Developments and Outlook for Wood Pulp Production in Asia and the World

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1 Developments and Outlook for Wood Pulp Production in Asia and the World IWRTC Da Nang, Vietnam February 2017 Kurt Schaefer Vice President, Fiber

2 Brief CV VP Fiber (World Pulp and Recovered Paper) 20+ years with RISI 15 years forecasting the world pulp market Five years forecasting North American graphic, packaging and tissue papers Chartered Financial Analyst (CFA) charter in 1995 Posted in Beijing in 2011, Brussels in 2012, now Boston Author (or lead author) World Pulp Monthly Pulp and Recovered Paper 5 and 15 Year Forecasts The China Pulp Market (multi client study, November 2015) 2

3 For Further Details and Analysis: World Pulp & Recovered Paper 5-Year and 15-Year Forecasts World Pulp Monthly 3

4 Abbreviations and Grades BSK = Bleached softwood kraft pulp ( long fiber) NBSK (northern), SBSK (southern), radiata BHK = Bleached hardwood kraft pulp ( short fiber) BEK (eucalyptus), NBHK (northern mixed), acacia DP = Dissolving pulp Primarily textile grade ( viscose pulp) P&W = Printing & writing paper Coated and uncoated; woodfree and mechanical Delivered cash cost = mill cost + delivery cost Includes: Fiber, chemicals, energy, labor, logistics Excludes: Depreciation, interest, SG&A TPY = Tonnes per year 4

5 Recent Developments 5

6 Commodity Prices: A Strong Dollar, Oversupplied Markets, Low Prices CRB Commodity Index, 2011 Present 6

7 In China, Pulp (and Other) Prices Have Posted a Remarkable Rebound Lately Pulp prices in the Chinese local market (RMB) 7,000 7,000 6,700 6,400 6,100 NBSK Local RMB (L) NBSK Local US$ ex VAT NBSK Imp. Net Price US$ $900 $800 6,700 6,400 6,100 BEK Local Price RMB (L) BEK Local US$ ex VAT BEK Imp. Net Price US$ $900 $800 Renminbi per Tonne 5,800 5,500 5,200 4,900 4,600 $700 $600 5,800 5,500 5,200 4,900 4,600 $700 $600 4,300 $500 4,300 $500 4,000 4,000 3,700 $400 3,700 $400 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Renminbi per Tonne 7

8 APP s OKI Mill Startup Is Proceeding, with a Slow Ramp Up to 2.8 Million TPY 2x1.4 million TPY lines, second line starts in April? Total production in 2017: 1.5 million tonnes??? 2.8 million tonnes = 8.7% of world BHK demand Wood supply: Still conflicting accounts 8

9 Fibria s 2 Million TPY Line Is About 80% Complete, and Could Start Early Target startup date: Early 4Q17 Nominal capacity of 1.95 million TPY equals 6% of world BHK market demand in 2017 Dollar denominated funding as low as 2% per year 9

10 BHK Cash Cost Curve End 2016: Asian and US Mills Are Vulnerable Mill level costs, no D, I, SG&A or logistics Asia Europe South America North Amer. 10

11 Production of DP and BHK on Swing Lines Is Responding to Price Gaps DP and BEK import prices in China (USD) $470/Tonne 11

12 A Potentially Huge Shift from BHK to DP Production Is Coming in Asia Pre Hydrolyzing Vessel retrofits on digesters Andritz supplied PHV at a Sun Paper mill in China Until recently, conversion from papergrade pulp to DP was limited to batch digesters. New technology is now being retrofitted to continuous digesters, creating many more candidates for conversion. Large lines in Indonesia and China are likely conversions. 12

13 DP Will Be a Strong Driver of Woodchip Demand in Asia World DP market is about 7.5 million tonnes, growing by about 5+% per year, or over 400,000 TPY. Risk here could be to the upside as income levels rise in Asia. Switching a papergrade line to DP removes 1.4 tonnes of BHK capacity for every tonne of DP. There are new DP lines coming in China, Laos and possibly the USA, plus conversions in Indonesia and China, potentially far exceeding demand. 13

14 Key BHK Capacity Developments 2016 Klabin Ortigueira, March: 1.1 million tonnes Alizay (France): BHK restart postponed indefinitely APP Sumatra (OKI), December: million tonnes RGE Rizhao: Small line switching to BSK ( 300,000 tonnes) APRIL Kerinci: New PM ( 250,000 tonnes market, +250,000 tonnes integrated) 2017 Fibria, 4Q17: 1.95 million tonnes Metsä Äänekoski: +100,000 tonnes, 3Q17 APRIL Kerinci: Conversion to DP ( 200, ,000 tonnes 2017 to 2019) 14

15 Key BSK Capacity Developments 2016 Klabin Ortigueira, March: 400,000 tonnes fluff/sbsk IP Riegelwood, 2Q16: 360,000 tonnes fluff/sbsk Domtar Ashdown, 3Q16: >300,000 tonnes fluff/sbsk Sodra Varo, 2H16: 275,000 tonnes RGE Rizhao mill: BSK on 300,000 tonne pulp line 2017 IP Pensacola (140,000 tonnes fluff) is down at least temporarily Domtar Plymouth: 90,000 tonnes fluff Metsä Fibre, 3Q17 4Q17: 700,000 tonnes BSK Belarus likely delayed again to late in 2017 (300,000 tonnes BSK) 15

16 Near Term Prognostications (2017) BHK availability will greatly outpace demand growth by the end of Much lower operating margins will be seen at BHK mills. Closures/conversions will happen. Southern BSK (SBSK/fluff) will be increasingly oversupplied as well later this year, unless some additional capacity were to be removed from the market. 16

17 Forecast Drivers and Outlook 17

18 The Global Economic Outlook Is Clouded by Uncertainty 18

19 World Production of Paper and Board Is Accelerating, but Very Slowly Graphic, Packaging and Specialty and Tissue; Percentage Change 8% 6% 6.5% 4% 2% 0% 2.1% 4.0% 3.0% 1.0% 0.2% 0.8% 0.9% 0.4% 0.8% 1.1% 1.7% 2.0% 2.1% 2% 0.6% 4% 6% 5.3%

20 World Paper and Board Production Million Tonnes Containerboard P&W and Newsprint Other Paper and Board Tissue

21 How Much Is Growth of Tissue Contributing to Pulp Demand? Tissue demand will grow by 3.5% per year in , so about 1.3 million tonnes per year of additional tissue production and fiber demand Slight increase over time in pulp share, compared to recovered fiber (2/3 vs 1/3 at present) In the USA, consumer tissue is growing faster than awayfrom home, which is good for pulp demand There is increasing use of integrated or captive pulp to produce tissue Less market pulp demand, but also less pulp capacity available for the market 21

22 Like Tissue, Fluff Pulp Demand Is Growing Quite Steadily, Adding About 250,000 Tonnes per Year to Pulp Demand 7 World Fluff Pulp Consumption 6 Millions of Tonnes

23 Paper Grade Wood Pulp Demand Should Trend Upward, Despite Declining Graphic Paper Production In 2016, world paper grade pulp demand (and production) totaled 170 million tonnes Expecting growth of slightly less than paper industry growth: 1 2% per year over the next five years Chemical papergrade pulp: Roughly 2% per year Mechanical pulp: About flat 23

24 Asia s BHK Consumption Will Trend Higher Million Tonnes Apparent Consumption Production Net Imports

25 Chinese Paper and Board Production: Packaging Trending Firmly Upward Million Tonnes, Four Major Grades of Paper Containerboard P&W and Newsprint Tissue Other Paper and Board

26 Chinese Pulp Consumption Will Shift More Toward Imports Million Tonnes, BHK and Mechanical Pulp Net Imports Production

27 Outlook for Chinese Nonwood Pulp Production Remains Uncertain Million Tonnes, Wood and Nonwood Pulp Nonwood Pulp Wood Pulp

28 Only Mechanical Pulp Is Likely to Post Strong Production Gains in China Papergrade Pulp Production (Million Tonnes) NON BHK MEC UKP BSK

29 Other Asia BHK Capacity Is Surging, Mostly Because of OKI BHK (Million Tonnes) in Asia ex. China and Japan Total Capacity Integrated Capacity Market Capacity

30 Brazilian BHK Capacity Is Accelerating Fibria, Eldorado BHK (Million Tonnes) in Brazil Total Capacity Market Capacity Integrated Capacity

31 Led by New Mills in Brazil, South America Will Gain More Share in BHK Shares of World BHK Shipments (1=100%) Latin America Europe Asia, Africa and Oceania North America

32 Key Takeaways A tsunami of BHK by the end of 2017, with a lot of risk of closure and downtime. BSK operating rates also likely to regress by end of year. Our forecast for the world economy and for the P&P industry is moderate, steady growth. The paper industry will grow by 1 2% per year over the next five years, with pulp demand roughly matching that growth. This would be a continuation of the unusual stability seen over the past five years. 32

33 Key Takeaways DP production will help fuel solid growth in wood chip demand in Asia. Expect even larger conversions from papergrade pulp to DP. China is projected to turn more toward imports for incremental paper grade pulp, with the exception of mechanical pulp Asia s production and net imports of wood pulp will post solid gains. By 2020, South America could account for two thirds of world BHK shipments. 33

34 Until next time, thanks and safe travels. For more information: World Pulp & Recovered Paper 5-Year and 15-Year Forecasts World Pulp Monthly 34