European Packaging Paper An outlook for the next two years RISI European Conference, Berlin 29 February 2 March, 2016 Alejandro Mata Economist, European Forest Products
Alejandro Mata Economist, European Forest Products Bachelor s hl degree in Engineering, MBA degree earned in 2007 Worked in business and market intelligence functions for one of Europe s leading paper producers Have been analyzing and forecasting the industry since 2009 Author of the Paper Trader Europe and Paper Packaging Monitor amata@risi.com Europe,, the European Graphic 5 Year and 15 Year Forecasts and the Packaging Paper 5 Year and 15 Year Forecasts 2
Enhancement Visual appearance Enhancement Value creation Brand awareness Transportation Performance Protection Avoid waste Functionality 3
Only a graphic phenomenon? Digital Revolution 4
! Amazing facts about e commerce in Europe EU + International ordinary parcels EU27 15% of all EU 28 consumers purchased cross border in 2014 Convenience Fast deliveries Resource optimization 198 80 198 83 198 86 198 89 199 92 199 95 199 98 200 01 200 04 200 07 201 10 201 13 5
Tracking and preserving Smart packaging Augmented ed Reality NFC enabled abed 6
What else matters? 7
Weak euro vs. US dollar to keep favoring European competitiveness abroad Low oil prices will continue, although their impact on the economy is still unclear y Geopolitical situation (Brexit and more) 8
How is global containerboard doing? Beyond Global demand growth slowing down Containerboard Growth concentrated in emerging markets Implications for European markets Repercussions on trade flows Europe s cost competitiveness Dem mand Tr rade S&D Balance Profitability Overview of capacity changes 9
Global Perspective (Containerboard) Slowdown in the USA Driven by low oil prices Lower exports (impacting i virgin grades) 1+ million tonnes last year into recycled containerboard High US prices vs. all other Economic instability Brazil, Argentina, Venezuela Strong demand elsewhere Higher imports needed (mainly virgin) Capacity increases in Europe Replacing imports (virgin) Net exports to increase (recycled) Recycled fiber costs rising Substantial growth (excluding China) Capacity in China still growing Low operating rates vs. global Brazilian recession China s transformation Currency fluctuations 10
Demand 3.9% 9%up in 2015 1.5% up in 2016 Trade 6,000 5,000 Net imports higher in 2015 Overseas suppliers 4,000 increasing market share Imports to come down Conversions 3,000 Capacity Significant changes recently 2,000 Capacity Demand Production 2010 2011 2012 2013 2014 2015 2016 2017 Dem mand 1.5% in 2016 Su upply ances Bal 90% 11
Operating rates Rising due to Strong demand in 2015 Will come down due to Capacity conversions Lower imports to help mitigatethe the loss Production costs Slightly higher for 2016 (fiber) Margins to remain fairly stable to slightly down 700 600 500 400 300 Production Cost Operating Rate 200 2010 2011 2012 2013 2014 2015 2016 2017 100% 95% 90% 85% 80% 75% 70% Dem mand 1.5% in 2016 Su upply ances Bal 90% Copyright Copyright 2016 2016 RISI, RISI, Inc. Inc. Proprietary Proprietary Information Information 12
Turkish Import Duties Turkey imposing ADD 20% (CIF value) for US imports of unbleached kraft ftlinerboard, 175 g and less Started in July 2015 Companies affected: IP, RockTenn US exports down about 50% since August US redirecting exports to: Latin America and Emerging Europe Other southern EU countries (Italy and Spain) Consequences for Europe? Higher imports from Russia into Turkey Lower prices in southern Europe 13 13
Demand 2.4% 4%up in 2015 2.0% up in 2016 Trade Net exports rising due to Capacity additions Weak euro Global changes Capacity Significant changes recently 23,000 Capacity 22,000 Demand 21,000 20,000 19,000 18,000 17,000 16,000 15,000 Production 2010 2011 2012 2013 2014 2015 2016 2017 Dem mand 2.0% in 2016 Su upply Balances 90% 14
Operating rates Higher in 2014/2015 due to healthy demand and higher exports Will come down due to Capacity additions Added pressure from Asia (low operating rates) 700 600 500 Production Cost Operating Rate 100% 95% 90% 85% 400 Production costs 80% Higher for 2016, linked to recovered paper prices 300 75% Margins for producers most likely to come down 200 2010 2011 2012 2013 2014 2015 2016 2017 70% Dem mand 2.0% in 2016 Su upply Balances 90% 15
Why So Much in Recycled Containerboard? European Demand Trends Market Concentration World Trends (Trade Flows) Copyright Copyright 2016 2015 RISI, RISI, Inc. Inc. Proprietary Proprietary Information Information 16
Major Capacity Changes (Containerboard) Stracel 270,000 (FR) Conversion (LWC) Aviretta 200,000 (DE) Conversion (SC) Varkaus Kraft and White Top 390,000 (FI) Conversion from UWF EcoPaper 280,000 (RO) Pro Gest 550,000 (IT) Conversion (Newsprint) Hamburger White top & Brown Testliner 450,000 (DE or TK) Schoellershammer 250,000 (DE) 2014 2015 2016 2017 Husum Kraft ftwhite Top 300,000* (SE) Conversion (CWF) Kipas Lightweight 400,000 (TK) Modern Karton 400,000 (TK) Parenco 385,000 (NL) Conversion (Newsprint) Leipa White top testliner 450,000 (DE) Conversion (Newsprint) Virgin Recycled Two New Machines in 2018 Heinzel 450,000 (AT) Conversion (Umec) Mondi 300,000 tonnes (Slovakia) white testliner BillerudKorsnäs 500,000 tonnes (DE)?? 17
European Demand Trends Containerboard 4% Printing & Writing 4% Cartonboard 3% Newsprint 12% Tissue 6% Containerboard is the largest segment of all paper & board Size Matters 18
European Demand Trends 130 120 110 100 90 80 70 60 50 40 Containerboard Cartonboard Newsprint P&W 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 19
Market Concentration Top 5 Next 5 Other 74% 22% Kraftliner Clear(er) leadership Overall steeper industry cost curve Top players dominating the cost curve 4% Top 5 Next 5 Other 16% 38% 46% Recycled Containerboard No clear leadership Smaller gap between the first and fourth quartiles on the industry cost curve Easier to secure an attractive position on the industry cost curve 20
World Trends (Trade Flows) North America Net Exporter? Capacity Expansions (Boxboard) Not many clear opportunities for Europe 21
World Trends (Trade Flows) Lightweight North America Net Importer Less capacity buildup globally Warning! Global market becoming more competitive 22
Global Cash Cost Curve 300 Recycled Linerboard 300 Recycled Medium 250 250 200 200 150 150 100 100 50 50 0 Europe Asia Latin America North America 0 Europe Asia Latin America North America Fiber Chemicals Energy Labor 23
How is global cartonboard doing? Beyond Global demand growth slowing down Cartonboard Growth concentrated in emerging markets Implications for European markets Repercussions on trade flows Europe s cost competitiveness Dem mand Tr rade S&D Balance Profitability Increasing threat from Asia 24
Global Perspective (Cartonboard) Slowdown in the USA Virgin grades 65% of the market Demand relatively flat Imports expected to rise in 2016 20172017 Exports also to come under pressure Capacity increases in Europe Demand growing invirgingrades grades Capacity expansions (virgin) Exports under pressure Tremendous growth in capacity Capacity expansion mainly in Economic instability China (at least as fast as Brazil, Argentina, Venezuela demand in 2016 and 2017) Strong demand elsewhere Low operating rates vs. global Small market overall Brazilian recession China s transformation Currency fluctuations 25
Demand 1.5% 5%up in 2015 1.4% up in 2016 Trade Net exports rising due to conversions from graphics Weak euro Western European net exports mainly to Emerging Europe 7,000 6,000 5,000 4,000 3,000 Capacity Demand Production Capacity Significant changes recently 2,000 2010 2011 2012 2013 2014 2015 2016 2017 Dem mand 1.4% in 2016 Su upply ances Bal 90% 26
Operating rates Rising due to 1,100 Production Cost Operating Rate 100% Increasing exports Better domestic demand 1,000 95% Will come down due to Capacity conversions 900 90% Competition from Ai Asian producers 800 85% Production costs Higher for 2016 (fiber) Margins to come under severe pressure due to OR 700 600 500 2010 2011 2012 2013 2014 2015 2016 2017 80% 75% 70% Dem mand 1.4% in 2016 Su upply ances Bal 90% 27
Global Cash Cost Curve Latin and North America Virgin Cartonboard 600 have abundant virgin fibers 500 400 Main exporting regions 300 will be: 200 North America Europe 100 Asia 0 Europe Asia Latin America North America Fiber Chemicals Energy Labor 28
Demand 0.8% 8%up in 2015 4,000 0.5% up in 2016 Capacity Demand Production Trade Net exports not expected to change much due to sluggish demand worldwide 3,000 Capacity Rising: incremental capacity at existing mills Some conversions to virgin being considered 2,000 1,000 2010 2011 2012 2013 2014 2015 2016 2017 Dem mand 0.5% in 2016 Su upply ances Bal 90% 29
Operating rates Trending down due to 700 Production Cost Operating Rate Increasing pressure from 95% Asia on exports side 600 Capacity rising faster than demand in Europe 90% Production costs 500 Rising mainly due to prices for recovered paper 80% Margins for producers to 400 come slightly down 75% 100% 85% 300 2010 2011 2012 2013 2014 2015 2016 2017 70% Dem mand 0.5% in 2016 Su upply ances Bal 90% 30
European Boxboard Trade Balance European exports in 2014 were about 10 million tonnes 31
Europe s Main Destinations? Emerging Europe (46%) Americas (14%) Asia (21%) Africa & Middle East (16%) 32
What Is at Risk? Emerging Europe (46%) Americas (14%) Asia (21%) North America Net exporter of virgin boxboard Africa & Middle East (16%) 33
Demand Supply Balances 1.5% in 2016 90% Demand Supply Bala nces 2.0% in 2016 90% 90% Demand Supply Su pply Balances Balances 1.4% in 2016 0.5% in 2016 90% 34 Demand
Conversions What s driving them? Higher margins Growing markets 35
Is the grass greener on the other side? Containerboard 4% Printing & Writing 4% Graphics: Demand declining since 2007, and in many regionsinthe in world Despite significant amount of closures, more will be needed in the coming years Lower margins for producers Cartonboard 3% Tissue 6% Newsprint Packaging: 12% Demand still growing, globally and in Europe The industry will sooner or later absorb the wave of increases Higher margins for producers 36
Packaging gvs. Graphics Profitability: Prices/Total Cost 175 1.75 Kraftliner Testliner Boxboard CWF Newsprint 1.50 1.25 1.00 0.75 2001 2003 2005 2007 2009 2011 2013 2015 37
Questions? 38 38
Thank you! For more information: European Graphic Paper 5 Year Forecast www.risi.com/forecasts World Boxboard Study www.risi.com/ 39