Market pulp Outlook

London Pulp Week

November 2018

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

92% • Instead of analysing marginal

production costs and vulnerable
90% pulp mills, we start to look at paper
(and viscose) prices and
88% affordability
Illustration based on
86% confirmed capacity projects • A consensus has formed that
and demand trends prices will remain high for at least
84% 2-3 years…how realistic is this and
2007 2009 2011 2013 2015 2017 2019 2021
what could go wrong?

Source: Hawkins Wright

Includes all chemical pulps (BCP, UKP and dissolving wood pulp)
DWP capacity ~ 7 million t/y, Commodity pulp capacity ~66 million t/y HAWKINS WRIGHT
No cycle is the same…but we can still learn from history

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???!

• Difficult to see the supply-side responding given:

 Widespread pulpwood shortages
 Ageing asset base
 Extreme weather events, and climate change
 Unknown unknowns (often political in nature)
 Hiatus in the investment cycle

• Demand is more fragile, in our view

 Weakening macro-support
 Structural shifts in paper production?
 Price sensitivity of paper demand? Substitution for lower grade fibre?

HAWKINS WRIGHT
 “It’s the economy, stupid”

• Global GDP accelerated from

Pulp prices versus other commodities (index)
+2.5% in 2016, to +3.1% in 2017.
250
 Strongest growth in paper &
board production for 10 years
200

• US dollar weakened through 2017

Index, 2005=100

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

Global tissue capacity growth

• And where is India?!
3.0
Africa
2.5
Latin America • Although tissue represents a target market for most market
2.0 Middle East pulp producers, the sector brings its own challenges, and
million tonnes

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

Proportion of BCP shipments consumed

35%

30% Graphic papers

(inc. NSPT)

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

Year on year growth in market pulp demand, China v ROW

• China accounts for 34% global pulp
demand, from 14% ten years ago,
3 and Chinese buying patterns remain
unpredictable
2
Millions of tonnes

China 10yr avg: +1.3Mt/yr

1
• Shipments slowing but remain
healthy in 2018, but what about next
year?
ROW 10yr avg: -0.2Mt/y
-1
China
-2 Rest of world
Total
-3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(f)

HAWKINS WRIGHT
 RISKS TO THE DEMAND FORECAST

• Despite rising prices, margin pressure is evident in P&W &

specialty sectors. Non-integrated assets are most vulnerable
 US P&W converting margins have improved, but sector is
largely integrated. US market pulp demand is -5% in 2018

• Tissue margins also severely squeezed.

China converting margin: European converting
UWF margin: CWF
3500 500 • To what extent is paper demand price sensitive?
450
 Renewable credentials of paper packaging may be over-
Rmb per tonne of UWF paper

looked if paper becomes too expensive

€ per tonne of CWF paper

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)

Source: Hawkins Wright

Note: The papermakers' converting margin is the absolute difference between the selling price of paper and the input cost of fibre.
China

• Pulp imports +0.6Mt in 2018 Apparent recovery is

 BSKP +0.1, BHKP +0.5, UKP +0.1, Chinese pulp imports, not reflected in market
Year-on-year growth, total paper grade conditions in Q4
BCTMP -0.1
700
• In addition, +0.4Mt of “other”, assumed to be
processed recovered fibre and unbleached 600

hardwood kraft 500

Q3: +0.6Mt

 = +1 million t of papermaking fibre import 400

growth so far

thousand tonnes
300

200
• US-China trade tensions, high debt levels, and
the weaker rmb weigh heavily on sentiment. 100

 These are not short-term/temporary issues -

-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)

Pulp & recovered fibre imports Paper and board imports

3.5 400

Newsprint Fluting & kraft Coated paper

3.0 350

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!

Company Project/Target Location Grade Date Comment

Nine Dragons Old Town ME, USA BHKP Oct-18 Acquired from OTM Holdings. Convert to UKP
Paper Excellence Crofton, Alberni, Powell River Vancouver, Can NBSK Oct-18 Acquired from Catalyst
Nine Dragons Fairmont WV, USA DIP Aug-18 Acquired from Resolute for $55 million (plus working capital)
Cheng Loong New PM Vietnam Linerboard Oct-18 Plans 1Mty board complex in Binh Duong. 0.3Mty machine will start Q4 2018.
Shanying Wickliffe KY, USA kraft pulp, packaging Aug-18 Global Win Wickliffe acquired Wickliffe mill for $16 million from Verso. Will invest $150 million to restart and upgrad
Shanying WPT Netherlands RCP Jul-18 Cycle Link is subsidiary and overseas sourcing arm of Shanying, acquired Waste Paper Trader
RGE/APRIL Lwarcel SP, Brazil BEKP Jun-18 Details undisclosed
APRIL MNI Malaysia Newsprint Jun-18 APRIL affiliate believed to be acquiring MNI with a view to converting to UWF in due course
Nine Dragons Rumford WI, USA kraft pulp, paper May-18 Acquires Catalyst mills for $175 million
Nine Dragons Biron ME, USA fine paper May-18 Acquires Catalyst mills for $175 million
Hengan Greenfield, Finnpulp Kuopio, Finland kraft pulp May-18 Acquired 36% in Finnpulp project for $15 million
Shanying/CAMC/Silvi Brownfield, Boreal Bioref Kemijarvi, Finland Bio-refinery Apr-18 CAMC and Silvi Industries formed an agreement to develop projects together in Finland, Russia and elsewhere
Sun Paper Greenfield Laos BHKP/DWP Mar-18 250,000t/y BHKP line started in Q1 2018
Paper Excellence Eldorado MGS, Brazil BEKP Sep-17 PE acquires Eldorado for $4.7bn - double market value. Failed $12bn bid for Fibria in March 2018
Nine Dragons New PMs Vietnam Linerboard Aug-17 Already installed a 0.4 Million PM nr HCM City, plans another $800 million investment for 1.2Mty mill in Haiphong
Shanying Nordic Paper Sweden, Norway Packaging Jul-17 Acquired Nordic Paper for $290 million. Four mills in Sweden and Norway
Lee & Man New PM Vietnam Linerboard Mar-17 lntalled 0.4Mty liner machine in Q1 2017. Hau Giang province, Vietnam
Sun Paper Greenfield AR, USA fluff/DP/Liner? Apr-16 Project under planning for several years already
Tranlin Greenfield VA, USA Straw Jun-14 Cancelled

Plus OKI P&P, Paper Excellence in North America

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

Mill Company Location Year Capacity Grade

New machines

PUMA Klabin Brazil 2020-21 1,000 KLB/FBB

Florence West Rock South Carolina 2020 710 KLB
Ust-Ilimsk
Brown County
Ilim
Green Bay Packaging
Russia
Wisconsin
2021
2021
600
685
KLB
RCF
HAWKINS WRIGHT
Obbola SCA Sweden n/a 450 KLB
Since 2016 we have experienced two cycles within a cycle

Cycle 1 dominated by strong Cycle 2 dominated by supply-side

demand disruptions
1000

900 BEKP NBSK

US$/t net China price

800

700

600

500

400

HAWKINS WRIGHT
Supply-side disruptions persist to this day…

Indonesian BHKP exports +1 million t/y since late 2016

• Capacity assumptions have consistently been revised
lower, due to project delays, mill conversions or 500 5.0

integrations

12 month moving total, million t

450 4.5
400 4.0
350 3.5

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?

• Difficult to identify spare capacity in any region

• 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…

• Consolidation also playing a role

• Arauco MAPA from 2021, then very possibly…

 RGE/Lwarcel, UPM Uruguay, Suzano/Fibria,
 Several projects in Russia and Finland
 …but none before 2021-22

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

Join us for the next instalment in Shanghai, on 21st March 2019…

HAWKINS WRIGHT