FIBER QUALITY & SUPPLY GLOBAL OUTLOOK

Transcription

1 FIBER QUALITY & SUPPLY GLOBAL OUTLOOK FOREST RESOURCES ASSOCIATION COEUR D ALENE, IDAHO SEPTEMBER 28, 2016 Larry Davis 1

2 Topics Covered Pulp & Paper Trends Fiber Quality Fiber Supply & Demand Timber Resource Trends Outlook Conclusions 2

3 PULP & PAPER TRENDS 3

4 Million Tons US Pulp & Paper Production Distribution US Production Capacity Share by Region, 2015 US Pulp & Paper Production Capacity US- Midwest 21% US- Northeast 11% US-West 11% US- Southeast 57% 10 0 Source: Fisher International 4

5 Global Capacity Distribution Packaging Tissue & Towel Europe 22% North America 22% Europe 25% North America 21% Asia Pacific 48% Latin America 6% 0% Asia Pacific 34% Latin America 16% Source: Fisher International Africa / Middle East 2% Africa / Middle East 4% 5

6 Million MT Paper Machine Capacity by Year Built North America Global Total Last period North America had majority of global investment Source: Fisher International 6

7 Market Share of Top 3 Companies North America Industry Consolidation (and Asia Pacific Comparison) 80% 70% 60% Stage 1 Opening Stage 2 Scale Stage 3 Focus Containerboard (IP, WestRock, GP) Stage 4 Balance & Alliance Tissue (GP, P&G, KC) Newsprint (Resolute, Kruger, White Birch) 50% 40% 30% 20% 10% 0% Asia Pacific Containerboard (Nine Dragons, Lee & Man, Oji) Time Small scale; emerging markets Winners invest in largescale operations Concentration accelerates No growth, or decline; a few mega mergers Source: Consolidation Curve concept from Harvard Business Review; G Deans, F Kroeger, S Zeisel; Dec 2002

8 WA, OR, and BC Pulp and Paper Grades Majority of West Coast kraft pulp is in BC Majority of West Coast packaging is in WA/OR 8

9 Western North America Pulp Mills Paper / no pulping Recycled pulp mill Wood pulp + recycled Wood pulp Site Selected sites Size by TPY 9

10 FIBER QUALITY 10

11 Residual Chips and Whole Log Chips 100 Cosmo Chip Quality Index 2016 YTD CQI is highly correlated with yield 40 Source: Forest Resources Association 30 Whole log Residuals Source: Cosmo Proprietary Data 11

12 Key Variables Affecting Fiber Quality Conventional Size distribution-length, width, thickness Contaminants (bark, plastics, species, decay, etc.) Additional factors less controllable Moisture content BTW, why shouldn t pulp logs be sold on a dry basis? Sources of variation: species, geographic source, tree age, ambient moisture, chip storage and handling, sampling Wood density Cracks & fissures good for chemical penetration Knots Heartwood vs sapwood Tree age / position within the tree Other controllable: Freshness (Of logs / chips) Clean cut (vs crushed) Post-delivery handling Co-products or by-products (i.e. hog fuel, sawdust) Non-traditional Quality Metrics Supplier capabilities Volume (scale) Volume flexibility Log sources (e.g. landowner & wood producer relationships) Values alignment Integrity Customer focus Collaborative Sustainability the most critical factor regarding supply (and quality) 12

13 PNW Fiber Quality PNW chip quality is, on average, lower than many competing regions because of relatively high % residual chips Residual chips are byproducts, not coproducts (don t carry equal importance) Few onsite chip plants Some disposable chippers gradually being replaced 13

14 FIBER SUPPLY & DEMAND 14

15 Indexed Delivered Chip Prices PNW Hemlock, Southern Pine, and Global Softwood (Q = 100)

16 Area of West Coast Working Forests=Mississippi Timberland 16

17 ODMT (000) U.S. Conifer Wood Chip Exports 250 Equivalent to large pulp mill shutdown WA OR Other West North South Source: Wood Resources International LLC 17

18 Sources: Timber Harvest WA DNR & OR DOF; Chip Receipts Forest Resources Association

19 Sources: Timber Harvest WA DNR & OR DOF Harvest Reports; Chip Receipts Forest Resources Association

20 Sources: Timber Harvest WA DNR & OR DOF; Chip Receipts Forest Resources Association

21 BBF Pacific Northwest Log Demand Expanding log exports Slowing of log exports Can PNW timber harvest support higher demand? 2 0 Source: Forest Economic Advisors, RISI West Coast Lumber Production Log Exports (Lumber Basis) 21

22 TIMBER RESOURCE 22

23 Western WA Doug-fir and Hemlock Acres Private Timberland, Source: USFS FIA data

24 Percent Canadian Share of U.S. Lumber Market Pine Beetle drives decline Source: Random Lengths, RISI 24

25 Market Share of Top 3 Companies North America Industry Consolidation (and Asia Pacific Comparison) 80% 70% 60% 50% Stage 1 Opening Stage 2 Scale What are consequences of landowners merging for complementary age classes? Stage 3 Focus Containerboard (IP, WestRock, GP) Stage 4 Balance & Alliance Tissue (GP, P&G, KC) Newsprint (Resolute, Kruger, White Birch) 40% 30% 20% 10% 0% Industrial Forests (Weyco, AFM, Hancock) + TFG, Campbell, RMS, RYN, SPI Lumber (W. Fraser, Canfor, Weyco) + GP, Resolute, Interfor, SPI, Hampton, Tolko Asia Pacific Containerboard (Nine Dragons, Lee & Man, Oji) Time Small scale; emerging markets Winners invest in largescale operations Concentration accelerates No growth, or decline; a few mega mergers Source: Consolidation Curve concept from Harvard Business Review; G Deans, F Kroeger, S Zeisel; Dec 2002

26 OUTLOOK 26

27 Outlook of Factors Affecting Fiber New-normal housing starts limit sawmill expansion Exchange rates continue to disadvantage US exports New demand for pulp logs (e.g. biofuels, wood pellets, fuel chips) Increasing interest from China in West Coast chips More consolidation(s) landowners, manufacturers? Extreme weather events and fires Changing timber profile shorter rotations Some landowners unable to surge harvest due to previous high harvest levels Absence of Softwood Lumber Agreement leads to minor shift toward equity between U.S. and Canada 27

28 Conclusions PNW has sub-par average chip quality Some excellent quality; residuals bring down the average Competiveness with other regions requires new thinking about chip quality PNW has multiple cost disadvantages (e.g. aging mills) FRA can be part of the solution, across all segments of the wood supply chain PNW sustainable timber harvest is in jeopardy There must be a better answer than dilution via acquisition Public companies, at least, should be more transparent about their assets Managing fiber supply and quality in the PNW requires nuance skills Advantage of scale is gone forever 28

29 Cosmo Specialty Fibers, Inc. 29