & Writing Tissue
(12,000)
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
p/w + tissue mkt pulp
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Global Paper & Forest Products 25 June 2015
9
Reports indicate Chinese paper/board markets remain broadly
oversupplied with high finished good inventories, suggesting that
Chinese fiber purchases could potentially be outstripping the real
underlying demand trend.
Figure 13: Chinese paper/board capacity growth, 000 tonnes
Source: RISI and UBS estimates
Another large component of China's impact on the pulp market is
opportunistic buying; not only substituting pulp grades in
production (hardwood/softwood) but also replacing internal pulp
production with purchased pulp, depending on market
circumstances.
China has fairly high pulp production costs and some Chinese
paper companies have been known to substitute purchased market pulp
for their internally produced pulp when purchased pulp prices
approach their own production costs.
But this is usually price-sensitive demand and tends to reverse
as soon as market pulp prices rise. As can be seen in the following
chart Chinese purchases tend to peak when pricing is at its trough
and sink when pricing is at its highest.
Figure 14: World pulp shipments to China vs BEK selling price to
China
Source: PPPC and RISI
(600)
400
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9400
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
newsprint print/write tissue cbd other
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Jan-09 Jan-11 Jan-13 Jan-15pulp shipments to China (kt)-lhsBEK
pulp price to China $/t-rhs
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Global Paper & Forest Products 25 June 2015
10
RISI estimates average Chinese hardwood pulp costs are about
$550 per tonne, about $200 per tonne above their estimate of the
average global cost.
Over the past few years this level has approximated an
inflection point in Chinese pricing.
Figure 15: Hardwood pulp delivered to China, $/t (w/avg
cost)
Source: RISI
Another unknown most acute in China is grade swings amongst pulp
furnishes. Over the past several years the Chinese government has
targeted significant closures of old higher cost pulp and paper
capacity on environmental grounds. The Chinese paper/board markets
remain materially oversupplied so it is hard to determine to what
extent these closures have been enforced (benefits are not apparent
in the markets).
That said recent data shows substantial step-downs in
production/consumption of nonwood pulp in China. Over the past 20+
years while chemical pulp and recovered fiber demand surged
exponentially in China, consumption of nonwood pulp was relatively
stable.
But more recently, reported nonwood pulp consumption in China
has contracted materially. Since 2010 nonwood pulp has declined by
nearly 5.5 million tonnes, or 42%. The rate of decline moderated
from 2.5 million tonnes in 2013 to only 0.74 million tonnes in
2014. According to the Chinese Paper Association the country
made/used about 7.5 million tonnes of nonwood pulp in 2014.
The decline in nonwood pulp consumption may be the manifestation
of the government closure efforts.
Much of this nonwood pulp appears to have been offset with paper
grade pulp. While nonwood pulp declined 5.4 million tonnes since
2010 over the same period wood pulp consumption grew 6.8 million
tonnes.
During the first quarter 2015 reporting season both Mercer and
Suzano management expressed the view that Chinese
government-enforced closures were indeed creating incremental pull
on market pulp.
We admit we have been overly bearish on pulp pricing the past
1-2 years, potentially under-estimating the dynamic of falling
nonwood pulp consumption in
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Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
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Global Paper & Forest Products 25 June 2015
11
China. But we would caution against assuming this trend will
continue. We do not expect Chinese nonwood pulp production to fall
to zero. In fact, there has been a modest revival of interest in
straw pulp in the USA. And it is possible some of the reduction in
nonwood volumes is just a price-driven dynamic which could reverse
were wood pulp prices to rally sharply.
Figure 16: Chinese fiber demand, 000 tonnes Figure 17: Chinese
nonwood pulp demand, 000 tonnes
Source: RISI Source: RISI
Figure 18: Chinese wood and nonwood pulp consumption, 000
tonnes
Source: China Paper Association
Another hard-to-measure dynamic is the movement between
dissolving/paper grade pulp production. Several years ago there was
a wave of investment converting some paper pulp capacity in China
to dissolving pulp. But with very weak dissolving markets returning
to paper grade pulp production could be attractive. There is
limited visibility into these swings, but recent reports suggest
some movement back towards paper grade and away from dissolving
pulp in China.
0
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BKP recovered paper nonwood pulp6,000
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Global Paper & Forest Products 25 June 2015
12
Supply Our most significant concern regarding the pulp markets
remains the sheer magnitude of supply growth planned for the next
several years.
RISI estimates bleached chemical market pulp capacity growth
will average 2.3 million tonnes per year 2014-17, about double
historic annual demand growth. We believe this capacity number
could prove low given the number of projects we are tracking (see
tables in the back of this section).
We see potential for annual capacity growth to average 3.4
million tonnes 2014-18, more than 2.5x the 20 year historic annual
growth rate. We expect supply growth to accelerate moving through
this period.
Assuming that demand continues to grow about 2.5% a year we see
risk that global pulp operating rates will fall from 91-92% to
below 85%.
Figure 19: World chemical market pulp capacity Figure 20: World
chemical market pulp capacity change kt
Source: RISI, UBS estimates Source: RISI, UBS estimates
Figure 21: World market pulp consumption growth Figure 22: World
market pulp operating rate
Source: RISI, UBS estimates Source: RISI, UBS estimates
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1987 1990 1993 1996 1999 2002 2005 2008 20112014p2017e
(2,000)
(1,000)
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1988 1992 1996 2000 2004 2008 2012 2016e
-6.0%
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1988 1991 1994 1997 2000 2003 2006 2009 2012 2015e
80%
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1987 1991 1995 1999 2003 2007 2011 2015e
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Global Paper & Forest Products 25 June 2015
13
We are not convinced the markets have felt the full force of
recent capacity growth, yet. 3 mills with combined 3+ million
tonnes of capacity started in late 2013/2014. That equates to about
2.5 years average annual demand growth. Historically the
approximate 55 million tonne chemical pulp market sees about 1.3
million tonnes annual demand growth.
Reported world pulp production increased about 1.2 million
tonnes in 2014 (including a 300,000 tonne inventory build). This is
only a fraction of the gross supply growth. This partially reflects
timing of mill starts with two of the lines not producing until the
middle of the year and the slope of the ramp up curve. In fact, Oji
has only just started producing dried pulp on the 500,000 tonne
line they started last year, up until now they have made far less
common wet pulp. There were also some offsets in 2014 with a
400,000 tonne Spanish mill shutting and the temporary idling of a
mill in Maine (the Maine mill subsequently restarted under new
ownership and has apparently just finished the ramp up phase).
This spring CMPC started production on a new 1.3 million tonne
pulp line in Brazil. In addition, restarts and other smaller
projects could add at least 800,000 tonnes if/when fully ramped.
Combined, this could equate to nearly 2 years of theoretical demand
growth.
The pressure does not appear likely to abate in 2016; pulp lines
with 6 million tonnes are expected to start up. Klabin is expected
to start a 1.5 million tone line. APP is targeting a late 2016
start of a large new mill in Indonesia. Lately there have been
reports that the project may slip into 2017 but also that the
project scale has expanded to 2.8 million tonnes (from 2 million).
In addition to these, we estimate that other smaller projects could
add a further 1.5 million tonnes; this includes Domtar and
International Paper's planned conversions to fluff/paper grade pulp
from uncoated free sheet/bleached board, respectively.
Admittedly much of this activity is targeted for the second half
of 2016 with even greater implications for 2017.
Looking to 2017 and beyond there are additional projects with
about 5 million tonnes of capacity which we believe have a fairly
high probability and 16 million tonnes of potential new additions
in aggregate.
Finland is a region to watch closely in terms of pulp supply
growth. While not exactly intuitive, there are 3 organizations
studying the prospect of major world scale pup lines in Finland. At
least 1 of these projects is proceeding, Metsa's planned net
addition of 800,000 tonnes. Finnpulp has launched an environmental
impact assessment for its proposed world-scale expansion.
We estimate about 75% of the planned expansions are hardwood
based.
2013-14 capacity growth was absorbed with much less disruption
than we had feared, but we would caution against extrapolating that
to future growth.
A smattering of closures offset the bulk of 2013 growth. Also
the Ilim expansion in Russia ultimately experienced a very gradual
ramp with the mill only reaching its stride in late 2014.
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Global Paper & Forest Products 25 June 2015
14
Figure 23: Major global pulp capacity changes 2013
Company 000 tonnes country grade timing
Eldorado 1500 Brazil hardwood 4Q12 Ilim 500 Russia softwood mid
2013 Resolute -120 Canada softwood early 2013 Domtar -120 Canada
softwood early 2013 Jari -410 Brazil hardwood early 2013 Sodra -375
Norway soft/hardwood Aug-13 Sappi -300 US hardwood spring 2013
total 675 Source: Company reports, industry sources and UBS
estimates
In comparison, 2014 offsetting closures were relatively limited.
Ence shut a 400,000 tonne line in Spain. Old Town in Maine (200,000
tonnes) briefly shut but has since reopened under new ownership.
This is against 3+ million tonnes of new capacity.
There were several large greenfield projects. But in addition,
there have been numerous expansions on existing lines in aggregate
we estimate these added the equivalent of a new world-scale
greenfield pulp line. With so much attention on the large new mills
we believe the markets could be under-appreciating the cumulative
impact of these smaller expansions.
Figure 24: Major global pulp capacity changes 2014-15
Company 000
tonnes
country grade timing
Suzano 1500 Brazil hardwood late 2013
UPM 100 Uruguay hardwood late 2013
Stora Enso/Arauco 1300 Uruguay hardwood mid 2014
Oji 500 China hardwood mid 2014
Mondi 100 Russia hardwood 2H 2014
Eldorado 200 Brazil hardwood 2014
UPM 100 Uruguay hardwood mid 2014
Old Town Pulp -200 USA hardwood 3Q 2014
Ence -410 Spain hardwood 2H 2014
Sappi 180 USA hardwood 2H 2014
UPM 100 Uruguay hardwood 2014-15
CMPC 1300 Brazil hardwood 2015
UPM 170 Finland hwd/soft 2015
Svetlogorsk 400 Belarus hwd/soft 3Q15
Expera (Old Town) 200 USA hwd/soft 2015
Portucel 70 Portugal hardwood 2015
total 5610
Source: Company reports, industry source and UBS estimates
In addition to the list above, the Jari mill in Brazil has
restarted with the intent to produce dissolving pulp. But we
understand the mill has some ability to flex back
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Global Paper & Forest Products 25 June 2015
15
to eucalyptus. Recent reports suggest the mills is putting at
least some hardwood paper grade pulp on the market.
In aggregate we estimate nearly 6 million tonnes being added
next year (not adjusted for timing/mill ramp).
Figure 25: Select major global pulp capacity changes 2016
Company 000 tonnes country grade
target start
Klabin 1500 Brazil hardwood/fluff 1Q 2016 APP 2800 Indonesia
hardwood 2H 2016
IGIC -100 USA hardwood (integration) 2016
Double A 300 France hardwood 2016 Domtar 515 USA fluff/softwood
2H16 International Paper 400 USA fluff/softwood 2H16 Sodra 320
Sweden softwood 2016
total 5735 Source: Company reports, industry sources and UBS
estimates
Even beyond this, the project pipeline remains robust. But as
previously mentioned many of these projects are fairly preliminary
and could still be canceled or delayed. But we believe at 5 million
worth of projects are fairly likely to proceed.
Figure 26: Potential major global pulp capacity changes 2017 and
beyond
Company 000
tonnes country grade target start
Fibria 1750 Brazil hardwood 4Q17
Metsa 800 Finland soft/hard 2017
Arauco -550 Chile hwd (convert
to dissolving) 2017
Eldorado 2300 Brazil hardwood 1H18
Lwarcel 750 Brazil hardwood 2019
Sveza 1200 Russia soft/hardwood 2020
Braxcel 1500 Brazil hardwood 2021
CRPE 2200 Brazil hardwood 2018+
Arauco 1500 Chile hardwood tbd
Eco Brasil 1500 Brazil hardwood tbd
Finnpulp 1100 Finland softwood tbd
Angara 1250 Russia softwood tbd
Stora Enso 900 China hardwood tbd
Source: Company reports, industry sources and UBS estimates
Offsets to new supply?
If new supply pressures prices too far we would expect some
higher cost mills to shut. However, it is not entirely clear what
or how much will be taken out. As discussed elsewhere, many of the
highest cost mills sit in China and owners seem willing to flex the
mills up/down with market pricing.
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Global Paper & Forest Products 25 June 2015
16
With each addition of a new 1+ million tonne pulp mill the
global cost curve seems to flatten a bit. There is some capacity to
be squeezed out, but not likely enough to offset growth in the
magnitude we are forecasting over the next few years.
Just over 50% of world hardwood pulp capacity is integrated into
papermaking. We are not convinced global papermakers will opt to
shut integrated pulp lines and rely on purchased market pulp
instead.
In fact, as integrated paper makers have adjusted paper capacity
down to match to shrinking demand many mills have continued to
operate associated pulp lines, maintaining a revenue stream from
the asset. International Paper and Domtar's planned conversions are
current examples of this trend.
Implications of the stronger US dollar Pulp trades globally in
US dollars, so the recent surge in the trade weighted US dollar has
some implications for the pulp market.
Generally speaking a strong dollar is unfavorable for global
pulp pricing.
The strong dollar makes pulp less affordable for key buyers in
Europe (still about 30% of global market pulp shipments by
destination).
Additionally, pulp mills in markets such as Brazil, Russia,
Finland and Canada should see improved profitability with sales
denominated in US dollars but costs in a depreciating local
currency. This should afford more room for competitive pricing.
Currency should have minimal direct impact in the Chinese market
other than the potential for more competitive offers into China
from global producers in markets with weaker currencies.
There are also some potential secondary impacts to consider.
While not our base case, in theory the weaker euro could make
European papermakers more competitive on global markets and may
provide support for paper production in this key market pulp
consuming region. European printing and writing paper production is
off 5.5% year to date in 2015.
The European graphic paper markets are oversupplied and the
industry has maintained a high reliance on exports (about 30% of
printing and writing production) even when the euro was
stronger.
In late 2014 there was a new round of capacity closure
announcements to address the oversupply in the European markets. In
general we see these closures as negative for global market pulp to
the extent that they either reduce demand for purchased pulp or
free up formerly integrated pulp to be sold on the open market.
We do not expect the recent decline in the euro to significantly
alter announced closure plans and continue to see a modest negative
for the global pulp markets.
Since last fall NBSK prices delivered to China have declined
roughly 10%, measured in US dollars. But translating this into
Russian ruble the price is up 40% (and in January at the ruble
trough, in ruble prices were up 65% from September).
In Russian ruble terms recent pricing is 35% higher than the
5-year average. In US dollars the current price is 12% below the
5-year average.
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Global Paper & Forest Products 25 June 2015
17
Measured in both Russian ruble and Brazilian real local currency
pulp prices stand at some of the highest levels in 20 years.
Figure 27: NBSK delivered to China US$, ruble/t Figure 28:
Eucalyptus pulp delivered China, US$, real/t
Source: RISI, FactSet Source: RISI and US Federal Reserve
On the flip side the weaker euro has materially raised pulp
costs for European buyers. In 2014 Europe accounted for 31.5% of
global pulp deliveries.
Measured in euros both eucalyptus and NBSK prices have touched
highs not seen since mid 2010.
Figure 29: Pulp prices delivered to Western Europe
Source: RISI, US Federal Reserve
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
350
450
550
650
750
850
950
Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15
NBSK to China USD/t-lhs NBSK to China ruble/t-rhs
700
900
1,100
1,300
1,500
1,700
1,900
2,100
300
400
500
600
700
800
900
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
BEK into China-$/t-lhs BEK into China-real/t-rhs
300
400
500
600
700
800
900
1,000
1,100
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
Jan-15
NBSK-US$/t BEK-US$/t NBSK-/t BEK-/t
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Global Paper & Forest Products 25 June 2015
18
Statement of Risk
Overall, the paper and forest products industry is highly
sensitive to shifts in supply and demand. Consequently, the key
risks are weak demand, as evidenced by general economic conditions,
or increases in supply, in the form of capacity additions. We
believe these could cause market imbalances and lead to price
declines. Severe input cost inflation can also reduce industry
profitability. The paper/forest industry uses significant financial
leverage and weaker profitability can impede their ability to
service their debt burdens.
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Global Paper & Forest Products 25 June 2015
19
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-
Global Paper & Forest Products 25 June 2015
20
Unless otherwise indicated, please refer to the Valuation and
Risk sections within the body of this report.
Additional Prices: International Paper, US$49.09 (24 Jun 2015);
Stora Enso, 9.50 (24 Jun 2015); UPM, 16.15 (24 Jun 2015); Klabin,
R$18.80 (24 Jun 2015); Weyerhaeuser, US$32.25 (24 Jun 2015);
Fibria, R$43.69 (24 Jun 2015); CMPC, P1,762.50 (24 Jun 2015);
Source: UBS. All prices as of local market close.
-
Global Paper & Forest Products 25 June 2015
21
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Global Paper & Forest Products 25 June 2015
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