Panel 2 Hot Canadian Sectors for Investment Forestry and other Natural Resources 8th Chinese Enterprises Outbound Investment Conference April 2014 Jamie Samograd 2010 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International..
Presentation Outline 1. Overview of the Canadian forestry industry 2. Shift in focus from the US to Asia 3. Case study 2
Overview - Canadian forestry industry Canada is the second largest exporter of primary forest products in the world, after the U.S. Canada s forest sector is a top five contributor to the nation's net trade. The forest industry is an important employer in many regions of Canada, particularly in rural and remote communities. Major forest products include softwood lumber, structural panels, newsprint, pulp and various paper products. The development and production of many new and innovative products is also underway (ranging from bioenergy and bioplastics to new building systems). 3
Overview - Canadian forestry industry Regional snapshot of the industry Canada s forest industry varies across the country: Eastern Canada is dominated by pulp and paper product manufacturing. Western Canada is dominated by wood product manufacturing. The Atlantic Provinces, Quebec and British Columbia are the most forest-dependent regions, with a large share of their economy based on the sector. 4
Overview - Canadian forestry industry A sector in transition In recent years, refocusing its business model to help the sector adapt to new challenges: - a worldwide economic downturn - strengthening of the Canadian dollar against the currencies of our key competitors - a structural decline in North American newsprint demand; and - increased competition from other forest product suppliers (e.g. Brazil). 5
Shift in focus from the US to Asia British Columbia is a resource economy: - 75% of exports to the rest of the world come from natural resources. - 80% of exports of natural resources go to China. B.C. exports to China have grown from $1 billion in 2003 to $6 billion in 2012. Forestry makes up $3 billion of the $6 billion exported to China in 2012. In comparison, exports to the U.S. have fallen from $19 billion to $14 billion. China is not as large as the U.S. market for lumber, but it is where the growth is. 6
Shift in focus from the US to Asia Why the shift? Some reasons: - 59% decline in North American newsprint demand (1990 2010) - Steady decline in US housing starts (2004: 2.3 million 2010: 0.5 million) - Higher unit production costs old mills, over capacity - Log quality declined due to pine beetle Number of restructurings in North America 7
Case study - background Long standing mill at Port Alice on the west coast of Vancouver Island. Went into bankruptcy in 2004 and mill shut. Purchased out of bankruptcy in 2005 by US Private Equity and rebranded as Neucel Specialty Cellulose. The mill was converted to produce dissolving sulphite pulp. Prices for the product are more than twice the price for the product used in paper and cardboard manufacturing that is produced by most B.C. mills. It is used in a wide range of manufacturing processes including rayon filament for garments, pharmaceuticals, film, food thickeners, LCD screens and other products. 8
Case study - background Neucel operate a cellulose plant on the west coast of Vancouver Island at Port Alice. It has access to a deep water port at Port Alice, can bring an ocean-going vessel within 30 feet of the warehouse, load and send to China. Geographic advantage in being on the west coast of Vancouver Island close to a high-quality source of supply (Hemlock) From coastal forest supply, it can be transported by barge, which is the lowest cost method of transportation. Does not have its own forestry license. Production equipment and mill are relatively old. 9
Case study - background Fulida is the largest rayon manufacturer in China and one of the largest textile manufacturers in the world. It is headquartered near China Textile City, Hangzhou Bay, southwest of Shanghai. Production of dissolving cellulose pulp is a key ingredient in viscose rayon fiber fabric. Viscose rayon fibre competition in China has become intense. Few dissolving pulp plants are operating in the world. 10
Case study investment rationale Fulida s strategy: - saw an opportunity to integrate a vertical portion of their supply with a reliable source. - gain control of quality assurance - gain expertise in pulp production - there was also an interest in expanding internationally - acquiring a mill was cheaper than constructing one. Acquired a strategic investment interest in 2010. Acquired the remaining interest in 2011. 11
Case study Post acquisition Focus has been on improving the reliability of the mill. Significant investment in capital improvements and debottlenecking the mill. Using lean manufacturing and Six Sigma methods combined with new computerized, energy-saving controls for the boilers to achieve that goal. After the improvements, the mill expects to produce close to 200,000 tons per year of cellulose versus the approximately 160,000 tons it produced prior to the acquisition. Fully integrated into the Fulida organization to explore new growth opportunities while continuing the aggressive cost and capacity initiatives. 12
Jamie Samograd jwsamograd@kpmg.ca www.competitivealternatives.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 13