FIBER. June 20, 2012 KATHY KNEER, PRINCIPAL New York, NY

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1 FIBER June 20, 2012 KATHY KNEER, PRINCIPAL New York, NY GAA Environmental Workshop Washington, D.C. June 19-21, 2012

2 OVERVIEW OF FIBER DEMAND GAA Environmental Workshop

3 THE WORLD OF FIBER The global fiber market totalled some 375 million tons in Recovered fiber accounts for slightly over half the consumption. Papermaking Fiber 53% 47% Recovered Fiber Virgin Fiber 31% 69% Market Pulp Integrated Highgrades 10% ONP / OMG 22% OCC 49% Mixed 19% BHKP BSKP 52% 33% Other 15% GAA Environmental Workshop

4 2020 DEMAND OUTLOOK Demand for RCP will increase going forward: Most paper/board production increase is in emerging markets Many emerging markets, Asia, especially, have less available virgin fiber RCP share of total fiber will get close to 60% Total Fiber Demand million t/a RCP Share of Total Fiber Pulp RCP GAA Environmental Workshop

5 RECOVERED PAPER GLOBAL OVERVIEW North America and Western Europe are the main surplus areas, while China can currently source only about half of its needs from domestic collection. North America Western Europe Eastern Europe China Japan Latin America Africa Rest of Asia Oceania Collection Consumption Net exporter Net importer GAA Environmental Workshop

6 MAJOR TRADE FLOWS OF RECOVERED PAPER China is increasing imports of RCP from all regions, including US. Volumes from US to China have grown from 5 to 14 million tons between Year 2009, million tons Major Global Trade Flows GAA Environmental Workshop

7 LARGEST PAPER INDUSTRY RCP USERS GLOBALLY RCP Usage of Selected Paper Companies 2010E *Does not produce printing and writing grade papers. Million tons GAA Environmental Workshop

8 USE IN PAPERMAKING Today, approximately 200 million tons of paper are recovered for reuse in papermaking, corresponding to approximately 50% of global paper and board consumption. The recovery rate varies by region and by grade. Consumption also varies by region, and by grade. Paper and Board Consumption RCP Consumption by Paper Grades Million tons 390 Other Non-recoverable* 80 20% Tissue Newsprint Incineration & Landfill % Cartonboard Recovered % Containerboard *Tissue, cigarette, labels etc. GAA Environmental Workshop

9 FIBER DEMAND AND SUPPLY: CHALLENGES AHEAD GAA Environmental Workshop

10 CHALLENGES RCP supply Will there be enough? How will demand and recovery/consumption balance? Collection rates How much can they increase and where? Furnish substitution What will be the impact on demand for RCP? RCP prices and paying capability Graphic paper demand How much can prices increase? Who can afford to pay? How much can it decline? How does the decline impact availability of RCP and production of tissue and cartonboard? GAA Environmental Workshop

11 ALTERNATIVE PATHWAYS FOR FIBER MARKET World Fiber Demand VIRGIN FIBER Recovered paper supply constraints and price Sources of virgin fiber? New fiber platforms Million tons RECOVERED FIBER Supply constraints - Shortage? Competition for recovered paper Implications for market balances? Million tons Mature Markets* Mature Markets* Emerging Markets Emerging Markets * ) North America, W.Europe & Japan GAA Environmental Workshop

12 SO WHERE IS FIBER NEEDED? The growth of paper and paperboard production is expected to be highest in China and other Southeast Asia. Graphic paper production will decrease on a global basis. 000 mt 000 mt Mature markets* -0.5% China 3.7% Other regions 3.0% Mature markets* -2.4% China 2.4% Other regions 1.9% *Mature markets: North America, Western Europe and Japan Poyry Consulting GAA Environmental Workshop

13 IMPACT OF CHINA ON GLOBAL RCP MARKET RCP demand growth has been very rapid in China from 8 million tons in 1995 to over 65 million tons in This development is estimated to continue and the demand is projected to exceed 100 mt by RCP consumption in China RCP utilization in China in 2010 Forecast 65 million tons GAA Environmental Workshop

14 CHINA IMPORT SUPPLY OF RCP Imports of recovered paper have increased substantially driven by availability in specific countries and Chinese demand. This growth will slow over the next decade. Imports of recovered paper to China have grown rapidly over the last decade, coinciding with investment in collection systems and availability across Europe and North America. The key exporting countries remain the US, the UK and Japan. GAA Environmental Workshop

15 GRAPHIC PAPER DEMAND Graphic papers demand will behave very differently in mature vs. emerging markets, with slight overall decline forecast. Graphic paper is the only major paper/board category with forecast decline Driven by rapid decline in mature markets, especially in newsprint, but also in other grades Lower demand drives lower production: less available for collection Leads to need for fiber substitution in tissue and cartonboard grades, especially * ) Newsprint and Printing/Writing papers GAA Environmental Workshop

16 GRAPHIC PAPERS PROVIDE FIBER TO PACKAGING AND TISSUE Graphic Papers Fiber Production End Use Virgin RCP Not collected Recovered Graphic papers lose RCP to other grades and have to compensate for it with an additional inflow of virgin fiber 50 % Globally some 40million t/a Packaging and Tissue Fiber Production End Use Packaging and tissue are dependent on the fiber inflow from graphic papers, both in terms of volume and quality RCP Virgin Not collected Recovered 100 % GAA Environmental Workshop

17 FURNISH DEVELOPMENT IN NORTH AMERICA Furnishes of the selected grades are not expected to change much through GAA Environmental Workshop

18 FURNISH DEVELOPMENT COMPARISON North America s furnish development is much different from China s. Tissue 2020 Cartonboard 2020 Containerboard 2020 North America China Tissue 2020 Cartonboard 2020 Containerboard 2020 GAA Environmental Workshop

19 RECOVERED PAPER FLOW There are several paths from collection to consumption, some which include several handlers and intermediate steps. This can increase costs significantly. Landfill Office Household Trade Industry Printing Converting Corrugated Plants Source Waste management company Collector Collection Handling plant Trader Dealer Sorting Baling Shredding Trade End-users (Paper producer, board producer etc.) RCP Consumption GAA Environmental Workshop

20 Demand Demand Cost of collection INCREASING COLLECTION RATES HIGHER COLLECTION COSTS AND PRICES Since low-cost sources are already largely utilised, it is likely that the marginal cost of collection will go up in the future. This will drive prices higher. Today Price Tomorrow Price Retail Printing Industry Households Illustrative Collected Volume GAA Environmental Workshop

21 RCP COLLECTION ROUNDS AND QUALITY It is possible to recycle fiber numerous times, but in reality, due to collection rates and process losses, over 80% of the fiber is lost after two collection rounds. Furthermore, the quality of the fiber weakens significantly with each collection round. GAA Environmental Workshop

22 DECLINING RCP FIBER AVAILABILITY Changes in paper and board consumption structures could generate a vicious circle in RCP availability and consequently influence global fiber dynamics. Driver for Change DECLINE IN GRAPHIC DEMAND Electronic substitution coupled with cost reduction initiatives. PACKAGING GROWTH BUT IN DEVELOPING REGIONS Shift of industrial production and packaging from mature markets to Asia accelerates. Main Challenges Availability of ONP/OMG and HG RCP Price pressures Fiber inflow to tissue and packaging Availability of OCC Limitations regarding collection rates Quality limitations GAA Environmental Workshop

23 SUMMARY: KEY ISSUES IN RCP Growing demand and stagnating collection rates coupled with deteriorating quality and yields result in tighter supply/demand balance... impacting prices. Threat from energy use? Supply chain control? GAA Environmental Workshop

24 KATHY KNEER, PRINCIPAL Poyry Consulting GAA Environmental Workshop