Trends and Developments in the Chinese Pulp and Paper Industry International Forum on Investment and Finance in China s Forestry Sector September 22-23, 24, Beijing, China Ilkka Kuusisto Associate Principal Jaakko Pöyry Consulting, Shanghai
Agenda Paper and paperboard consumption Will the growth continue? Production and capacity additions Where will the production be located and who will operate it? Future fibre supply Is there enough fibre? Where will it come from? 2
Global Consulting and Engineering Group Client- and technology-oriented globally operating consulting and engineering firm Core operations based on three know-how clusters: 1. forest industry 2. energy, and 3. infrastructure & environment Global market leader in forest industry Strong international position 3
Paper and paperboard consumption Will the growth continue? Production and capacity additions Future fibre supply 4
Global Paper and Board Consumption Over the past 23 years, global paper and paperboard consumption has grown 3.% a year or a total of 165 million tons. 35 Million tons + 3.1 %/a Rest of World 3 + 3.4 %/a Non-Japan Asia 25 2 Japan 15 Europe 1 5 North America 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 5
Co-existence of Media Historically, electronic media has not threatened the growth of paper based communication in many cases the paper industry has benefited from it. 4 3 - Paper consumption, million t/a - Newsprint and pr/wr paper consumption in Western Europe Expansion of Internet/WWW CD-ROMs Laser Printers 4 3 2 1 Radio Cinema TV Mainframe Computers Colour TV Satellite TV Mini Computers Cable TV VCR Printing and writing papers Newsprint 195 1955 196 1965 197 1975 198 1985 199 1995 2 PCs 2 1 13TTS1 6
Innovations and Paper-based Packaging Paper remains a very competitive packaging material. New innovations and applications help maintain its position against other materials and systems. 2 - Consumption, million t/a - 15 Smart packaging Digital printing Non-impact printing Microflutes 1 5 Lightweighting Barrier technology Aseptic liquid packaging World consumption of packaging paper and board 195 1955 196 1965 197 1975 198 1985 199 1995 2 13TTS1 7
GDP Growth by Region and the rapid economic growth in Asia will underpin the growth in paper consumption. Japan Asia (excl. Japan and China) China 1997 1998 1999 2 21 22 23 24 25 26 27 1.6.8 2.8.4.2 2.5 4.2 1.8 1.9 1.8 1997 1998 1999 2 21 22 23 24 25 26 27.4 4.4 5.9 5.3 3.8 4.4 5.9 5.8 5.6 5.5 5.5 1997 1998 1999 2 21 22 23 24 25 26 27 8.8 7.8 7.1 8. 7.3 8. 9.1 8.3 7.7 7.6 7. 28 2.1 28 5.7 28 7.3 L-t trend 1.3 L-t trend 5.4 L-t trend 7.7 2 4 6 8 2 4 6 8 % change in GDP 2 4 6 8 1 Source: Consensus Forecasts and OECD 8
World Demand for Paper and Paperboard World demand for paper and paperboard continues to grow. With an average growth rate of 2.2 percents a year, it will reach 45 million tons by the year 215. 5 Million tons Forecast Rest of the World 4 Latin America Rest of Asia 3 China 2 Japan Eastern Europe 1 Western Europe North America 198 1985 199 1995 2 25 21 215 9
Growth of Paper and Paperboard Demand Most of the growth will take place in more volatile emerging markets. 5 4 3 Demand growth %/a Eastern Europe China Emerging Growth Markets Asia excl. Japan & China Latin America Africa 2 1 Oceania Western Europe Traditional Strongholds Average 2.2 %/a Japan North America 2 4 6 8 1 Share of consumption in 2 (325 million tons), % 1
Growth of Paper and Paperboard Demand Woodfree papers and tissue show highest growth rates, packaging boards account for substantial volume growth. 4 Demand growth %/a 3 Coated mechanical Uncoated woodfree Coated woodfree Tissue Corrugating materials Average 2.2%/a Cartonboards 2 Uncoated mechanical Newsprint 1 Sack paper Other grades 2 4 6 8 1 Share of consumption in 2, % 11
Paper and paperboard consumption Production and capacity additions Where will the production be located and who will operate it? Future fibre supply 12
Consolidation and Globalization Search for markets, assets and competitive advantage drive consolidation and globalization Market growth Trade policy & legislation Resource availability Search for improved efficiency Search for new markets & growth Search for strategic assets & capabilities Globalization of customers Regional cost advantages Competitive pressure 13
Leading Global Paper and Paperboard Producers Truly global companies are yet to emerge but many companies have by now established Asian presence. Stora Enso International Paper UPM Oji Georgia-Pacific Weyerhaeuser Nippon Unipac Holding Smurfit-Stone Container Abitibi-Consolidated Regional Capacity Distribution, 24/IIQ SCA M-real Asia Pulp & Paper Norske Skog MeadWestvaco Mondi North America Western Europe Eastern Europe Latin America Asia Other 2 4 6 8 1 12 14 16 18 - Capacity, 1 t/a - 14
Paper Industry Concentration 1997 vs. 22 The pulp and paper industry is still relatively fragmented with top five firms controlling only 2-4% of regional capacity. 6 Combined capacity share of top five firms (%) 1997 22 4 2 North America Western Europe Asia Latin America World 15
Industry-level Benefits of Consolidation Consolidation helps to bring price stability. Price volatility vs. industry concentration 16 14 12 1 - Standard deviation, % - Global price, regional concentration for pulp BHKP Testliner BSKP 8 Uncoated woodfree Kraftliner 6 4 2 Newsprint LWC SC 2 4 6 8 1 - Concentration of Top 5, % - 16
Changes in Investment Conduct The past 1 years has been a decade of acquisitions. 25 % - Investment spend, % of sales - 2 % 15 % 12.3% 1 % 2.4% 2.7% 1.8% 1.5% 5 % 11.2% 7.% 6.9% % Total inv. Acq. New lines capex Other Total inv. Acq. 1991-1995 1996-2 New lines capex Other. 17
Acquisition and Investment Activity Consolidation has mainly taken place in developed, slow growing, mature markets. Asian companies are still growing through new investments. North America, Europe and Japan China and Rest of Asia Acquisitions Acquisitions 55 % Fixed Investments 45 % 1 % 9 % Fixed Investments Source: JP Research 18
Global Capacity Growth Non-Japan Asia s share of global capacity investments has grown significantly 1 % Asia 8 Rest of World Japan China 6 4 Europe 2 North America 197s 198s 199s 21-26 Source: JP Research 19
Capacity Expansion Projects in China Over the next five years, China will lead the world in capacity growth. Company Capacity 1 t/a Grade Location Time APP Ningxing Zhonghua 7 Duplex board Zhejiang 24 APP Hainan Jinhai Pulp 1 Bl hardwood pulp Hainan 25 APP Gold East Paper 7 Coated woodfree Jiangsu 25/26 APRIL 4 Uncoated woodfree Guangdong 26/27 APRIL 1 Bl hardwood pulp Shandong n.a. Daewoo Paper 3 Coated woodfree Heilongjiang 26 Dongguang Jia Hui (Sun) 3 Duplex board Guangdong June 24 Dongguang Jia Hui (Sun) 3 Duplex board Guangdong August 25 Foshan Huafeng 3 Duplex board Guangdong 25 Hebei Pan Asia Long-Teng 33 Newsprint Hebei 25 Jiangxi Chenming Paper 4 LWC Jiangxi 24 Lee & Man Paper Mfg. 25 Unbl testliner Jiangsu 24 Lee & Man Paper Mfg. 35 Recycled medium Jiangsu September 24 Lee & Man Paper Mfg. 4 Testliner/medium Guangdong 25 Nine Dragons 25 Recycled medium Guangdong August 24 Nine Dragons 25 Recycled medium Guangdong August 24 Nine Dragons 3 Unbl testliner Guangdong 25 Ningxia Meili Paper Industry 3 Folding boxboard/duplex Ningxia 25 Oji Paper 4 Coated woodfree Jiangsu 26 Shandong Cheming 4 Folding boxboard Shandong 25 Shandong Cheming Qihe 3 Recycled medium Shandong n.a. Shandong Huatai 45 Newsprint/LWC Shandong 25 Shandong Jin Feng Yuan 45 Duplex board Shanghai/Fengxian n.a. Shanghai Zhonglong Paper 3 Testliner/medium Shanghai/Pudong 24 StoraEnso Suzhou Paper 45 Coated woodfree Jiangsu n.a. UPM-Kymmene 45 Uncoated woodfree Jiangsu 25 Wuhan Chenming 3 Cartonboard Hubei n.a. Wuxi Long Chen Paper 4 Testliner/medium Jiangsu 27 Yuen Foong Yu Paper 5 Testliner/medium Jiangsu 26 Yuen Foong Yu Paper 5 Testliner/medium n.a. n.a. Yueyang Paper 3 Folding boxboard Hunan n.a. Zhanjiang Wood Pulp Mill 7 Bl hardwood pulp Guangdong n.a. TOTAL ABOVE 1373 2
Paper and paperboard consumption Production and capacity additions Future fibre supply Is there enough fibre? Where will it come from? 21
Global Consumption of Papermaking Fibre World consumption of papermaking fibre is forecast to grow from 35 million tons in 23 to 46 million tons by the year 215, or 2.3%/a on average. 5 Million tons Forecast 4 3 Recovered paper 2 Non-wood pulps Sulphite pulps UKP BHKP 1 BSKP Mechanical/semichemical 197 1975 198 1985 199 1995 2 25 21 215 22
Average Papermaking Fibre Furnish in the World Wood pulp is still the most important papermaking raw material, but recovered paper continuously increases its share of the total today about 48% of the total 1% 9% 8% 7% 6% 5% Percent Recovered paper Non-wood pulps Sulphite pulps UKP Forecast 4% 3% 2% 1% BHKP BSKP Mechanical/semichemical % 197 1975 198 1985 199 1995 2 25 21 215 23
Recovered Paper Collection and Consumption 23 North America is the great provider of recovered paper for Asia. Million tons 5 45 58% 5% 6.9 4.1 9.3 2. 2.7 4 35 3 4%.7.4 1.5 25 2 15 1 65% Recovery rate Consumption Collection 5 Western Europe North America Non-Japan Asia Japan
New Capacity in China 11 million tons of new papermaking capacity came on stream in China during the past three years. To keep these machines running requires nearly 8 million tons of recycled fibre as well as virgin wood pulp. 12 Million tons 1 8 6 4 2 Containerboard Cartonboard Printing and writing Newsprint Pulp & fillers Mixed OCC ONP 22 23 24 RCF required 25
Recovered Paper Imports into Mainland China Large part of the increase in consumption has come from imports. 14 Million tons 12 1 White Mix 8 ONP 6 4 2 OCC '95 '96 '97 '98 '99 ' '1 '2 '3 '4 Note: 24 estimated based on Jan-Jul statistics 26
Recovered Paper Imports into Mainland China USA, Europe and Japan are the largest import sources, but they have just about reached their limits. Other countries cannot export more, either. 14 Million tons 12 1 Japan Others Korea Canada Australia Hong Kong 8 Europe 6 4 2 USA '95 '96 '97 '98 '99 ' '1 '2 '3 '4 Note: 24 estimated based on Jan-Jul statistics 27
Paper Recycling Water Wheel Continuous additions of fibre are needed to offset losses. Virgin Wood Pulp Minerals and Additives Process Losses (deinking) Production of Paper Paper Trade Used for Paper Production Consumption of Paper Trade in Paper Products Recovered Paper Trade Collection of Paper Other Uses of Old Paper Not Collected (tissue, library books, burned, etc.) 28
Paper and Paperboard Collection Cycle Fibre quality decreases over time until it disappears in the recycling process. 12 1 8 6 4 - Volume of raw material - Collection 45%/Round 2 Days Collection 5%/Round 2 Days Collection 6%/Round 2 Days Collection 6%/Round 3 Days Without virgin fibre injection, paper & paperboard industry would run out of raw material within 6 months. 2 2 4 6 8 1 12 14 16 18 2 22 24 Days CALCMOD2/ILE 29
Growing Stock of Forests There is plenty of wood in the World. It is just not all in the right places. China must secure a reliable and sustainable source of wood for its industry. 22.6 63.7 -billion m 3-16.9 6.8 13. 7.5 12.7 9.5 1.8 1.1 4.9 4.9 17.4 37.1 55.1 3.8 2..5 Total 38 billion m 3 Softwood 126 billion m 3 Hardwood 254 billion m 3.9 7.9 3
Conclusions The global demand for paper and paperboard continues to grow The industry growth is shifting outside traditional supply areas, especially to Asia and increasingly to China The industry remains fragmented, especially in Asia Acquisitions have become an important driver of corporate growth, but capacity growth continues in China Recycled fibre will soon constitute over 5% of global paper industry s fibre raw materials Traditional supply sources cannot continuously increase their exports of recovered paper Domestic collection must be developed and improved to meet a growing part of the fibre mix Non wood pulp must be developed into a viable alternative World has enough wood to meet the growing demand but it is not all located in the right places. China will have to develop sustainable source of wood to help meet its growing demand for fibre. 31