Outlook for the World Paper Grade Pulp Market European Conference March 2016 Kurt Schaefer Vice President, Fiber
The BSK BHK Price Spread in China Reversed in 2015 1,000 900 800 700 Price Gap (RIGHT) China BEK Net China NBSK Net 500 450 400 350 600 300 500 250 400 200 300 150 200 100 100 50 0 0 100 50 20 000 20 001 20 002 20 003 20 004 20 005 20 006 20 007 20 008 20 009 20 010 20 011 20 012 20 013 20 014 20 015 20 016 Source: RISI 2
BHK Prices in China Have Dropped Sharply in Recent Months 900 850 800 BEK Net Price China NBHK SpotPriceUS BEK Spot Price Europe 750 700 650 600 550 500 10 11 12 13 14 15 16 3
We Had Been Expecting a Drop in BEK Prices in 2H15, and It (Finally) Happened Supply side issues at BHK mills in 2015 helped sustain prices at higher than expected levels Asia Symbol (RGE/APRIL) Rizhao mill: Was down due to drought in Shandong Province, China (Summer 2015) Cenibra (Brazil): Was down in part of November due to a dam break Reduced operating rates at two other mills (in Indonesia and Brazil) due to drought All issues were resolved by the end of 2015 4
BHK Delivered Cash Cost Curve to Shanghai, Fourth Quarter 2015 5
In China, the DP BEK Price Spread Has Moved Up to Almost $300 3,000 2,500 2,000 China Import Price DP China Import Price BEK 3,000 DP/BEK Price Spread 2,500 200 2,000 1,500 1,500 1,000 1,000 500 0 500 0 08 09 10 11 12 13 14 15 08 09 10 11 12 13 14 15 6
BSK: US Spot Prices Are Down by Almost $250/Tonne Since Early 2014 1,000 950 900 850 800 750 700 650 600 550 500 Net Price China Spot Price US Spot Price Europe 10 11 12 13 14 15 16 7
BSK: Downward Pricing Pressure Was Unexpectedly Persistent US P&W demand and shipments in 2015 falling about 2x expectations. 2.2% drop expected, 4.8% actual Pi Prices flat to down rather than rising ii Mechanical paper demand in the USA was down by about 11%, rather than the expected 3%, coming into the year. Demand for mechanical P&W paper in the USA is falling by more than newsprint demand. 8
BSK Delivered Cash Cost Curve to Shanghai, Fourth Quarter 2015 9
Cost Curve Comparisons: BHK (Left), BSK (Right) 10
Near Term Indicators: BHK Producer Inventories Are Above Average 65 BHK 60 AVG BHK (37.7) 55 BSK AVG BSK (28.8) 50 45 40 35 30 25 20 15 Source: PPPC, RISI 04 05 06 07 08 09 10 11 12 13 14 15 16 11
The High Season for Woodfree Paper Demand in W. Europe Is Almost Here Seasonal adjustment factors for W. European P&W 1.15 Stronger than Normal Demand 1.10 105 1.05 1.00 0.95 0.90 0.85 Mechanical Papers Woodfree Papers Weaker than Normal Demand 0.80 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. 12
2016 Forecast Drivers 13
FX: Strong Dollar Continues in 2016 $1.60 $1.40 $1.20 EUR/USD CAD/USD BRL/USD $1.00 $0.80 $0.60 $0.40 $0.20 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 14
World Production of Paper and Board: Accelerating Slowly Graphic, Packaging and Specialty and Tissue; Percent tchange 8% 6% 5.7% 6.6% 4% 2% 0% 3.7% 3.3% 27% 2.7% 2.1% 4.0% 3.0% 1.0% 0.2% 0.8% 1.0% 0.3% 1.2% 2% 2.0% 0.6% 4% 6% 5.4% 2000 2002 2004 2006 2008 2010 2012 2014 2016 15
Most of the Growth in the Industry Is in Packaging Modest Effect on Market Pulp 300 250 200 150 100 50 0 200 00 200 02 Packaging/Specialty P&W Tissue News 200 04 200 06 200 08 201 10 201 12 201 14 201 16 180 160 140 120 100 80 60 40 20 0 2000 2002 2004 2006 2008 2010 Tissue + P&W 2012 2014 2016 16
World Production of P&W Paper: Relative Stability in 2016? % Chang ge from Pre evious Year 5% 3% 1% 1% 3% 5% 7% % 3.4% 2.0% 0.0% 0.5% 1.4% 1.3% 1.4% 1.6% 1.5% 1.4% 1.6% 2.1% 21% 2.6% 3.0% 2.9% 4.1% 4.6% 46% 5.1% 5.7% 5.3% Euro Area United States China World 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 17
P&W Consumption per Capita: Japan and South Korea Have Peaked. Has China? Per Capita GDP vs. P&W Consumption: 1970 to 2014 140 120 100 80 60 kg/person Japan South Korea China 40 20 0 Per capita real GDP, US$ 0 5000 10000 15000 20000 25000 30000 35000 18 18
In China, P&W Production Is Leveling Off, While Tissue Continues to Grow 30 Tonnes per Year 25 20 15 P&W Tissue Million 10 5 0 1990 1995 2000 2005 2010 2015 19
In China, Pulp Imports Posted Double Digit Percentage Changes in 2015 800 BSK Imports 900 BHK Imports 700 800 600 700 500 400 600 500 400 300 300 200 200 100 100 0 0 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/061/071/081/091/101/111/121/131/141/15 20
What Are the Sources of China s Incremental Pulp Demand? Tissue production is rising ii by about 7% or 600,000000 tpy Predominantly based on virgin fiber Policy closures of backward pulp and paper capacity favors BHK consumption growth (at the expense of local fiber, including nonwood) Rising demand for higher quality paper also raises BHK demand Continuing move toward more BHK, less BSK, as new paper machines are installed BSK demand for absorbent applications is growing Conclusion: Net importsof of BHKintoChina willcontinue to show solid growth 21
Key BHK Capacity Developments 2015 Old Town closures, 4Q15: Approximately 180,000 tonnes BHK/BSK 2016 Sun Paper Yanzhou switch to BHK Klabin Ortigueira, March: 1.1 million tonnes APP OKI, 4Q16/1Q17: 2.0 2.8million tonnes Alizay (France) restart postponed indefinitely 2017 Fibria, 4Q17: 1.85 million tonnes Vietracimex: 400,000 tonnes (Former Tofte mill) 22
Key BSK Capacity Developments 2016 Klabin Ortigueira, March: 400,000 tonnes fluff/sbsk IP Riegelwood, 2Q16: 360,000000 tonnes fluff/sbsk Domtar Ashdown, 3Q16: >300,000 tonnes fluff/sbsk Sodra Varo, 4Q16: 275,000 tonnes Svetlogorksy BSK/BHK/DP, 2H2016: 400,000 tonnes 2017 Metsa Fibre, 3Q17 4Q17: 700,000 tonnes 23
2016 Forecast Summary Continuing strong dollar, with upside risk in terms of dollar strength outperforming the US economy Modest acceleration in growth of paper and board demand, d mostly because of packaging Supply side changes remain more prominent than usual For BHK, prices in China are already approaching delivered cash costs of Chinese pulp mills, which usually triggers a surge in demand and contraction of supply For BSK, second half of 2016 looks weak in terms of operating rates, especially for SBSK/fluff; but there is capacity rationalization risk, which is an upside risk for operating rates 24
2017 Forecast Summary Continuing ramp up of APP mill, plus Vietracimex and Fibria by the end of the year Modest acceleration in growth of paper and board demand, mostly b/c of packaging, and in pulp demand Very weak operating rates for BHK Weak environment for BSK as well, depending on potential capacity rationalization in the US 25
Thank you for your attention For more information: World Pulp & Recovered Paper 5 Year and 15 Year Forecasts www.risi.com/forecasts World Pulp Monthly www.risi.com/wpm 26