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2020 | Fastmarkets RISI | Mill Intelligence Outlook
Ville Henttonen
Senior Product Manager, Mill Intelligence
Mill Intelligence OutlookIntroduction to panel discussion
2
Agenda
2020 | Fastmarkets RISI | Mill Intelligence Outlook
• Key cost drivers
• Machine conversions
• Risk of closure
• Converting integration strategies
• Paper vs. plastics case study: Shopping bags
• Water efficiency and effluent treatment
Key cost drivers have varying volatility
TYPICAL RISK SCENARIOS FOCUS ON
THOSE THAT FLUCTUATE THE MOST
AND MAKE THE BIGGEST DIFFERENCE
• Recovered paper prices have typically been
more volatile than wood prices, especially since
the changes in China’s market, which have also
affected the global pulp market
• Wood prices are relatively regional, which is
why even large local changes, like storm or
beetle damage, often have a more moderate
effect on average European prices
• Recently, Central Europe has seen a situation
where all fiber prices (wood, recovered paper
and market pulp) have dropped to low levels
• Average electricity and natural gas prices have
followed a similar trend, but recently electricity
prices have remained higher and more stable
32020 | Fastmarkets RISI | Mill Intelligence Outlook
European conversions from graphic to packaging papers
42020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
RECENTLY ALL SORTS OF
GRAPHIC PAPER MACHINES
HAVE BEEN CONVERTED TO
VARIOUS PACKAGING PAPERS
• Asset quality of an individual machine
often has high importance in conversion
decisions, especially in containerboard
• It seems that most of the best deals
have already been done, which may
lead to less competitive conversions
• Many graphic paper grades suffer from
such strong demand declines that any
other grade is seen as a better option
• Containerboard is not necessarily the
best conversion grade anymore, as the
market and prices have weakened
Machine conversion competitiveness may vary
MACHINES CONVERTED FROM
GRAPHIC PAPERS CAN HAVE
SIGNIFICANTLY DIFFERENT
CASH COST COMPETITIVENESS
• Successful conversions depend on
several factors: rebuild concept, asset
quality, fiber sourcing, cost position,
product quality, sales and marketing, etc.
• The most successful European machine
conversions have been able to reach the
second or even the first quartile on the
regional containerboard cash cost curve
• Typically, converted machines are not
the widest, biggest or most modern, but
are still slightly ahead of the average
producer
52020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
Machine conversion also requires investment
MACHINES CONVERSION CASES
HAVE DIFFERENT INVESTMENT
REQUIREMENTS
• First key factor is the asset ownership
• Is the machine already owned or does it
have to be acquired?
• Some machines are easier to convert
than others as equipment changes and
upgrade needs may vary
• Most of the European conversions lose
cost competitiveness when capital
costs are included
• Globally many conversions have been
done with minimal “zero” investments
62020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
Risk matrix: Company risk is combined with machine risk
COMPARISON OF COMPANY AND
MACHINE RISK TO THE REGIONAL
INDUSTRY AVERAGE MAY REVEAL
POTENTIAL INDUSTRY ACTIONS
• Company risk identifies those companies
that are most likely to do forced or planned
closures or to divest their competitive assets
• Machine risk identifies those machines
inside the high-risk companies that are most
likely to be closed or divested
• Machines with high company and machine
risk are most likely to face forced closure in
difficult market conditions
• Case study: Western and Central European
containerboard market (2017)
72020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
Comparison of corrugated board cost and price index
CORRUGATING COSTS HAVE
DECREASED DUE TO LOWER
CONTAINERBOARD PRICES
• Containerboard is the most important
key cost driver of corrugated board
• In 2017-2018, high containerboard
prices increased the corrugating costs
• Many corrugated board producers faced
difficulties in transferring the full effect of
cost increases to their prices
• Recently, corrugating cost indices have
come down to the same level as the
price index
• Currently, corrugated board has better
business potential than containerboard
• Integrating both containerboard and
corrugating operations to the same
company helps to control volatility risks
82020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
Integrated vs. independent corrugating plant
MANUFACTURING CORRUGATED
BOARD WITH TWO INTEGRATION
STRATEGIES
• Integrated = Containerboard net price at
corporate level equals manufacturing
cost + delivery to “natural market,” thus
own corrugator
• Integrated corrugators are exposed to
immediate price changes in necessary
containerboard raw materials
• Independent corrugators usually
experience a slight delay in raw material
cost changes (containerboard prices)
• In 19H2, both integrated and independent
corrugators operated at relatively low cost
92020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
Cost variation between corrugators
THE CASH COST DIFFERENCE
BETWEEN LOW-COST AND
HIGH-COST CORRUGATORS
CAN BE WIDE
• The cost difference is mainly due to
operational efficiency; labor productivity
in particular is a significant factor
• Despite the wide gap, the vast majority
of capacity operates near the average
cost level
• The cost difference has been quite
consistent
• All raw materials are assumed to be
purchased at estimated market prices
of each country
102020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI
Competitiveness of packaging paper vs. plastics: Shopping bags
PAPER AND PLASTIC SHOPPING BAG
COST COMPETITIVENESS COMPARISON
• Moldable thermoplastics compete with packaging
papers in various packaging applications
• Resin commodities are sold as both virgin pellets
and somewhat cheaper recycled regrind flakes
• Low-density polyethylene (PELD) is used, for
example, in shopping bags
• Unbleached machine-finished (MF) bag paper is
used in comparable paper bags
• Case study: Shopping bag raw material costs in
Germany, excluding other converting costs
• MF bag paper average costs are a delivered total
cost estimate of all identified European producers
• Plastics prices per tonne have been more volatile
but have recently stabilized at a relatively low
level
112020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI, Plasticker.de
Competitiveness of packaging paper vs. plastics: Shopping bags
PAPER BAG COSTS HAVE BEEN HIGHER
AND RECENTLY MORE VOLATILE
• Heavier 55 g paper bag requires more raw
material than lighter 21 g plastic bag
• Relative price volatility of plastics is much lower if
analyzed per bag instead of per tonne
122020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI, Plasticker.de
Water efficiency and effluent treatment
WATER SUPPLY IS LIKELY TO BE AN ISSUE
AND EFFLUENTS WILL BE LESS TOLERATED
• All environmental aspects are getting higher focus, and
most related laws and regulations are likely to become
stricter
• Many regional environmental authorities have put a
higher emphasis on effluent treatment and emissions
• Several European mills have recently faced effluent-
related inspections, sanctions and even constraints
• Climate change is likely to complicate fresh water
supply as precipitation decreases in southern Europe
• Precipitation may actually increase in central and
northern Europe, hampering harvesting in the Nordic
region
• The importance of water efficiency and effluent
treatment at pulp and paper mills is likely to increase,
as will demand for related technology and solutions
132020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI, EEA / EURO-CORDEX
Take away
Machine conversions can give varying results
▪ Conversion does not necessarily improve competitiveness
▪ The packaging markets also have their own complexities and issues
Two-dimensional risk analysis
▪ Both company risk and machine risk are worth analyzing
▪ Fiber and energy price scenarios can predict profit volatility
Integration strategy is an important factor in the
containerboard business
▪ Integrated corrugating may safeguard otherwise high-risk units
▪ Price fluctuations have a bigger effect on independent corrugators
▪ Transportation, operational and labor efficiency are also important
2020 | Fastmarkets RISI | Mill Intelligence Outlook 14
Fiber and energy are the key cost drivers
▪ Especially volatile recovered paper costs for recycled mills
▪ Gas and electricity are the most important energy cost drivers
Further reading
European Containerboard Risk of Closure Study
https://www.risiinfo.com/product/european-containerboard-risk-
closure-study/
Analytical Cornerstone Cost Benchmarking Tool
https://www.risiinfo.com/product/analytical-cornerstone-4-0-cost-
benchmarking-tool/
2020 | Fastmarkets RISI | Mill Intelligence Outlook 15
European Corrugators: A Comprehensive View
https://www.risiinfo.com/product/european-corrugator-study/
European Containerboard Machine Conversion Study
https://www.risiinfo.com/product/european-containerboard-machine-
conversion-study/
Asset Database
https://www.risiinfo.com/service/mill-data-costs/asset-database/
Index Builder
https://www.risiinfo.com/product/index-builder/
Thank you for your attention
Ville Henttonen, Senior Product Manager, Mill Intelligence
ville.henttonen@fastmarkets.com
Fastmarkets RISI
162020 | Fastmarkets RISI | Mill Intelligence Outlook
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