Structural Changes in the Bio-Products Sector: An Investment Perspective

Transcription

1 Structural Changes in the Bio-Products Sector: An Investment Perspective. Don Roberts CEO, Nawitka Capital Advisors Ltd. November 27, 2017 New Value of Bioeconomy Seminar Pellervo Economic Research PTT Helsinki, Finland..

2 Situation Analysis The global bio-products sector is vertically integrated, and comprised of multiple industries and market segments. It is undergoing transformational change related to a series of demographic, technological, societal and environmental shocks. ü Within the paper industry, communication papers are in secular decline, while packaging & tissue papers are continuing to grow These shocks are affecting both the demand and supply-side of the market, and creating winners and losers amongst traditional players. How is Finland positioned to deal with this disruption? 1

3 Outsiders View of Finland National Innovation Report Card Grade A Grade B Grade C Grade D Finland U.S.A. Canada Ireland Denmark Switzerland Germany Sweden Netherlands Japan Austria Norway Australia Belgium U.K. France Overall, how innovative is Finland perceived to be by outsiders? According to the Conference Board of Canada (2015), Finland is one of only 3 countries to receive a Grade A in terms of national innovation the top rank. According to Nawitka Capital (2017), the continental leaders in the forest products industry regarding bio-products innovation are: UPM-Kymmene in Europe Fibria in Latin America Georgia Pacific in North America Oji Paper in Asia 2

4 Finland s Response? Nine major new and pending projects related to Bio-Products in Finland Investor Location Year Product/ Investment type Metsa- Fibre UPM- Kymmene Stora- Enso Boreal Bioref KaiCell Fibers Aanekoski NBSK & NBHK pulp - Micro Fibrillated Cellulose (MFC)] Kouvola Pietarsaari Imatra Uimaharju NBSK/NBHK pulp NBSK/NBHK pulp MFC Dissolving pulp Kemijarvi NBSK & dissolving pulp - Micro Crystalline Cellulose Paltamo Biorefinery with NBSK & intermediate for viscose FinnPulp Kuopio NBSK pulp Kaidi Kemi Biodiesel & bio- gasoline NEB Kajaani Bioethanol SEB Kouvola Bioethanol In addition to pulp, this includes bio-materials (eg., MFC, MCC, intermediate for viscose) and biofuels. Metsa s EUR 1.2B bioproduct mill is the largest investment in the history of Finland s forest products industry If all the planned product is exported, it would likely boost Finland s bio-products trade by more than 2 billion euros/year. 3 Source: Prof. Olli Dahl

5 Three Fundamental Questions This keynote presentation explores three fundamental questions facing the Bio-Products sector. 1) Are key transformational technologies strengthening or weakening the traditional competitive advantage of countries like Finland & Canada? 2) Is renewable energy a meaningful opportunity for the bioproducts industry or a potential threat? 3) Given demographic changes and low fossil fuel prices, can governments afford to financially support the production of clean bio-products? 4

6 Question #1 Are key transformational technologies strengthening or weakening the traditional competitive advantage of countries like Finland? Fiber strength resulting from slow growing trees has historically been a key competitive advantage of both the pulp and solidwood industries in northern countries. 5

7 Value of Long vs Short Fiber: Recent Data Point Ø Consider an interesting data point generated in September A subsidiary of Asia Pulp & Paper paid a very high premium for El Dorado s pulp mill and expansion option in Brazil Reflected a particularly bullish view from Asia. Paid $2,810/tonne of pulp capacity ü ~70% premium over average Brazilian peers (Fibria, Suzano) ü > 500% premium over the NBSK producer Canfor Pulp Interesting perspective on the future demand for pulp, and relative attractiveness of southern hardwood and northern softwood pulp. Ø Does this suggest that northern countries like Canada and Finland have a bad case of pulp chauvinism? 6

8 Next- Generation Genomics Ø Cost of DNA sequencing is falling even faster than that suggested by Moore s Law from ~$100 million per genome in 2000 to ~$1,000 in 2017 Ø It is not if this dramatic cost reduction in DNA sequencing will have a meaningful impact on the bio-products value chain, it is how & when. 7

9 Next- Generation Genomics Ø A technological fix can increasingly be used to enhance the natural attributes of biomass. Ø For example, Brazilian forest companies have already enhanced genetics to produce energy oriented eucalyptus clones: Have high lignin content/calorific value superior for generating energy, but cannot be used to produce pulp Forest yield ~60-80 m3/ha/year (vs ~35-50 for pulp oriented clones) Harvest in 2-3 years (vs 7 years for pulp) Ø Can the Brazilians also produce fast growing trees that can be processed into stronger pulp? Likely. 8

10 Biomaterials/Biochemicals Wood is roughly 1/3 cellulose, 1/3 hemicellulose, and 1/3 lignin. Focus on fractionating the biomass - extracting, separating and processing each of the three components. For example: Aside from being used to produce paper, cellulose can be used to produce intermediates for things like films (eg., cellophane), and a range of pharmaceutical applications. Use hemicellulose to produce xylose an input into the sweetener market. Use lignin to replace phenols in the wood adhesives market, or processed into a substitute for carbon fibre composites. 9

11 Biomaterials/Biochemicals Nanocellulose is nano-sized cellulose fibrils (eg. Micro-fibrillated cellulose, Nano Crystalline Cellulose). Nanocellulose can enhance the performance of paper in terms of, strength, stiffness, printability. If we want to produce Nanocellulose at scale, we don t have to constrain ourselves to the paper industry. ü Schlumberger is finding the application of NCC and Cellulose Filaments show positive results in the oil and gas industry, with respect to cement well casing, drilling fluid and enhanced oil recovery. The greatest financial returns will likely be applications outside the paper industry. (eg., Personal & Health Care, Electronics) 10

12 Solidwood The solidwood industry has historically been the cornerstone of a competitive forest sector in Scandinavia and Canada. It s use in the construction industry generates a high value per m3 of roundwood, and helps pay for removing lower quality biomass from the forest. 11

13 Structural Wood Products Opening up New Markets Cross Laminated Timber is an engineered mass timber product that utilizes smaller dimension lumber (2x4, 2x6, 2x8, etc.) to create large, lightweight, made-to-order panels. CLT was first developed and used in Austria in the early 1990s Glue Laminated Timber or Glulam is a product similar to CLT and is an established product in the North American market. Like CLT it is made by laminating smaller dimension lumber together, but in one direction as opposed to alternating each layer. CLT Glulam CLT panel. Photo Courtesy of Structurlam Products, Ltd. Glulam beam. Photo courtesy of BMC West. 12

14 UBC s Brock Commons, Vancouver 18- storey student residence, primarily made of wood (CLT) Mid & High rise buildings open up a whole new market for wood. Constructed in 9 ½ weeks. 13 Source: Naturally Wood

15 UBC s Brock Commons H=53.5m the tallest woodbased building in the world. Hybrid structure Two-way point-supported CLT floor system Gravity loads taken by glulam and PSL columns Lateral system consists of floor panels and 2 concrete cores 14

16 UBC s Brock Commons: Environmental Footprint 15 Source: Naturally Wood

17 CLT is already in Scandinavia The Treet Building in Bergen, Norway 14- storeys 51m the world s second tallest contemporary wood building Stora Enso is a champion of CLT in Europe, and the largest producer. 16

18 CLT Wind Turbines, Germany H= 100 m with a ladder and lift system Turbine rotor diameter of 77 m weighs 100 tons 1,500 kw of electricity 17

19 Implications of New Markets for Structural Wood Products? The good news? Potentially opening up the mid & high-rise market for wood, with the associated economic and environmental benefits The bad news? Given the newer panel technologies, we do not necessarily need slow growing wood for structural applications (eg., Eucalyptus is also good for CLT).. 18

20 3D Printing 3D Printing has been called the source of the next industrial revolution. It allows for mass customization. It is a manufacturing process that builds layers to create a three -dimensional solid object from a digital model on a computer. A range of alternative materials are being assessed for building with 3D printers including woody biomass. China and the Netherlands are the global leaders in exploring this application. ü Winsun, a Chinese construction company, has already built flats using 3D printing. 19

21 3D Printing a House Using a 3D printer in 2016 Apis Cor built this 400 ft2 structure for ~$10,000. The walls, partitions and building envelope were all printed. The team sprayed a polyurethanebased mixture for insulation, then installed the house's windows and finishes, like countertops and cabinets, and painted it bright yellow. The workers and the 3D printer finished everything in about 24 hours. 20

22 Finished 3D Printed House All the walls, decorative elements and tower were printed off-site, and then assembled like a Lego kit It is estimated that the use of 3D printing technology reduces the construction time by 8 to 12 times, which in turn increases efficiency and reduces production costs. 21

23 Why 3D Printing for Construction? Ø Labor productivity in the Construction sector has been declining. Ø Construction is the last remaining manufacturing sector to not be automated. There is a large economic incentive to change the way we build and 3D Printing will become one option. Non-farm productivity index Construction Productivity index

24 Implications of 3D Printed Structures? The good news? Potential dramatic increase in labor productivity and reduced time for construction and waste. Improved value proposition for wood in construction IF biomass is the preferred substrate. The bad news? Most of the substrate used for 3D printing is Polymers (petrochemical plastics), metal alloys and modified cement. Biomaterials are currently less than 1% of the market. 23

25 Answer to Question #1? Are key transformational technologies strengthening or weakening the traditional competitive advantage of slow growing temperate forests? It depends on the specific technology, but on balance they are likely to decrease the traditional advantage of strong-northern fibers Especially true with respect to ü Next Generation Genomics ü Tall-timber building ü 3D Printing Less clear with respect to Biomaterials/Biochemicals, whose applications may depend more on close co-operation & proximity to major customers. 24

26 Question #2 Is renewable energy a meaningful opportunity for the bio-products industry or a potential threat? 25

27 Isn t Bio- Energy Unique? Bio-energy is unique in that it: Creates base-load power which is dispatchable Generates relatively high employment compared to other sources of renewable power. ü ~5.5 permanent jobs per MW of capacity versus 0.7/MW for wind power and 0.2 for solar power. Can be converted into liquid fuels. 26

28 Trend in Bio- Energy Investment Global Investment in Bio-energy ($US Billion), Ø After peaking at over $US 50 billion in 2007, annual global investment in bioenergy has trended down to ~$US 9 billion in Ø An aggregate decline of ~80% over the last ten years, and the fall was even greater for liquid biofuels than power projects. 27

29 Global Investments in Bio- Power Ø Investment down significantly from the recent peak in 2011 due to: ü Low fossil fuel prices (natural gas & coal); ü Uncertainty over feedstock supply & future price; ü Falling prices of solar & wind energy; and, ü Government efforts to rein in subsidies on renewable power. Ø A few large coal-to-biomass conversions in Europe and Asia are still being financed. Stand-alone plants are very challenging to finance. Ø Smaller CHP plants are still being funded especially where power prices are relatively high. Ø Some growth in wood pellet demand from Europe and Asia, but forecasts have been revised downward. Ø From a purely financial perspective, most bio-power investments are not attractive.. 28

30 This is a snap shot as of H2/2016, but what is the trend over time? Benchmark Levelized Cost of Electricity: H ($/MWh) Marine - wave Marine - tidal STEG - LFR STEG - parabolic trough w/ storage Nuclear (AMER) STEG - tower & heliostat w/storage Wind - offshore Nuclear (EMEA) Biomass - anaerobic digestion Biomass - incineration PV - c-si tracking Biomass - gasification PV - thin film PV - c-si Natural gas CCGT (EMEA) CHP (AMER) Coal fired (EMEA) Municipal solid waste Geothermal - binary plant Natural gas CCGT (APAC) CHP (EMEA) Wind - onshore Natural gas CCGT (AMER) Small hydro Large hydro Coal fired (AMER) Coal fired (APAC) Geothermal - flash plant Landfill gas Source: Bloomberg New Energy Finance, There is a large variation in the cost of producing electricity across the sources of electricity. (Also large variation within technologies) Bio-power is not the lowest cost source of electricity.

31 Wind and Solar Experience Curves SOLAR PV MODULE COST ($/W) ONSHORE WIND LEVELISED COST* ($/MWH) SOLAR COSTS HAVE FALLEN >99% SINCE % since , WIND COSTS HAVE y = 3,582.42x R² = FALLEN % SINCE Learning rate = 19% 0.1 Learning rate 24.3% ,000 10, ,000 1,000,000 Cumulative capacity (MW) ,000 10, ,000 1,000,000 Source: Bloomberg New Energy Finance, Maycock Source: Bloomberg New Energy Finance Dramatic cost reductions for solar and wind continue to be driven by technological improvements and scaling of the supply chain..largely due to the delivered cost of biomass, the cost of biopower has remained relatively flat over time.

32 Unsubsidised Clean Energy World Records Set in 2016/17 Solar PV Onshore wind Offshore wind Country: Bidder: Signed: Construction: Price: Mexico FRV September US$ 2.69 c/kwh Country: Bidder: Signed: Construction: Price: Morocco Enel Green Power January US$ 3.0 c/kwh Country: Bidder: Signed: Construction: Merchant Price: Germany DONG/EnBW April US$ 4.9 c/kwh Note: The offshore wind merchant price is estimated based on project LCOE in real 2016 terms Source: Bloomberg New Energy Finance; ImagesSiemens; Wikimedia Commons By comparison, what is the typical cost of stand alone biopower plants? ~ US$ 10 c/kwh?

33 Lithium- ion Battery Experience Curve ($/kwh) and Cumulative Capacity E (GWh) Lithium- ion Battery Price Forecast. Source: Bloomberg New Energy Finance Cost of power storage fell by more than 70% from , and is expected to drop by another 75% by Lower costs of storage are improving the value proposition for intermittent sources of power like wind & solar PV vs biomass 32

34 Global Investment in Biofuels, by Technology Q Q ($m) GLOBAL INVESTMENT IN FIRST- GENERATION BIOFUELS, 35,000 30,000 3,000 GLOBAL INVESTMENT IN NEXT- GENERATION BIOFUELS, 25,000 2,500 20,000 2,000 15,000 1,500 10,000 1,000 5, Investors are switching from First-Generation to Next-Generation Biofuels. Large concern over ethanol s blend wall constraint and food vs fuel debate. Almost $9 billion has been invested globally in developing Next Generation biofuels over the past five years. The industry is emerging beyond the initial stage. Ø There are 12 small-scale next-generation commercial plants currently in operation

35 US Oil Production and Rig Efficiency New-well Production per Rig (bbl/day) US Monthly Oil Production (mbbl) Up 1,300% Up 83% Source: EIA BUT - The technological revolution in fossil fuel extraction is still under appreciated. It started in N. America, but has yet to be meaningfully deployed around the world. True for oil..

36 US Gas Production and Rig Efficiency New-well production per rig ( 000 cf/day) 4,000 US monthly natural gas production (bcf) 3,000 3,500 3,000 2, Up 388% 2,500 2,000 2,000 1,500 1, ,500 1, Up 35% Source: EIA...also true for natural gas Don t bet that high fossil fuel prices will be what makes biobased fuels & chemicals more cost competitive

37 Answer to Question #2 Is renewable energy a meaningful opportunity for the bio-products industry or a potential threat? Combined Heat & Power (CHP) applications integrated into bio-refineries continue to offer a compelling value proposition. Although there are local exceptions, bio-power is already generally less competitive than other forms of renewable power (eg., hydro, solar, wind). With improving battery storage technology, even liquid biofuels will be threatened in the long-term. 36

38 Question #3 Given demographic changes and low fossil fuel prices, can governments afford to financially support the production of clean bio-products? 37

39 Is Carbon Pricing Enough? Fundamental problem is that there is a disconnect between the private and public value of bioenergy. Without some form of gov t intervention, we expect very few bioenergy projects to be financially viable. Carbon pricing? right idea, but are levels high enough in most countries to actually change behavior? No. Ø In 2016, the three highest national carbon prices in the world were $131 in Sweden, $86 in Switzerland and $65 in Finland. Ø.but only ~$25 in France, ~$23 in B.C., $13 in California, $8 in China (Beijing Pilot), and $5 in EU ETS 38

40 Options for Governments? Many countries still do not price carbon, and ~3/4 of the carbon emissions subject to carbon pricing in 2016 were priced below $10. UK Government estimates the Social Cost of Carbon to be in the range of $41-$124, with a central estimate of $83. If carbon pricing remains well below the Social Cost of Carbon, what are the best options? Most governments are under fiscal pressure, and the problem is likely to grow. Rising cost of pensions, health care, etc. The affordability of subsidies for the bio-economy will be a challenge. Smart Regulations may be one option (eg., California s Low Carbon Fuel Standard) 39

41 Focus on Fuel Standards Renewable and Low Carbon Fuel Standards can play an important role in stimulating investment in advanced biofuels Fuel Standards can be viewed as a Compliance Tool as opposed to an Incentive Tool. Anecdotal evidence suggests the former are more stable than the latter, and thus tend to be more effective in driving investment due to lower regulatory risk over time. Globally, the U.S. s Renewable Fuel Standard 2 and California s Low Carbon Fuel Standard are likely the most important and effective Fuel Standards. 40

42 U.S. Experience 40,000 35,000 RFS2 Blending Mandates (millions of gallons) 30,000 25,000 20,000 15,000 10,000 5, Corn Ethanol Biodiesel Advanced Cellulosic RFS2 established mandates on the oil refining sector to integrate up to 36 billion gallons of specific types of renewable fuels by A plant-by-plant review suggests that over 80% of the global capacity in cellulosic biofuels has been built in response to the RFS2 including those plants in Canada and Brazil. California has implemented a similar (but better) Low Carbon Fuel Standard, which focuses on decreasing the Carbon Intensity of fuel in the State. 41

43 Value of the RFS2 and California LCFS to Investors: Case Study of a Bio-Crude Oil Plant ($US) Given a $47/barrel market price of oil, prevailing C-RIN/ LCFS Credit prices & an estimated Carbon Intensity of ~0.20 gco2/mj, qualifying under the California/RFS2 regimes add an additional $153/barrel in value total comes to $200/barrel. ü ü ü ü Fuel Value = $47 barrel; RFS2 = $122/barrel; California LCFS = $26/barrel; California Cap & Trade Credit = $5/barrel The capital cost of a 75 million liter bio-crude plant is ~US$120 million, with an operating cost of ~$42/barrel cash flow positive, but not profitable without a subsidy. ü BUT, it generates ~$80 million/year in regulatory savings (to be shared between the bio-crude oil plant & oil refiner). ü Significant incentive to produce bio-crude oil..and it doesn t cost the public treasury. 42

44 Answer to Question #3 Given demographic changes and low fossil fuel prices, can governments financially support the production of clean bioproducts without over burdening the public treasury? It will be difficult. Production subsidies and tax breaks can be a very significant tax burden. Meaningful carbon taxes are the best bet, but ü Generally too low to change behavior (but not in Finland) ü A competitive disadvantage for industry if not applied in other countries. Targeted capital subsidies for R&D through to first commercial plants can make sense. Gov t procurement also has a role, especially to establish an early market for emerging products. Explore Smart regulations which set Carbon Intensity targets, are technology neutral, and create a credit market involving obligated parties so governments don t have to pay. 43

45 Why should we be embracing the Bio- Economy? Climate-related flood risk at Mar-a-Lago Club, Miami, Florida: (i.e., President Trump s Winter White House ) Note: Blue areas indicate risk of flooding in Source: Coastal Risk Consulting Mapbox, OpenStreetMap Graphic: Jan Diehm/The Guardian Don t you want to save Donald s golf course from flooding? 44

46 . APPENDIX: U.S. INCENTIVES FOR LIQUID BIOFUEL 45

47 U.S. Renewable Fuel Standard: RIN Credit and Pricing Overview Ø Ø RFS2 credits are generated by displacing, blending or processing fossil fuels with renewable fuel, yielding Renewable Identification Numbers, or RIN Credits, which are used for compliance Four types of RIN credits can be generated based on the different types of biofuel that are blended: Historical C- RIN Pricing (US$/C- RIN Credit) Cellulosic Biofuel - C-RIN Biomass Based Biodiesel - B-RIN (Conventional Biodiesel) Advanced - A-RIN (Sugar cane ethanol, Renewable Diesel) Conventional - R-RIN (Corn Ethanol) Ø C-RINS are the most valuable category of RINS, and are primarily created when wood is used as the feedstock. The price is strongly influenced by a legislative formula that is inversely correlated to oil prices this provides a premium over other RIN categories. Source: OPIS RFS2 Market Value per Barrel of Biocrude US$2.60 = US$122 Per C- RIN Value t per barrel of Biocrude Ø Unlike the price of R-RINS (corn ethanol), that of C-RINS did not drop in response to the U.S. election.investors perceive less political risk.. 54

48 California Low Carbon Fuel Standard (LCFS): Credit and Pricing Overview LCFS credits are measured in Metric Tonnes of Carbon Dioxide Equivalent (MTCO2e) and priced in US$ LCFS credit trading is currently limited to primary market trading between obligated parties and producers of credits Historical LCFS Credit Pricing (US$/MTCO2e) LCFS credit prices have averaged US$90 over the last year, US$89 over the last two years and are currently priced at US$70 LCFS credit prices are expected to rise further due to the high marginal costs of compliance in the transportation fuels sector Source: OPIS LFCS Value per Barrel of Biocrude US$90 = US$26 Per MTCO2e Value Per barrel Biocrude LCFS credit prices are capped at a US$200 ceiling which is increased each year by a CPI factor. 56

49 California Cap and Trade: Allowance Credit and Pricing Overview The instrument used to measure emissions reductions under the California Cap and Trade program is referred to as Allowances. Allowances are denominated in dollars per Metric Ton of Carbon Dioxide Equivalent (US$/MTCO2e) Historical Cap and Trade Credit Pricing (US$/MtCO2e) The Quebec and California Cap and Trade Programs are now linked, and Ontario s will be linked next year. California s Cap and Trade system started with a price floor in 2012 of US$10.00, which is escalated each year by 5% plus the CPI inflation factor, ensuring a growing compliance cost Market prices for Allowances averaged ~US$15/MTCO2e in July/August Source: California Air Resources Board C&T Value per Barrel of Biocrude to Project US$15 = US$5 Value per barrel of Biocrude Per MTCO2e The carbon price will likely trend higher since: The transportation sector is now covered under the California program and free allocations of emissions credits are mandated to decline. The Ontario market is expected to be short of credits. 58