INDUSTRY OVERVIEW. Introduction

Transcription

1 The information presented in this section is derived from various official government and other publications and from the PCI Fibres Research Report, the Clothesource Research Report and the CCF Research Report which were commissioned by us, unless otherwise indicated. We believe that the sources of such information are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading in any material respect or that any fact has been omitted that would render such information false or misleading in any material respect. The information has not been independently verified by our Company or any of our or their respective directors, officers or representatives and no representation is given as to its accuracy. Introduction Cellulose is a fibrous organic material and is the principal constituent of plant biomass. It is a natural and bio-degradable polymer used as feedstock to manufacture a broad range of recyclable commodity and specialty products. Dissolving wood pulp is a highly purified form of cellulose made from wood. Cotton linter pulp, which is a by-product of cotton production is a substitute of dissolving wood pulp. Both dissolving wood pulp and cotton linter pulp can be further processed into cellulose-based products used in a wide range of applications. The chart below illustrates the specialty cellulose value chain. 75

2 Notes: (1) Market size as of December 29 (2) Consistent with the practice of comparable companies, we categorize cellophane as an application under specialty grades of pulp. Principal Cellulose-Based Products In 29, the six principal cellulose-based products, viscose staple fibers, acetate tow, cellulose ethers, microcrystalline cellulose, viscose filament and nitrocellulose, together accounted for approximately 89% of the global demand for dissolving wood pulp. Viscose Staple Fibers: These are the principal mainstream product of rayon grades of pulp. The demand for rayon grades of pulp for production of viscose staple fibers grew at a CAGR of 9.% between 25 and 29, and is expected to grow at a CAGR of 13.3% between 29 and 212. While demand slowed in 28, recovery was underway by the end of the year, aided by a proportion of viscose staple fibers demand switching from developed markets, where consumer spending decreased, to emerging markets, notably China, where consumer spending had remained robust. Viscose staple fibers are used in textiles, for example in knitwear, men s jackets, shirts, suits and trousers, women s jackets, dresses and blouses, sportswear, underwear and nightwear. Viscose staple fibers produced for textiles are first spun into a yarn, which is then further processed by knitting or weaving into cloth. The cloth is then dyed, cut and sewn into garments. Viscose staple fibers can also be used in non-woven applications, for example baby wipes, cosmetic and personal care wipes, household and industrial wipes as well as flame retardant applications, for example in mattress ticking. Acetate Tow: The second largest downstream product of dissolving wood pulp, this is predominantly used as the filtration medium in cigarette filters. While smoking rates in developed markets have been falling, this decline has been more than offset by the rise in smoking rates in major emerging markets, notably China, South America, Eastern Europe, India and Southeast Asia, and rising wealth has enabled smokers to switch from non-filtered to filtered cigarettes. In addition, demand for triacetate cellulose film, used in liquid crystal display (LCD) screens, is estimated to drive demand for other specialty grades of pulp used to produce acetate products. Cellulose Ethers: These are used as additives, acting as thickeners, stabilizers, film formers, rheology modifiers, emulsifiers, lubrication aids and conditioners in a wide range of fluid products. The principal market for these additives is the industrial and construction materials market, including pumpable plasters and paints. Microcrystalline Cellulose: This is used as an excipient in the manufacturing of pharmaceutical tablets, as well as a gum and a low digestibility bulking agent in processed foods. Viscose Filament: The main markets for viscose filament are in linings (principally for jackets) and high end fashion-wear. As the textile industry has migrated to lower cost markets, demand for viscose filament has grown in these markets, notably China but also in India, South Korea and Turkey. Nitrocellulose: There are two grades of nitrocellulose: high-nitrogen nitrocellulose, which is typically produced using cotton linter pulp and is used as a smokeless propellant, and low-nitrogen nitrocellulose, which is used in coatings, paints, lacquers and varnishes for a wide range of applications including automotive, outdoor furniture and nail varnishes. 76

3 Global Demand for Dissolving Wood Pulp and Cotton Linter Pulp In 29, demand for dissolving wood pulp was approximately 3.4 million metric tons, compared with approximately 1. million metric tons of cotton linter pulp. The chart below shows the historical and expected global demand for dissolving wood pulp and cotton linter pulp between 25 and 212. Demand for Dissolving Wood Pulp and Cotton Linter Pulp s Metric Tons 6, 5, 4, 3, 2, 1, 5,398 5,49 4,368 4,655 4,719 4,18 4,82 4,333 1, ,119 1, ,71 1, ,52 4,39 2,947 3,249 3,523 3,55 3,358 3, E 211E 212E Dissolving Wood Pulp Cotton Linter Pulp Cotton linter pulp is predominantly produced and used in China, where it is utilized for the manufacture of textile viscose fibers, viscose filament and nitrocellulose. Outside China, the high price of cotton linter pulp limits its use to the production of a narrow range of specialty products. Global Demand for Dissolving Wood Pulp Depending on its level of purity and type of application, dissolving wood pulp is generally categorized into rayon grades of pulp and specialty grades of pulp. Rayon grades of pulp typically contain between 91% and 95% of alpha-cellulose, while specialty grades of pulp typically contain over 95% of alpha-cellulose. The chart below shows the historical and expected global demand for rayon grades of pulp and specialty grades of pulp between 25 and 212. Demand for Rayon Grades and Specialty Grades of Pulp ʼs Metric Tons 5, 4, 3, 2, 1, 3,523 3,249 2,947 1,155 1,13 1,112 1,835 2,119 2,368 3,55 1,127 1,928 3,358 3,736 1,55 1,1 2,33 2,636 4,52 4,39 1,144 1,178 2,98 3, E 211E 212E Rayon Grades of Pulp Specialty Grades of Pulp 77

4 The chart below shows the historical and expected global demand for dissolving wood pulp for viscose staple fibers production between 25 and 212. Demand for Dissolving Wood Pulp for Production of Viscose Staple Fibers Principal Drivers of Global Demand for Dissolving Wood Pulp Since the 198s demand for dissolving wood pulp decreased in many market segments due to substitution by lower priced synthetic alternatives in applications that previously had used dissolving wood pulp. For example, viscose staple fibers, viscose filament and acetate filament were being substituted by polyester staple and filament fibers; cellophane by polypropylene film; and acetate film by polyester and polypropylene film. Since 22, however, this trend has been reversed. Demand for dissolving wood pulp reached 3.4 million metric tons in 29, and is expected to grow to 4.4 million metric tons in 212, representing a CAGR of 9.3%. This can be attributed to a number of key factors: Macroeconomic and Demographic Changes: The global population increase and strong economic growth have significantly increased the demand for textile viscose staple fibers, which in turn increased the demand for dissolving wood pulp. Due to its attractive characteristics such as comfort, dyeability, drape and handle, textile viscose staple fibers have been preferred, especially for summer clothing, to polyester-based fibers. China: China has been the principal contributor to the increase in demand for dissolving wood pulp. The increase in personal disposable income in China and the migration of a substantial proportion of the global textile manufacturing industry from higher cost regions to China have led it to account for 5% to 6% of global textile production in 29, a development that triggered substantial investment in man-made fiber production capacity, including viscose staple fiber capacity, in China. New Applications: New applications have been developed in recent years that contributed to the increase in demand for dissolving wood pulp. For example, triacetate cellulose film, which is used as a protective layer on LCD screens, microcrystalline cellulose, which is used as bulking agents, and disposable wipes, which are made with high absorbency viscose staple fibers. Increasing Environmental Awareness: Increasing environmental awareness has shifted consumers preference away from non-recyclable materials towards recyclable products with low environmental impact. The biodegradable feature of viscose staple fibers has made it a suitable material to be used for the production of disposable non-woven products. 78

5 Demand for Dissolving Wood Pulp By Region Demand for dissolving wood pulp has historically been concentrated in the developed markets. However, the globalization of the production of cellulose-based products, notably viscose staple fibers and viscose filament, has led to the migration of capacity for these products to lower cost markets, especially the emerging Asian markets. Moreover, future demand for dissolving wood pulp is set to grow in these Asian markets as capacity for viscose staple fibers and other cellulose-based products grows, while demand continues to contract in developed markets. China now holds the largest share of global demand for rayon grades of pulp, with a 33.8% market share in 29. The chart below shows the demand for rayon grades of pulp by region in 29. % Demand for Rayon Grades of Pulp by Region (29) 4% 3% 2% 1% % 33.8% 21.7% 15.3% 13.6% 5.% 4.2% 2.% 1.4% 2.9% China Europe India Indonesia Taiwan Thailand Japan North America Rest of World Demand for dissolving wood pulp in China has been growing rapidly in recent years. In 27, China imported approximately.39 million metric tons of rayon grades of pulp. Between 27 and 29, Chinese imports of rayon grades of pulp increased at a CAGR of 38.4% to.74 million metric tons. This rapid rise was due to increased viscose staple fiber production and constrained cotton linter pulp supply. Considering the continuous investments in additional viscose staple fiber capacity in China and the constraints limiting the supply of cotton linter pulp, China s total demand for dissolving wood pulp may surpass two million metric tons in 212, representing more than 48% of the global market for rayon grades of pulp. The chart below shows the annual growth in rayon grades of pulp demand in China from 27 to 29, compared with other Asian countries and developed markets. Growth in Rayon Grades of Pulp Demand (CAGR 27-29) % 5% 4% 3% 2% 1% % (1%) (2%).% (2.9%) (1.4%) (.5%) (.3%) (.%) (5.5%) (11.9%) Taiwan Indonesia Thailand Europe India Rest of World North America Japan 38.4% China 79

6 The chart below shows the historical and expected global demand for specialty grades of pulp between 25 and 212. Demand for Specialty Grades of Pulp s Metric Tons 1,5 1,112 1,13 1,154 1,2 1,127 1,55 1,99 1,144 1, E 211E 212E Acetate Tow Other Products Demand for specialty grades of pulp used for the manufacture of acetate tow grew at a CAGR of 1.4% between 25 and 29 and was relatively unaffected by the economic downturn in 28 and 29. According to PCI Fibres, demand is expected to rise at a CAGR of 2.1% between 29 and 212, aided by increasing smoking rates in emerging markets, further displacement of polypropylene tow by acetate tow in cigarette filters in China and the development of light cigarettes and the concomitant increase in the size of cigarette filters (and the average weight of acetate tow per filter). Demand for specialty grades of pulp for other products grew at a CAGR of 1.7% between 25 and 27. Aggregate demand for specialty grades of pulp then fell in 28 and 29 as the downturn in construction activity, particularly in the developed markets, due to the global economic downturn adversely impacted the demand for cellulose ethers. Total demand for the specialty grades of pulp is expected to expand at a CAGR of 5.2% between 29 and 212, according to PCI Fibres, driven principally by the recovery in demand for cellulose ethers. For specialty grades of pulp, chemical properties and quality (for example, consistency) are especially important and, as a result, product qualification is often a requirement to sell to downstream processors, such as the manufacturers of the specialty cellulose ethers and cellulose acetate, or their customers, such as cigarette and pharmaceutical manufacturers. For example, cigarette manufacturers require the qualification of the acetate tow used in their filters, which, in turn, demands the qualification of the specialty grades of pulp used to manufacture this acetate tow. Similarly, pharmaceutical manufacturers typically qualify the cellulose ethers and MCC used in their products. The qualification process is highly technical and involves participants from all sides assessing product specifications and quality. This process also leads to considerable customization. One consequence of the qualification process and high degree of customization is the development of strong long term relationships between producers of specialty grades of pulp and their major customers. Price is also becoming an increasingly important consideration within even the higher end applications in the specialty grades of pulp industry. For example, triacetyl film, used in liquid crystal display units, has historically been produced using cotton linter pulp due to the high optical purity and strength of triacetyl film made with cotton linter pulp. However, competitively priced specialty grades of pulp that can be used to produce triacetyl films have entered the market and are beginning to displace some cotton linter pulp-based triacetyl products. Dissolving Wood Pulp Production By Producer There are 17 major dissolving wood pulp producers currently operating 21 mills worldwide. Together, the five largest producers, Sappi Saiccor, Sateri, Rayonier, Birla (including AV Cell Group) and Lenzing, together account for approximately 65% of global dissolving wood pulp production capacity as of July 21. During 28 and 29, three large dissolving wood pulp mills ceased production, constraining the global dissolving wood pulp production capacity. A high cost mill, the Borregaard Schweiz mill in Switzerland 8

7 closed in 28 followed by two Russian mills, Kotlas (which is now part of International Paper and converted to paperboard pulp production) and Baikalsk, which closed in 29. As demand is beginning to recover, market supply of dissolving wood pulp is set to increase through 211 and 212 as existing producers expand production capacity and new producers enter the market. The chart below shows the world s top ten dissolving wood pulp producers by estimated production capacity as of the end of 21. Estimated Production Capacity of Major Dissolving Wood Pulp Producers (as of the end of 21) Metric Tons 1, Sappi Rayonier Sateri AV Cell Group Lenzing Tembec Domsjö Buckeye Borregaard Neucel The table below details the principal grades produced by the top ten dissolving wood pulp producers by estimated production capacity together with their major geographic markets. Business Profiles of the Top Dissolving Wood Pulp Producers Country Principal Geographic Markets Principal Grades Produced Sappi Saiccor... South Africa Global Rayon and specialty Sateri... Brazil Global Rayon and specialty Rayonier.... USA Global Specialty AV Cell Group.. Canada Integrated (Aditya Birla) Rayon Lenzing... Austria Integrated (Lenzing) Rayon Tembec... Canada Global Rayon and specialty Domsjö... Sweden Europe & Asia Rayon Buckeye... USA Global Specialty Borregaard... Norway Europe & Asia Specialty Neucel... Canada Asia (China) Rayon and specialty Production Costs by Producer Mills operating in low cost markets have been able to benefit from access to both low cost labor and wood. The chart below shows the estimated production costs of the global top ten dissolving wood pulp producers by production capacity as of the end of

8 Estimated Production Costs of the Global Top Ten Dissolving Wood Pulp Producers (as of end of 21) US$/Metric Tons Bahia Specialty Cellulose Sappi Saiccor Buckeye Technologies Rayonier (Jesup) Lenzing AV Cell Group Domsjö Neucel Tembec Borregaard (Témiscaming) These global top ten dissolving wood pulp producers include two major merchant suppliers of rayon grades of pulp (Bahia Specialty Cellulose and Sappi Saiccor) and two major producers of specialty grades of pulp (Rayonier and Buckeye Technologies), together with four mills in high cost regions supplying both specialty grades of pulp (Borregaard and Tembec-Témiscaming) and predominantly rayon grades of pulp (Domsjö and Neucel). The final two producers operate mills that are fully integrated with viscose staple fibers production: the Lenzing mill, which is fully integrated with its viscose staple fibers production; and the AV Cell Group mill in eastern Canada, which supplies rayon grades of pulp to Birla s viscose staple fibers mills in Asia. Consumption of Dissolving Wood Pulp and Cotton Linter Pulp In China The rapid growth in viscose staple fibers production capacity in China has led to a significant demand for dissolving wood pulp and cotton linter pulp. Given the absence of domestic sources of dissolving wood pulp, demand was initially met by domestic Chinese production of cotton linter pulp. However, since 24, the increase in viscose staple fibers and viscose filament production has resulted in increased imports of dissolving wood pulp, as Chinese cotton linter pulp producers have been unable to expand their output sufficiently due predominantly to the shortage of cotton linter. This shortage has also led to higher costs for cotton linter pulp compared to dissolving wood pulp. Chinese imports of dissolving wood pulp have risen sharply from approximately 293, metric tons in 25 to approximately 852, metric tons in 29. With cotton linter supply not expected to exceed 8, metric tons in 212, imports of dissolving wood pulp are set to increase to 1,654, metric tons in 212. The chart below shows the historical and expected balance between imported dissolving wood pulp and domestically produced cotton linter pulp consumed in China between 25 and 212. ʻs Metric Tons 2,5 2, 1,5 1, 5 Consumption of Dissolving Wood Pulp and Cotton Linter Pulp in China 1, , , ,131 1,22 1, Cotton Linter Pulp 1,822 2, , ,217 2,454 1,377 1, E 211E 212E Dissolving Wood Pulp Source: UN Comtrade and PCI Fibres 82

9 According to UN (Comtrade data) in 29, Brazil was the largest supplier of dissolving wood pulp to China, with an approximately 34% share of total dissolving wood pulp imports by volume, more than double the share of the next largest supplier. Bahia Specialty Cellulose has been the only supplier of dissolving wood pulp from Brazil into China. The chart below shows the countries exporting dissolving wood pulp to China between 27 and 29. Dissolving Wood Pulp Imports to China by Country ʻs Metric Tons Brazil USA Canada Sweden South Africa Norway Indonesia Spain Russia Others Source: UN Comtrade Type of Fibers In 29, global fiber production was approximately 74 million metric tons with a value of approximately US$24 billion at mid-21 prices. Global Fibers Production Million Metric Tons Source: Clothesource from Fiber Organon 83

10 The table below shows the breakdown of global fiber production by weight and value respectively in 29. Global Fiber Production (29) Type of Fibers % by Weight % by Value Natural... Cotton 3.2% 35.1% Sheep s wool 1.6% 4.5% Cashmere.%.3% Flax 1.4% 3.2% Jute 3.1%.1% Ramie.4%.1% Silk.2% 1.% Sisal.4%.1% Other Natural 1.% 2.9% Total Natural 38.3% 47.4% Cellulosic... Lyocell / Tencel.1%.4% Viscose Filament Yarn.4%.7% Viscose Staple Fibers 3.3% 2.9% Total Cellulosic 3.8% 4.% Synthetic... Acrylic Staple Fibers 2.8% 3.1% Nylon 4.1% 7.1% Polyester Staple Fibers 16.7% 8.5% Polyester Filament Yarn 26.6% 16.2% Other synthetics 7.8% 13.7% Total Synthetics 58.% 48.6% Source: Clothesource from Fiber Organon and YNFX The table below summarizes the key qualities of major fibers categories compared with viscose staple fibers. Key Qualities of Major Fibers Key Quality Viscose Staple Fibers Cotton (1) Polyester (1) Wool Absorbency.... Biodegradation... Breathability... Brightness.... Drape... Dyeability... Regeneration... Softness... Purity... Source: Clothesource Note: Combed cotton and polyester have the quality of drape in higher counts 84

11 Demand For Viscose Staple Fibers Viscose staple fibers are fibers composed of, or derived from, cellulose and provide the same (or superior) moisture absorbency and breathability as cotton. They also have excellent handle, drape and dyeability. The viscose staple fibers market is segmented into regular viscose staple fibers used principally in textile and non-woven applications, and specialty viscose staple fibers, which include flame retardant viscose fibers for bedding linings, high absorbency fibers for personal hygiene products, micro-denier fibers for woven and non-woven products, high end non-woven grades and high wet modulus fibers. The chart below shows the breakdown of global production volume between these products in 29. Estimated Global Production of Major Categories of Viscose Staple Fibers (29) Modal 11% Nonwoven 1% High purity Nonwoven 5% Micro-denier 2% Flame Retardant 1% 1.33 dtex 2% Hygiene Products 1% 1.67 dtex 5% Total 2.5 million tons Note: 1.67 dtex and 1.33 dtex are equivalent to 1.5D and 1.2D titer Wipes constitute a fast expanding market segment encompassing consumer wipes (which include baby, cosmetic or personal care and household wipes) and industrial wipes (used in applications ranging from cleaning and food services to medical care). Viscose staple fibers have proved to be highly suitable in this application due to their high absorbency, moisture retention and soft handle. They are also biodegradable and can be made to be flushable. Consequently, the single-use, task-centered, disposable, viscose-based wipe is the fastest growing sector of the non-woven market, and it is expanding strongly in emerging markets, including China. Nevertheless, despite the growth in viscose staple fibers used in non-woven applications, textile applications continue to be the largest source of viscose staple fibers demand and this is set to grow, driven by demand for comfortable clothing as a result of the combination of population growth, rising wages and increasing disposable incomes. This demand cannot be fully met by cotton, as the global cotton supply continues to remain flat. According to the USDA FAS database, annual cotton production is expected to fall from between 25 and 26 million metric tons in 24 to 28 to 22.4 million metric tons in the 29/1 crop year. Currently, production in the 21/11 crop year is expected to recover to 24.8 million metric tons, due largely to improved US output. Production in other major cotton producing regions has been adversely affected by rain or drought. While current high cotton prices may result in considerable additional planting, 211/12 crop production will continue to be affected by the weather in key regions and the underlying trend is expected to be one of flat to limited growth. 85

12 While China accounts for the bulk of the supply and demand of viscose staple fibers, there is substantial demand for viscose staple fibers in Europe, Turkey, North America and the rest of Asia. In order to meet this anticipated growth in the demand for viscose staple fibers, there has been substantial investment in new production capacity, particularly in China, as well as other markets, including India, the ASEAN region and Europe. There are also plans for further investments in capacity additions in these markets as well as in Egypt. The chart below shows the increase in global viscose staple fiber production. Further, global production of viscose staple fibers is expected, according to PCI Fibres, to increase at a CAGR of 1.% between 29 and 212. The viscose staple fibers market has shown considerable resilience in recent years. While demand slowed in 28, recovery was well underway by the end of 28 aided by a substantial proportion of this demand switching from the developed markets, where consumer spending slumped, to emerging markets, notably China, where consumer spending has remained robust. As a result, the growth in viscose staple fibers production in China has outpaced that of the rest of the world, increasing from 42% of the global market in 25 to 58% of the global market in 29. According to PCI Fibres, this is expected further to increase to 61% in 212. The following chart shows the historical and expected volume of viscose staple fibers production in China and the rest of the world. Viscose Staple Fibers Production in China and the Rest of the World s Metric Tons 4, 3,5 3,383 3,133 3, 2,5 2, 1,5 2,8 1,2 2,388 1,228 2,628 1,288 2,17 1,65 2,543 1,63 2,84 1,123 1,243 1,36 1, ,16 1,34 1,15 1,48 1,717 1,89 2, E 211E 212E China Rest of World 86

13 Global Viscose Staple Fibers Production by Producer There are 11 viscose staple fibers producers outside China along with approximately 4 producers within China. The chart below shows the global top ten viscose staple fibers producers by estimated design annual production capacity as of June 3, 21. Estimated Design Annual Production Capacity of the Global Top Ten Viscose Staple Fibers Producers (as of June 3, 21) metric tons Plant Locations Birla India, Thailand, Indonesia, Lenzing Austria, Indonesia, Fulida Group China Shandong Helon China TangShan Sanyou China FCFC Taiwan Jiangsu Aoyang China Xinxiang Bailu China Sateri Jiangxi China Gaomi Chemical Fibre Group China China China, UK, USA Viscose Staple Fibers Industry in China Viscose staple fibers are gradually replacing cotton in the China fibers industry, as the growth of cotton production had remained stagnant in recent years. The share of cotton in Chinese fibers production decreased to 22.2% in 29 from 28.5% in 25 while the share of viscose staple fibers increased to 4.6% in 29. Between 25 and 29, the production of viscose staple fibers in China increased at a CAGR of 14.3% compared to 3.5% for cotton in the same period. The table below shows the breakdown of Chinese major fibers production in 29 and the CAGR between 25 and 29. China Major Fibers Production (29) metric tons % of World CAGR Natural... Cotton 7,1 32.2% 3.5% Wool (Sheep) % (1.1)% Synthetic... Acrylic Staple Fibers % (3.7)% Nylon 1, % 11.% Polyester Staple Fibers 13,75 7.4% 15.% Polyester Filament Yarn 7, % 11.8% Cellulosic.... Viscose Filament Yarn % (1.2)% Viscose Staple Fibers 1, % 14.3% Total... 32, % 1.2% Source: Clothesource from Fiber Organon and YNFX 87

14 China has become, according to CCF, the largest viscose staple fibers producer globally, accounting for 5% to 6% of global production capacity. The annual production capacity of viscose staple fibers in China increased from less than 43, metric tons in 2 to approximately 1.9 million metric tons in 29. In 29, ten new viscose staple fibers lines came on-stream in China, adding approximately 5, metric tons of viscose staple fibers capacity. By comparison, approximately 1, metric tons of new viscose staple fibers production capacity was added in the rest of the world in 29. With continued investment in new capacity still underway, viscose staple fibers capacity in China could exceed three million metric tons by 212. The chart below shows the growth in viscose staple fibers production capacity in China between 2 and 29. Viscose Staple Fibers Production Capacity in China 19 ' metric tons 1, ,468 1, Production Capacity Source: CCF There are approximately 4 viscose staple fibers producers in China, and as of the second quarter of 21, five of these producers have an annual production capacity of 1, metric tons or above as of the second quarter of 21. In addition, many of these producers have announced significant capacity expansion plans for 211 and 212, further increasing the viscose staple fiber production capacity in China. The table below shows the usage of viscose staple fibers in China. Based on the Clothesource estimates, with no assumptions of fibers substitution, the forecast median CAGR of viscose staple fibers is 5% between 29 and

15 Usage of Viscose Staple Fibers in Textiles in China Current 214 Target CAGR (in thousands of metric tons) (29-214) Domestic Apparel Retail % Institutional % Apparel Export Markets % Total Apparel ,12 6% Used in Non-apparel (Home Textiles and Technical Textiles, Domestic and Exports) % Exported as Yarn % Exported as Fabric % Total Non-Apparel % Total ,284 5% Source: Clothesource According to Clothesource, if the use of viscose staple fibers in Chinese made apparel fabrics is increased from 5.7% used in 29 to between 7.5% to 9.% by 214, demand for viscose staple fibers would grow to around 1.6 to 1.8 million metric tons from current demand of 1. million metric tons. Usage of Viscose Staple Fibers in Textiles in China by 214 Current Different Share of Fabric Used in Apparel Viscose Staple Fibers Share of Apparel Production % 5.7% 7.5% 9.% Apparel ( metric tons) ,12 1,315 1,566 Non-apparel ( metric tons) Total ,284 1,587 1,838 Design Annual Production Capacity of Top Ten Viscose Staple Fibers Producers in China (as of June 3, 21) metric tons Fulida Group 23 Shandong Helon 166 Tangshan Sanyou Jiangsu Aoyang Xinxiang Bailu Sateri Jiangxi Gaomi Chemical Fibre Group Hubei Jingwei Lenzing (Nanjing Chemical Fibre) 7 Shandong Yamei Others Plant Locations Zhejiang, Xinjiang Shandong, Xinjiang Hebei Jiangsu, Xinjiang Henan Jiangxi Shandong Hubei Jiangsu Shandong 89

16 The chart below shows the evolution of imports and exports of viscose staple fibers to and from China: ( s Metric Tons) 14 China s Imports and Exports of Viscose Staple Fibers Imports Exports Source: CCF Currently, Chinese viscose staple fibers exports are largely concentrated in a few companies such as Tangshan Sanyou, Sateri, Lenzing (Nanjing) and Shandong Helon. However, some new businesses have also begun to compete in the export market by developing medium-end products. As a result, the export market has become more competitive with cost and product quality becoming the determining factors for sales in this market. Pricing For Dissolving Wood Pulp Due to the requirement for consistent quality, specific product characteristics and on-going customer support, price is not the sole determinant driving demand for dissolving wood pulp. Customers for rayon grades of pulp tend to use a number of suppliers and prices are typically negotiated on a quarterly basis. On the other hand, customers for specialty grades of pulp tend to use only a few qualified suppliers with whom they have long established relationships and prices are typically negotiated on the basis of annual contracts. Consequently, prices for specialty grades of pulp have generally been more stable than the prices for rayon grades of pulp. Historically, specialty grades of pulp traded at a US$25-3 per metric ton premium over rayon grades of pulp. However, as of April 21, the spot price of rayon grades of pulp in China was approximately US$1,6 per metric ton, whereas that of specialty grades of pulp was close to US$1,45 per metric ton. This reversal of prices for rayon grades of pulp and specialty grades of pulp creates considerable tensions within the market, since there is now a considerable incentive for dissolving wood pulp producers which can switch their production to rayon grades of pulp to do so in light of the higher margin currently available. PCI Fibres believes that rayon grades of pulp prices will soften through the third quarter of 21 but then rise as viscose staple fibers demand picks up towards the end of 21 (when production switches to comfortable clothing for next year s summer season). This cycle is expected to be repeated on an annual basis, with rayon grades of pulp prices moving up towards US$1,65 to US$1,7 per metric ton by the end of

17 The chart below shows the historical price and the price outlook for rayon grades and specialty grades of pulp: Price Outlook for Rayon Grades and Specialty Grades of Dissolving Wood Pulp US$/Metric Tons 1,8 1,6 1,4 1,2 1, Q1 Q2 Q3 Q4 29 Q1 Q2 Q3 Q4 21 Q1 Q2 Q3 Q4 211 Q1 Specialty Grades of Pulp Used in Acetate Production Rayon Grades of Pulp Used in Viscose Production Q2 Q3 Q4 212 Q1 Q2 Q3 Q4 Source: PCI Fibres Pricing for Viscose Staple Fibers in China Viscose staple fibers prices in China have been on an upward trend since 2. Before 25, viscose staple fibers was mainly used as an alternative to cotton, and its price consistently followed, but at a discount to, cotton prices. Increases in the price of viscose staple fibers in 2 and 23 were largely attributable to a rise in cotton prices. When cotton prices fell in early 24, viscose staple fibers prices also declined rapidly. From the second half of 26, viscose staple fibers prices began an upward cycle benefiting from strong demand in sirospun yarns, compacted spun yarns, air-jet spun yarns and non-spun products, amidst a generally subdued textile market. The global economic crisis in 28 weakened viscose staple fibers prices significantly, but beginning in early 29, the economic recovery (and accompanying upturn in consumer demand) spurred viscose staple fibers prices from RMB11,6 (US$1,711) per metric ton in early 29 to RMB18,88 (US$2,785) per metric ton at the end of 29. This was due to constrained supply against strongly increasing demand. On the other hand, specialty viscose staple fibers command markedly higher prices than regular viscose staple fibers. The ongoing economic recovery is expected to lead to further increases in the price for viscose staple fibers. RMB/Metric Tons 24, 21, 18, 15, 12, 9, Source: CCF Competitive Landscape and Outlook for Specialty Cellulose Industry There are 17 major dissolving wood pulp producers currently operating 21 mills worldwide. The five largest producers accounted for approximately 65% of global dissolving wood pulp production capacity in 29. There are 11 viscose staple fibers producers outside China along with approximately 4 producers in China. The five largest producers accounted for 63% of viscose staple fibers capacity in

18 The specialty cellulose industry has considerable barriers to entry. Substantial investment is necessary to establish production facilities and to obtain the required technology, especially with regards to environmental protection and waste treatment management. In addition, sizeable recurrent investment in maintenance is also necessary. Specifically, for the viscose staple fibers industry in China, operators with new capacity additions from 29 onward are required to demonstrate a secure source of dissolving wood pulp and adequate environmental protection. While the need for customization in the rayon grades of pulp segment is not as stringent as it is in the specialty grades segment, processors producing viscose staple fibers need to make adjustments in order to substitute one source of rayon grades of pulp for another. Further, specialty grades of pulp have to meet other demanding technical specifications, such as minimum standards for brightness and viscosity, in addition to other parameters that are either stipulated by individual downstream processors or incorporated by the specialty grades of pulp producers. In order to meet these parameters, substantial investment of capital and time is required in the qualification process. Moreover, because of the high degree of integration with the downstream customer s production processes, there is limited substitution between suppliers due to high switching costs. Consequently in this part of the market, there tends to be long-term relationships between customers and suppliers. The risk of obsolescence for the products of the specialty cellulose industry due to substitution is low, according to PCI Fibres. Over the past five decades, cellulose-based products have competed in many downstream markets with low cost petrochemical-based substitutes and they have remained the material of choice in those markets where their price and performance profile give them a significant competitive advantage. Acetate tow, which provides the filtration medium for cigarette filters, is a clear example. Considerable efforts were expended in developing a low cost synthetic alternative, polypropylene tow, but polypropylene tow was rejected by consumers on the basis of taste. Products such as viscose staple fibers will play an increasingly important role in meeting demand for cellulosic fibers as the increase in demand for comfortable fabrics cannot be fully met by cotton, especially since little or no growth is currently anticipated in the global cotton supply. In addition, specialty cellulose is superior to that of competing petrochemical-based products from an environmental perspective. This is fueling a revival of interest in specialty cellulose products in many applications, such as cellophane. Broader applications for specialty cellulose are also being continually developed. In particular, PCI Fibres expects the trend of more specialty grades of viscose staple fibers being developed and commercialized by the major Chinese producers to continue. For example, of the mills outside Europe in 27, only Birla had the capability to produce high-end nonwoven and modal grades while FCFC was competent to supply a modal grade. By 29, Birla had added a microdenier grade to its viscose staple fibers portfolio while the Chinese manufacturer, Helon, had developed flame retardant and modal grades. Sources of Information Our Company commissioned PCI Fibres, an independent specialist consultancy to the global fibers and related industries founded in 1988, to conduct research and prepare a report on the global specialty cellulose industry. Our Company also commissioned CCF to prepare a report on the chemical fibers industry in China. Founded in 1997, CCF is an independent consultancy specializing in high quality chemical fiber and textile research. Our Company also commissioned Clothesource, an independent consultancy in the apparel and textile industries to prepare a report on the Chinese cellulosic fibers industry, with particular reference to their use in the global apparel market. All the PCI Fibres Research Report, the CCF Research Report and the Clothesource Research Report were prepared based on publicly available economic statistics and demographic data from governmental authorities and various industrial associations, and the proprietary databases of PCI Fibres, CCF and Clothesource. For example, PCI Fibres uses its proprietary global databases of fibers demand and supply as well as manufacturing plants, the USDA FAS database covering agricultural commodities production (including cotton), the GTIS (Global Trade Information Services) GTA (Global Trade Atlas) database on 92

19 world trade flows, and the UN Comtrade (United Nations Commodity Trade Statistics) database on dissolving wood pulp export and import for various countries. Clothesource, on the other hand, uses its proprietary global databases of fibers production, the UN Comtrade (United Nations Commodity Trade Statistics) database and China Customs on Chinese garment export. In addition, through frequent discussions and interviews with major producers as well as publicly available information on these producers, PCI Fibres, CCF and Clothesource are able to monitor the capacity expansion, maintenance, production, sales and inventories in the industries. The PCI Fibres Research Report covered the global dissolving wood pulp and viscose staple fibers markets from 2 to 29 and contains estimated industry information through 212. The CCF Research Report covered the viscose staple fibers industry in China from 2 to 29. The Clothesource Research Report covered the fibers industries including viscose staple fibers industry in China from 25 to 29 and contains estimated industry information until 214. The information contained in the PCI Fibres Research Report, the CCF Research Report and the Clothesource Research Report was obtained from sources believed by PCI Fibres, CCF and Clothesource to be reliable, but there can be no assurance as to the accuracy or completeness of included information. The total fees paid by our Company for the PCI Fibres Research Report, the CCF Research Report and the Clothesource Research Report were US$3,5. We have included certain information from the PCI Fibres Research Report, the CCF Research Report and the Clothesource Research Report for purposes of this document because we believe such information facilitates an understanding of these markets. Except for these research reports, we did not commission any other research report. 93