outlook for the world paper grade pulp market · mec. the bsk-bhk price spread in china ... sun...

Outlook for the World

Paper Grade Pulp Market

Kurt SchaeferVice President, Fiber

Shenzhen, China

May, 2017

© Copyright 2017 RISI, Inc. | Proprietary Information

$400

$500

$600

$700

$800

$900

3,700

4,000

4,300

4,600

4,900

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6,700

7,000

Jun

-11

Dec-1

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Jun

-12

Dec-1

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-13

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-14

Dec-1

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-15

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-16

Dec-1

6

NBSK Local, RMB

NBSK Local, US$ ex VAT

NBSK Import Net Price, US$

In China, Pulp (and Other) Prices Rebounded Very Sharply in Late 2016

2© Copyright 2017 RISI, Inc. | Proprietary Information

Pulp prices in the Chinese local market (RMB)

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3,700

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7,000

Jun

-11

Dec-1

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Jun

-12

Dec-1

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Jun

-13

Dec-1

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Jun

-14

Dec-1

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Jun

-15

Dec-1

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Jun

-16

Dec-1

6

BEK Local, RMB (Left)

BEK Local, US$ ex VAT

BEK Import Net Price, US$


BHK Pulp Imports into China Have Surged

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BHK

BSK

MEC

The BSK-BHK Price Spread in China


Source: RISI

-100

-50

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Price Gap (R)

BEK U.S. $

NBSK U.S. $


What Happened to Trigger the Spike?

• The rebound in prices started sooner than expected. Why?

• Major factors include:

▪ OKI delay

▪ Synchronized rebound in world economic activity in 2H16 into early 2017, surprising most observers

• Higher pulp consumption; inventory restocking

▪ Renminbi weakness >>> inventory restocking

▪ Stepped-up environmental closures in China

▪ Unexpected downtime (CMPC, Al. River, Pt. Wentworth)

▪ Relatively high DP prices contributed


Near-Term Conditions and Trends (1)• China economy slowing?

▪ Resurgence in real economic growth could be peaking right now

▪ Second half of 2017 and 2018 could see lower growth compared to the past three quarters

• European economy stronger▪ Current activity much stronger than expected

▪ No strong indications yet of a slowdown

▪ REFORM (?) in France (tax cuts, etc. ?)

• US economy▪ Economy remains strong, but recent indications of a

slowdown


Near-Term Conditions and Trends (2)

• Pulp inventories low across the industry

▪ Some papermakers are quite worried about sufficient volumes to maintain production

• Pulp prices high, paper prices low

▪ Paper margins being squeezed

• Stronger euro supports higher prices

• Seasonal slowdown coming in P&W markets

▪ But the downside to pulp demand could be more limited this year

Fibria’s 1.95 Million TPY Line Is to Start in September, as Signaled Earlier

• Nominal capacity of 1.95 million TPY equals 6% of world BHK market demand in 2017




• New capacity on the horizon

▪ OKI Line 1: Late May? Commercial tonnage in August/September?

▪ Fibria: Early September (3.5 months from now)

• Brazilian suppliers might take offsetting steps in early 2018

▪ Fibria maintenance downtime in the first quarter

▪ “Price shaping” behavior by Fibria?

▪ Suzano has at times also publicly discussed new decision framework for how much to produce



• DP prices collapsing in China

▪ Could bring swing capacity back into papergrade

• China policy-related closures

▪ Have to be watched and assessed carefully

▪ Not clear how important these have been

• China’s “National Sword” program

▪ Could stop imports of mixed recovered paper into China from the USA by late this year

• Trade flows will change

• RCP prices will rise in China

• Virgin boxboard production will receive a boost

DP/BEK Price Spread in ChinaUS Dollars per Tonne


Source: RISI

$230

Near-Term Indicator: Producer Inventories Dropping Sharply


Source: PPPC, RISI

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BHK

AVG BHK (2004-10 = 36.1, 2011-17 = 40.5)

BSK

AVG BSK (28.9)

Seasonality of European P&W Demand


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Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Mechanical Papers

Woodfree Papers

Stronger than Normal Demand

Weaker than Normal Demand

2017 Forecast Drivers


World Production of Paper and Board:Accelerating, but Very Slowly


Graphic, Packaging and Specialty and Tissue; Percentage Change

2.1%

4.0%

3.0%

-0.6%

-5.3%

6.5%

1.0%

0.2%0.8% 0.9%

0.4%0.8%

1.4%1.7%

-6%

-4%

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8%

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Most of the Growth in the Paper Industry Is in Packaging—with a Modest Effect on Market Pulp


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Packaging/Specialty

P&W

Tissue

News

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Tissue + P&W

World Production of P&W Paper: Relative Stability in 2017-2018?


-3.1%-2.8%

-4.7%

-3.6%

-2.5%

-5.7%-5.2%

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% C

han

ge f

rom

Pre

vio

us

Year

Euro Area

United States

China

World

Key BHK Capacity Developments

• 2016▪ Klabin Ortigueira, March: 1.1 million tonnes

▪ Alizay (France): BHK restart postponed indefinitely

▪ APP Sumatra (OKI), December: 2.0-2.8 million tonnes

▪ RGE Rizhao: Small line switching to BSK (-300,000 tonnes)

▪ APRIL Kerinci: New PM (-250,000 tonnes market, +250,000 tonnes integrated)

• 2017▪ Fibria, Sept. 17: 1.95 million tonnes

▪ Metsä Äänekoski: +100,000 tonnes, 3Q17

▪ APRIL Kerinci: Conversion to DP (-250,000-350,000 tonnes in 2018-2019…mostly starting in 2018)


BHK “Cash” Cost Curve, 4Q16Mill level costs, not including D, I, SG&A or logistics


North Amer.

South AmericaEuropeAsia

A Potentially Huge Shift from BHK to DP Production Is Coming in Asia

• Until recently, conversion from paper grade pulp to DP was limited to “batch” digesters.

• New technology is now being retrofitted to “continuous” digesters, creating many more candidates for conversion.

• Large lines in Indonesia and China are likely conversions.


“Pre-Hydrolyzing Vessel” retrofits on digesters

Andritz-supplied PHV at a Sun Paper mill in China

Key BSK Capacity Developments

• 2016▪ Klabin Ortigueira, March: 400,000 tonnes fluff/SBSK

▪ IP Riegelwood, 2Q16: 360,000 tonnes fluff/SBSK

▪ Domtar Ashdown, 3Q16: >300,000 tonnes fluff/SBSK

▪ Sodra Varo, 2H16: 275,000 tonnes

▪ RGE Rizhao mill: BSK on 300,000 tonne pulp line

• 2017▪ Domtar Plymouth: -90,000 tonnes fluff

▪ Metsä Fibre, 3Q17-4Q17: 700,000 tonnes BSK

▪ Svetlogorsk (Belarus): November 2017??? (300,000 tonnes BSK)

▪ RGE Rizhao mills: BSK to DP conversion underway


BSK “Cash” Cost Curve, 4Q16Mill level costs, not including D, I, SG&A or logistics


Asia

Europe South Amer.

North America

NZ

Asia

Europe South Amer.

North America

NZ


• BSK approaching a turning point in China? BEK has further room to run in some regions.

• BHK availability will significantly outpace demand growth by the end of 2017

▪ Much lower operating margins will be seen at BHK mills; closures/conversions will happen

• Southern BSK (SBSK/fluff) will be increasingly oversupplied as well later this year; fluff pulp prices are likely to be protected vs. SBSK

• More large-scale papergrade-to-DP conversions over the next three years

Near-Term Prognostications


Other Considerations and Risks

• Fibria: “Price Shaping” behavior after startup of 3L? Castelli said up to 200,000 tonnes of downtime

• OKI: No certainty here as to startup timing

• DP conversions: How well do these go?

• European economic/financial risk

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