competitiveness of european containerboard market...• especially volatile recovered paper costs...
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Competitiveness of European Containerboard Market
Ville HenttonenSenior Product Manager, Mill Intelligence
RISI European ConferenceBarcelona, March 7, 2018
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• M.Sc. in Paper Technology from Helsinki University of Technology
• With RISI for 13 years• Manager of RISI Mill Intelligence Service in EMEA
region• Analyzes pulp, graphic paper, packaging and tissue
mills• Develops RISI benchmarking models based on
mass and energy balances• Expertise in energy usage and costs• Special knowledge of machine conversions and risk
analysis
Senior Product Manager, Mill IntelligenceVille Henttonen
2© Copyright 2018 RISI, Inc. | Proprietary Information
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You will learn…Competitiveness of European Containerboard Market
• Key cost drivers of containerboard
• Machine conversions from graphic papers
• Risk matrix and competitiveness analyses
• Integration strategies
3© Copyright 2018 RISI, Inc. | Proprietary Information
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Key cost drivers have varying volatilityTypical risk scenarios focus on those that fluctuate the most and make the biggest difference
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Fiber is a key cost driver everywhere
5© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI
• Energy strategy can also make winners and losers
• Chemical usage is relatively consistent
• Labor costs may vary a lot but are quite stable
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Recycled containerboard dominates
6© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI
• Various OCC and mixed recovered paper qualities are the most common containerboard raw materials
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Energy prices can be especially volatile
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• Different fuels can have very different costs due to both market and policy reasons
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You will learn…Competitiveness of European Containerboard Market
• Key cost drivers of containerboard
• Machine conversions from graphic papers
• Risk matrix and competitiveness analyses
• Integration strategies
8© Copyright 2018 RISI, Inc. | Proprietary Information
![Page 9: Competitiveness of European Containerboard Market...• Especially volatile recovered paper costs for recycled mills • Wood supply and costs are critical for integrated mills •](https://reader033.vdocument.in/reader033/viewer/2022042203/5ea5058b1235514bdb1958e6/html5/thumbnails/9.jpg)
Asset quality is critical in conversionsSuccessful conversions depend on several factors
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Key conversion success factors found in case studies• Fiber availability and delivery costs• Manufacturing cost position (scale, efficiency, inputs)• Product quality and performance characteristics• Project definition and rebuild concept• Sales and marketing plan• Capital requirements
Source: RISI
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There are a wide range of conversions
10© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI
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Machine conversion competitivenessMachines converted from graphic papers can have significantly different containerboard cash cost competitiveness
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• The most successful European conversions have been able to reach the second quartile on the regional cost curve
Source: RISI
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A containerboard machine’s trim width should match the most common corrugator widths
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• Most European corrugators are 2.5 m or 2.8 m wide, but widths of 1.6‐3.3 m can also be found
Source: RISI
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Only certain graphic paper machines have the optimal width for containerboard
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• Wide machines have more width options and better productivity, but not necessarily flexibility
Source: RISI
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You will learn…Competitiveness of European Containerboard Market
• Key cost drivers of containerboard
• Machine conversions from graphic papers
• Risk matrix and competitiveness analyses
• Integration strategies
14© Copyright 2018 RISI, Inc. | Proprietary Information
![Page 15: Competitiveness of European Containerboard Market...• Especially volatile recovered paper costs for recycled mills • Wood supply and costs are critical for integrated mills •](https://reader033.vdocument.in/reader033/viewer/2022042203/5ea5058b1235514bdb1958e6/html5/thumbnails/15.jpg)
Closures happen for two main reasonsForced closures differ from planned closures
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Forced closures• In most forced closures, companies are facing bankruptcy • Typically family‐owned single mill operations with one to three machines• Mills closed due to bankruptcy have often been restarted
Planned closures• Typically have high costs and/or a high technical age compared to the company’s other assets
• Often aiming for efficient removal of overcapacity• Mostly executed by companies with a high capacity share • These have been more permanent than forced closures
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Risk matrix analysis
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• Company risk is combined with machine risk and compared to the industry average, in this case Western and Central European Containerboard
Source: RISI
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Machine risk evaluation methodsCombination of cost rankings with techinal age and specific categories
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Cash Cost Ranking = Fiber + Chemicals + Energy + Labor + MaterialsDirect Cost Ranking = Cash Costs + Capital CostsTechnical Age• Based on the investment history of the machine• Can be used as a measure for future investment needsImportance for the Company• PM capacity per company’s total capacity at the defined marketTechnology & Strategy• Anything that may give a competitive advantage
o Trim, flexibility, forming, sizing, coating, finishing, converting, etc.o Mill’s fiber supply, energy supply, chemical supply, etc.
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Direct cost = cash cost + capital cost
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• High direct cost despite low technical age means high risk of closure or divestment
Source: RISI
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Technical age correlates with output
19© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI
• High technical age may give a signal for the need of new investments
• High capacity machines are often needed for efficient production of lightweight containerboard
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Company risk evaluation methodsBoth universal and market specific categories
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Net Gearing• Net Gearing (%) = Net Debt / Total Equity• >100% means that the company has more debt than the assets are worth• High net gearing may identify potential divestments and/or closures
Importance for the Industry• Market share of the company’s combined capacity in the market• Big players can influence the industry more than small players
Market Specific Categories• Any factors that may give some companies competitive advantage• Typically something that creates major difference in cost structure
o Fiber supply, energy supply, converting capacity, etc.
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You will learn…Competitiveness of European Containerboard Market
• Key cost drivers of containerboard
• Machine conversions from graphic papers
• Risk matrix and competitiveness analyses
• Integration strategies
21© Copyright 2018 RISI, Inc. | Proprietary Information
![Page 22: Competitiveness of European Containerboard Market...• Especially volatile recovered paper costs for recycled mills • Wood supply and costs are critical for integrated mills •](https://reader033.vdocument.in/reader033/viewer/2022042203/5ea5058b1235514bdb1958e6/html5/thumbnails/22.jpg)
Local competition may increase risks
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Source: RISI, Google
•Other nearby producers of competing products and especially raw material demand are potential risks
• Recycled containerboard and corrugating plants are most often located near high population density areas
o Containerboard mills are typically slightly outside the city area, but still near recovered paper sources
o Corrugated plants in proximity of the clients, often in big cities
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Transportation of corrugated board sheets is very expensive compared to containerboard rolls
23© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI, FEFCO
Economical delivery distance is only around 100‐300 km
Cost savings are the main driver for the decreasing basis weights
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Integration to converting lowers risks
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Source: Company websites, RISI estimates
•Western European containerboard companies have, on average, a 53% integration level to corrugating
•Only a portion of their corrugators are located next to the containerboard mill
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Case: Integrated vs. IndependentManufacturing corrugated board with two integration strategies
• Case study: recycled single wall C‐flute sheet in France, integrated = 500 km delivery from the containerboard mill
• Independent corrugators usually experience a slight delay in raw material cost changes
• Integrated corrugators are exposed to immediate price changes in containerboard raw materials
25© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI
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Average corrugating costs have been more stable for integrated than for independent operations
26© Copyright 2018 RISI, Inc. | Proprietary InformationSource: RISI
• Case study: recycled single wall C‐flute sheet in France
• Bright columns: Integrated producers
• Shaded columns: Independent producers
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The difference in manufacturing costs between the low‐cost and the high‐cost corrugators can be wide
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• Case study: recycled single wall C‐flute sheet in Spain, all raw materials purchased at market prices
• Despite the wide gap, the vast majority of capacity operates near the average cost level
Source: RISI
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Take awayCompetitiveness of European Containerboard Market
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• Fiber and energy are the key cost drivers• Especially volatile recovered paper costs for recycled mills• Wood supply and costs are critical for integrated mills• Natural gas and electricity are the most important energy cost drivers
• Graphic paper machine conversions are still a hot topic• There are already several converted containerboard machines in Europe• More conversions are likely to follow in the near future• Grade swing/conversion does not necessarily improve cost competitiveness
• Two‐dimensional risk analysis: Company Risk and Machine Risk • Fiber and energy price scenarios help our understanding of profit volatility
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29© Copyright 2018 RISI, Inc. | Proprietary Information
• Forced closures vs. planned closures• Planned closures have been more permanent than forced closures
• Not every high‐risk mill will close, they are just more likely to do so • For every mill closure, the reduction in competition diminishes the overall risk• Even high‐risk mills are only vulnerable in a weak market
• Integration strategy is an important factor in the containerboard business
• Containerboard is the key cost driver in corrugating• Integrated corrugating may safeguard some otherwise high‐risk mills• Price fluctuations have a bigger effect on independent corrugators• Transportation, operational efficiency and labor productivity are also important
Take awayCompetitiveness of European Containerboard Market
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