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HAWKINS WRIGHT
Theoretical market pulp supply/demand balance
98%
• First time in more than 15 years
where investment in new capacity
96%
appears slower than “trend”
94%
demand
1,400
• These price cycles have ensured
1,200
6 that the supply-demand ratio is
restored to 91-92% over time
1 4 5
1,000 • In short-term, prices are driven by
3 inventory movements and
List prices,US$/t, cif Europe
800 2 expectations
• Prices invariably over-shoot in
600
both directions
400
BEKP (Hardwood)
200
NBSK (Softwood)
HAWKINS WRIGHT
So will market balance this time? If so, how?? And when???!
HAWKINS WRIGHT
“It’s the economy, stupid”
150
with growing risk appetite
100
• Macro- drivers are weakening
Economist Industrial Commodity index
everywhere through 2018, and
World Bank index
50
NBSK (net, China)
corrections are underway as
BEKP (net China)
emerging market currencies fall
0 (rupee, real, rupiah, ruble,
renminbi, lira,…all important pulp
Source: Hawkins Wright, World Bank, The Economist markets)
HAWKINS WRIGHT
Global BCP demand forecast by end-use
2017-2022: +5.5Mt
HAWKINS WRIGHT
Tissue capacity growth remains strong
1.5
Other Asia some new capacity is integrated
China
1.0
East Europe
0.5 West Europe 50%
North America
0.0 45%
-0.5 40%
Tissue
2015 2016 2017 2018 2019
25%
20%
Specialties
15%
10% Fluff
Packaging
5%
0%
-3% -2% -1% 0% 1% 2% 3% 4% 5% 6%
-5%
HAWKINS WRIGHT
Annual production growth rate (%)
Market pulp demand growth very dependent on China
HAWKINS WRIGHT
RISKS TO THE DEMAND FORECAST
3000
2500
400
Demand erosion in P&W grades will accelerate, substitution
350 towards lower grades
2000
300
Tissue demand is more resilient, but qualities may change
1500
'12 '13 '14 '15 '16 '17 '18 '19 250
'12 '13 '14 '15 '16 '17 '18 '19
The papermakers' converting margin is the absolute difference
between the selling price of uncoated woodfree paper and the input The papermakers' converting margin is the absolute difference between
cost of fibre. the selling price of coated woodfree paper and the input cost of fibre.
HAWKINS WRIGHT
(Data is based on a 3 month moving average) (Data is based on a 3 week moving average)
thousand tonnes
300
200
• US-China trade tensions, high debt levels, and
the weaker rmb weigh heavily on sentiment. 100
-100
-200
Jan-Jun 2017: +1.8Mt Jul-Dec 2017: +0.4Mt Jan-Jun 2018: -0.1Mt
-300
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
HAWKINS WRIGHT
Collapse in RCF imports has not stimulated much substitution for virgin fibre (yet)
• Recycled fibre imports are likely to fall by >10 million tonnes in 2018 (from 25.7 to 15Mt)
• Meanwhile, paper and board imports have increased by 1.7Mt (+55%). China’s net exports have fallen by 5.5 million t since 2016
• Talk of a “fibre deficit” is therefore misleading
Meaningful substitution requires lower pulp prices (relative to paper or RCF)
300
2.5
million tonnes
thousand tonnes
250
2.0
200
1.5
150
1.0
100
Pulp
0.5
50
Recovered paper
0.0 0
Jan-17 Jul-17 Jan-18 Jul-18 Jan-17 Jul-17 Jan-18 Jul-18
HAWKINS WRIGHT
Chinese on the hunt for fibre…at cost, not market price!
HAWKINS WRIGHT
Chinese are not the only ones investing…
Major investments in packaging globally
Mill Company Location Year Capacity Grade Converted from: • Investments allow firms to exit P&W and enter
Europe packaging sector, often at relatively low capital cost
Avezzano Burgo Italy 2014 180 RCF Fine paper (coated)
Hussum Metsa Board Sweden 2016 400 FBB Fine paper (uncoated)
• Lower recovered fibre prices attract investment in
Kotka Kotkamills Finland 2016 400 FBB Fine paper (coated) recycled based machines
Varkhaus Stora Enso Finland 2016 380 KLB Fine paper (uncoated)
Maastricht
Verzuolo
Sappi
Burgo
Netherlands
Italy
2018
2019
280
600
FBB
RCF
Fine paper (coated)
Fine paper (coated)
• Majors such as Klabin and Ilim retain exposure in
Oulu Stora Enso Finland n/a 850 FBB/KLB Fine paper (coated) pulp, but focus on integrated expansions
Total since 2016 3,090
North America
Alsip Corrugated Supplies Illinois 2016 200 RCF Fine paper (coated)
Trois-Rivieres Kruger Quebec 2017 400 RCF Newsprint
Androscoggin Verso Maine 2018 200 KLB Fine paper (coated)
Combined Locks Midwest Paper Group Wisconsin 2018 350 RCF Fine paper (coated & uncoated) • A total ban on recovered fibre imports by 2020 may
Wallula
Wickliffe
PCA
Shanying
Washington
Kentucky
2018
2019
400
280
KLB Fine paper (uncoated)
KLB/RCF Fine paper (coated)
accelerate these trends further…
McKinley Paper Bio-Pappel Washington 2019 160 RCF Fine paper (directory)
Selma International Paper Alabama 2019 450 WTL Fine paper (uncoated) • Leading to a tectonic shift in the location of paper
Catawba New Indy South Carolina 2020 400 KLB Fine paper (coated) production after 20 years of China growth…?
Rumford Nine Dragons Maine 2020 550 KLB/RCF Fine paper (coated)
Biron Nine Dragons Wisconsin 2020 400 RCF Fine paper (coated)
Bear Island Cascades Virginia 2021 400 RCF Newsprint
Total since 2016 4,190
Asia
Surabaya Fajar Paper East Java 330 Fine paper & cartonboard
Total since 2016 330
800
700
600
500
400
HAWKINS WRIGHT
Supply-side disruptions persist to this day…
integrations
thousand tonnes
• Existing capacity has failed to operate efficiently and 300 3.0
250 2.5
disruptions. We now assume structural balance to be 90-
200 2.0
91% 150 1.5
China Korea
100 Bangladesh India 1.0
50 Other Total (12 month) 0.5
• Global BCP capacity increases by +2Mt in 2018, +0.5Mt 0 0.0
in 2019, zero in 2020 (subject to DWP conversions)
Excluded from these numbers are new integrated lines
from Chenming (>1.5Mt/y kraft) and Bohui (+0.5Mt/y
BCTMP)
HAWKINS WRIGHT
Could supply surprise us again?
• So far there has been little swing dissolving production impacting on the kraft market
• Pulpwood prices rising in West Canada, Iberia, Northern Europe, New Zealand, South Africa, and especially Asia.
Even parts of Brazil…
HAWKINS WRIGHT
Summary
• Industry optimism is well founded, but headwinds are building, largely external or outside the
industry’s control
• Cyclicality and volatility should not be under-estimated. The current cycle is already the longest and
most profitable since the late ‘80s
• Scarce fibre should ensure that inflationary forces will persist for the foreseeable future
HAWKINS WRIGHT