Outlook for the World

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Jocelin Tyler
6 years ago
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4 Chinese BSK and BHK Imports: Canada and Brazil Continue to Lead BSK (top 5) 2014 Total BHK (top 5) 2014 Total World 6.7 million tonnes World 7.1 million tonnes Canada 23(34%) 2.3 Brazil 32(45%) 3.2 United States 1.2 (fluff) Indonesia 2.2 (31%) Chile 1.2 (18%) Uruguay 0.6 Russia 0.9 Chile 0.4 Finland 0.8 United States Copyright 2015 RISI, Inc. Proprietary Information

5 Inventories and Substitution Are Driving Short-Term Changes in China s Imports BSK Imports BHK Imports /06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 0 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 5 Copyright 2015 RISI, Inc. Proprietary Information

6 2014 Capacity Development Highlights: A Wave of BHK Startups Triggered Closures BHK Suzano Maranhao ramp up (Brazil) 1.5 million TPY, Jan Montes del Plata startup (Uruguay) 1.3 million TPY, Jul Oji Nantong startup ~500,000 TPY, Jul Old Town (USA) closure ~200,000 TPY, Aug ENCE Huelva closure ~400,000 TPY, Aug BSK Ilim Bratsk finished ramp up of new line Long ramp-up after a delayed start in k TPY Heinzel Pols (Austria) downtime Recovery boiler explosion 240,000 TPY loss until late Copyright 2015 RISI, Inc. Proprietary Information

8 Forecast Update: BHK Our BHK call for 2014 was on the mark, overall, adjusting for mill startup delays. We expected: Prices to fall to as low as $ /tonne in China Reached $ /tonne for BEK in June BHK mills to close in North America and Europe Old Town (August), Huelva (August): total 600,000 tpy Imports of BHK into China to be stronger after prices hit bottom, pulling up prices in the fall of 2014 and into 2015 Imports have rebounded since September Prices for BEK now up by about $70/tonne from the bottom (through May) in China 8 Copyright 2015 RISI, Inc. Proprietary Information

9 Forecast Update: BSK On the other hand, BSK Prices in 2014 were e higher than we expected, and the price differential between BSK and BHK was much higher than normal The reason: Supply-side issues in 2013 into 2014 BSK demand was about flat in 2014, including in China But supply was short of expectations (Bratsk and Pols) We did call for BSK prices to fall in late 2014 into early 2015, and the price gap to close become much smaller. Both of these happened. Buyers used more BHK, less BSK, especially in Asia. Some pulp producers have been shifting from BHK to BSK production. So even with no new mills on stream, BSK prices fell 9 Copyright 2015 RISI, Inc. Proprietary Information

10 Cash Margins at Canadian NBSK Mills Remain at Relatively High Levels C$2000 C$1800 C$1600 C$1400 C$1200 C$1000 C$800 C$600 C$400 C$200 NBSK Cash Margin (R) NBSK Real Net Price C$ (L) Eastern Canadian NBSK Real Variable Cost C$ (L) 250% 225% 200% 175% 150% 125% 100% 75% 50% 25% 0% C$ -C$ % 50% 10 Copyright 2015 RISI, Inc. Proprietary Information

11 World Production of Paper and Board Graphic, Packaging and Specialty and Tissue; Percent Change 8% 6% 5.7% 6.6% 4% 2% 37% 3.7% 3.2% 3.0% 1.9% 39% 3.9% 2.7% 1.0% 05% 07% 08% 1.2% 0.5% 0.7% 0.8% 2.3% 0% -0.4% -2% -2.0% -4% -6% -5.6% -8% Copyright 2015 RISI, Inc. Proprietary Information

13 For 2015, the High Season for Woodfree Paper Demand in W. Europe Is Over Seasonal adjustment factors for W. European P&W demand (Avg. = 1) Stronger than Normal Demand Mechanical Papers Woodfree Papers Weaker than Normal Demand 0.80 Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. 13 Copyright 2015 RISI, Inc. Proprietary Information

14 2015 Capacity Development Highlights: BHK Gains in 1H, BSK Gains in 2H BHK CMPC (Brazil) startup New pulp line, BEK +1.3 million TPY May, 2015 Old Town (USA) restart 200k BHK/BSK January 2015 BCMTP (Hardwood) Chetwynd (Canada) restart (shut 2012) 240,000 TPY May 2015 BSK Heinzel Pols (Austria) restart 4 th quarter after the recovery boiler repair 240,000 TPY Svetlogorsk (Belarus) startup New pulp line 400,000 TPY BSK/DP/BHK 4 th quarter Copyright 2015 RISI, Inc. Proprietary Information

15 Key Update: China s Pulp Demand Is Coming in Stronger than Expected in 2015 Based on the supply/demand d analysis a s we have been doing to this point, producer profitability should be declining starting now or soon However, a new round of monetary stimulus in China has led to more availability to loans for China s trading houses and paper companies This is leading to some inventory restocking Also, China s mandated d closures of backward pulp and paper capacity have become more aggressive, in terms of reality vs. targets This leads to a higher mix of virgin wood pulp in the furnish mix, especially BHK. BSK is more ambiguous. 15 Copyright 2015 RISI, Inc. Proprietary Information

16 China s Accelerating Closure Process Has Implications for 2015 and Beyond For 2015, producer profitability will be higher than we expected. We continue to see a drop in profitability later this year, but more modest, and with greater risk that it will not happen If the closure process remains in high gear over the next several years, then China s BHK imports will be notably higher than expected. The market would be better able to absorb the new capacity coming on stream in Indonesia and South America over the next five years. 16 Copyright 2015 RISI, Inc. Proprietary Information

17 2016 Capacity Development Highlights: BHK Gains in 1H; BSK Gains Throughout BHK Klabin (Brazil) startup New pulp line, BEK/BSK +1.1 million TPY BHK March, 2016 Alizay (France) restart 160k market BHK? Mid 2016? BSK Klabin (Brazil) startup +400k TPY fluff/sbskff/sbsk IP Riegelwood (USA) conversion + 360k TPY fluff/sbsk, 2Q Sodra Cell Varo (Sweden) rebuild +275k TPY NBSK, 2Q Domtar Ashdown (USA) conversion + 230k fluff/sbzsk, 3Q 17 Copyright 2015 RISI, Inc. Proprietary Information

18 Key Points for the Forecast In 2H 2015, still expecting a downward correction in pulp profitability, but more modest than expected earlier, and with higher risk of being directionally wrong. Due mostly to China s more robust demand for both BSK and BHK. In 2016, BSK capacity will be rising rapidly as the year proceeds, putting downward pressure on BSK profitability. SBSK and fluff will be most impacted. In 2016, BHK capacity gains will be modest, leading to tighter market conditions for BHK than for BSK. By late 2016, the list prices of BEK in China will be higher h than the list price of NBSK. 18 Copyright 2015 RISI, Inc. Proprietary Information

22 So What Are the Sources of Incremental Chinese Demand for Papergrade Pulp? Tissue production is rising by about 600,000 tpy Predominantly based on virgin fiber Policy closures of backward pulp and paper capacity favors BHK consumption growth (at the expense of local fiber, including nonwood). Rising demand for higher quality paper also raises BHK demand Continuing move toward more BHK, less BSK, as new paper p machines are installed and backward paper machines are closed BSK demand for absorbent applications is growing solidly (fluff pulp from the US South) 22 Copyright 2015 RISI, Inc. Proprietary Information

23 Tentative Conclusion: Pulp Demand in China Might Continue to Grow Even if P&W Production Turns Flat BHK is likely to continue to take share in China s furnish mix. But how much? Mechanical pulp (BCTMP/APMP) consumption will continue to grow, benefiting from its low-cost position and continuing use in boxboard But will this translate into higher import levels? BSK is still uncertain Upward trend in fluff pulp demand should continue BSK consumption in papergrade p applications seems less certain Newer P&W PMs use less BSK But newer tissue PMs will continue to use a lot of BSK 23 Copyright 2015 RISI, Inc. Proprietary Information

28 China s BEK Price, as Seen from Brazil, Is Up Very Sharply BEK List Price per Tonne in China in Three Currencies 1,400 Euros, US$ Reals ,200 BEK Euros BEK U.S. $ BEK Brazilian Reals , Source: RISI Copyright 2015 RISI, Inc. Proprietary Information

Even in a Weak Dollar Setting, China s Pulp Producers Have

and available land Many plantations ti are on marginal sites with low

is expensive Tighter enforcement of pollution and water use standards

29 Even in a Weak Dollar Setting, China s Pulp Producers Have Competitiveness Problems Related to Fiber Supply Lack of woodfiber and available land Many plantations ti are on marginal sites with low yields yeds Labor costs have been rising quickly Importing woodfiber is expensive Tighter enforcement of pollution and water use standards Eucalyptus in southern China. 29 Copyright 2015 RISI, Inc. Proprietary Information

30 In Indonesia, APP s South Sumatra BHK Project Will Open in Late 2016/Early million tonnes per year of BEK and BAK Acacia from plantations in South Sumatra Additional wood from elsewhere in Indonesia? Wood costs will vary according to distance 30 Copyright 2015 RISI, Inc. Proprietary Information

31 31 In Brazil, Five Large BEK Lines Will Be Started t Up from (Million tonnes per year MTPY) Copyright 2015 RISI, Inc. Proprietary Information VCP (now Fibria) 2009 Suzano Maranhao 1.5 MTPY, 2014 CMPC Guaiba 1.3 MTPY, 2015 Klabin Ortigueira 1.1 MTPY, 2016 Fibria Tres Lagoas 1.75 MTPY, 2017 Eldorado Tres Lagoas ~2.3 MTPY, 2018

32 Key Metrics For Fibria s Tres Lagoas Project Point to Coming Problems for Pulp Producers in China and the US According to CEO Castelli: Cash cost (ex mill): $150/tonne Construction ti cost: ~ $1300/tonne Distance from forest to mill: ~100 km. All of the monetary costs in dollars are much lower than they would have been in 2011/12, when the Brazilian Real was very strong Total cost of production in dollars will be substantially lower than the cash costs of many BHK producers in China and US, according to RISI estimates Conclusion: The Fibria project will make money for investors even when pulp prices are at cyclical lows 32 Copyright 2015 RISI, Inc. Proprietary Information

33 Will Eldorado s Tres Lagoas Project Match Fibria s in Competitiveness? Not enough information to say at this point But there are common misconceptions about the company and project generally Ownership marginally committed to the industry Eldorado s high debt/equity ratio prevents expansion Investors have deep pockets. Equity infusions are not dilutive. The project will have high wood costs The company is planting 50,000 ha/year around the mill site, and is also targeting 100km as an average distance Banks will not be willing to lend because it will lead to oversupply The weakness in the value of the Real seems to have changed this 33 Copyright 2015 RISI, Inc. Proprietary Information

34 The Weakness in South American Currencies Threatens to Disrupt the BHK Market in Important Ways Typically, in most industries, the highest quality products have higher production costs South American BEK at present has turned this relationship on its head---highest quality, lowest costs Indonesian BEK/BAK also has high h quality, very low costs, at current exchange rates. There is still a lot of land that can be planted in Indonesia If new pulp lines in these regions have total costs that are lower than cash costs than existing mills around the world, they can make money for investors even when prices are at cyclical lows If that is true, what is there to limit further expansion? 34 Copyright 2015 RISI, Inc. Proprietary Information

35 Risks to This Scenario Are Plentiful The BRL/USD (Brazilian Real vs. US$) exchange rate is highly volatile and tends to swing between extreme values. Is the weakness in the BRL short-term? If economic and political turmoil continues in Brazil, will it affect banks willingness to lend? What is the risk of higher interest rates and tighter monetary policy reducing lending for new projects? Will at-risk mills exit the market ahead of the problem? Will GDP in China, Europe surprise to the upside? Will China P&W start to grow solidly again, following the historical path of Japan and South Korea? 5%/year growth in BHK demand solves the problem 35 Copyright 2015 RISI, Inc. Proprietary Information

36 How Might the Chinese Pulp Industry Respond if Conditions Develop as Described Here? Chinese pulp producers still have a key advantage: Delivery costs to the local market. Smaller mills that service more remote markets in China will be partially shielded from lower imported pulp prices Forward integration into paper? Already happening and will continue Trade action? Chinese DP producers were e successful u in pushing for duties on imported DP Further conversions to DP? Doubling down with high fiber costs Overall, closures could be unavoidable, including some fairly new but smaller pulp mills 36 Copyright 2015 RISI, Inc. Proprietary Information

38 Key Take-Away Points Pulp prices have more upward momentum now than was expected. The probability of a sharp decline in profitability later this year is now smaller than earlier thought. Hard to see a cash-cost outcome. Capacity growth of BHK will be limited in 2H 2015 and in most of 2016, allowing the market to tighten considerably. Capacity of growth of BSK will accelerate sharply in late 2015 and in 2H 2016, especially for southern pine pulp (SBSK and fluff pulp) in the US and Brazil. Producer profitability will be affected. 38 Copyright 2015 RISI, Inc. Proprietary Information

39 Key Take-Away Points (II) The value of the US dollar (and the RMB) relative to most currencies has risen sharply very quickly This has reshaped the cost structure t of the pulp industry, with South American and Indonesian pulp mill projects becoming much more compelling investments If exchange rates stay near recent levels, e pulp p capacity growth will accelerate despite modest demand growth, putting more high-cost mills in China and the USA out of business. We continue to work through the implications as part of our new China Pulp Market study. 39 Copyright 2015 RISI, Inc. Proprietary Information

41 Thanks for your attention. For more information: World ldpulp & Recovered Paper 5-Year and 15-Year Forecasts World Pulp Monthly

Global Fluff Pulp Outlook

Global Fluff Pulp Outlook RISI North American Conference San Francisco, USA October 218 Patrick Cavanagh Economist, Pulp Presentation Overview Fluff pulp basics Demand Steady growth trends for both mature