HAWKINS WRIGHT




The Outlook for Market Pulp
Supply and demand through 2010
BWPA / Hawkins Wright Symposium



12 Novemb...
Agenda…



  •   The recovery from a macro perspective
  •   The recovery from a micro perspective
  •   Prospects for 201...
The big picture



 •   We believe that as much as two thirds of any changes in pulp
     prices can be explained by macro...
A ‘V’ shaped recovery – so far


                                                 300                                     ...
Key drivers of the recovery




   •   Near zero interest rates and quantitative easing (cheap money)

   •   Chinese dema...
Key drivers of the recovery


 Expansion of the US Monetary base
                   2,000
                                ...
Key drivers of the recovery


 China Bank Loans

                         500,000                                         ...
Chinese commodity demand



•     Chinese commodity demand driven by:
    >    Restocking
    >    Dollar hedge
    >    C...
Pulp imports


•   Imports of BSKP will be 4.9 million t this year, +38% (1.3Mt) on 2008

     > Increase comprises +0.6Mt...
Demand pull from China


World-20 shipments by destination, 9 months 2008 vs. 9 months 2009


                 Total      ...
A weakening US$ increased the cost base, and
helped support prices


                            1000                     ...
Micro drivers: production discipline


World-20 production-to-capacity ratio


           120%

           110%

         ...
World-20 BCP production vs. shipments



              3,750
                                                             ...
World-20 BHKP & BSKP producer inventories


    65

    60

    55

    50

    45

    40

    35

    30

    25        ...
All this, despite very weak paper shipments..


Global Printing and Writing Shipments by Quarter
Note: Sample size is for ...
The outlook for 2010




                       HAWKINS WRIGHT
The Outlook: Beware of the positive headlines…



   Much analysis will be based on year-on-year growth rates


   Those g...
The Outlook: Beware of the positive headlines…



   <It's the level, stupid -- it's not the growth rates, it's the levels...
The outlook: some leading indicators point to a
rebound in the next 5-6 months ….

OECD leading indicators show strong sig...
Return to growth in 2010


World Economic Outlook, Year-over-year GDP growth


                           2008     2009   ...
Key risks remain, mainly on the downside


•   Unemployment

•   Premature withdrawal of fiscal/monetary support

•   New ...
And will history repeat itself?



 •   Over the past 40 years, every US ‘slump’ has been interrupted by at
     least one...
US dollar splits opinion


  The US debt burden is HUGE.
  The government has only three choices to meet these liabilities...
US dollar splits opinion

    Euro
    Exchange rate: €/US$
      0.60

      0.65                                        ...
The dollars impact on pulp prices


    •   At today's pulp prices, a 10 US cent change in the exchange rate
        again...
Market pulp supply outlook


                                          35,000                                             ...
New pulp supply in 2010

Softwood:
            Restarts? Crofton, Harmac, Enocell,…Mackenzie and Terrace Bay remain down
 ...
Indonesian market pulp exports


Indonesian BHKP shipments by destination

                      3000
                    ...
But don’t forget the lower level of producer
stocks

     65

     60

     55

     50

     45

     40

     35

     3...
Market pulp demand outlook


 •   A Demand rebalancing - given weak demand in the mature economies,
     demand gains else...
Market pulp demand to improve?


Global Printing and Writing Shipments by Quarter. ‘V’, ‘U’ or ‘L’ shaped recovery?


    ...
NA P&W paper demand


12 month moving total

                                       16                                    ...
WE P&W paper demand


12 month moving total

                  10                                                         ...
BCP end-uses, 2008




                         Other
                          6%
         Specialty
           13%



  ...
What about demand in China?



•       Will the import demand drivers continue?

    >      Chinese stimulus plan, loans a...
Structural change or short-term phenomenon?



         P&B demand will no longer benefit from 20% growth of export
      ...
Chinese pulp imports by value

Although straw pulp closures may support import demand long term, price is the most
importa...
Other important considerations



  • Protectionist developments not encouraging
  • Subsidies




                       ...
Conclusion: the recovery has started, but the
             t
challenge is to sustain it

• Good news: we avoided a great d...
Thank you




            HAWKINS WRIGHT
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05 Oliver Lansdell The Outlook For Market Pulp

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05 Oliver Lansdell The Outlook For Market Pulp

  1. 1. HAWKINS WRIGHT The Outlook for Market Pulp Supply and demand through 2010 BWPA / Hawkins Wright Symposium 12 November 2009 HAWKINS WRIGHT
  2. 2. Agenda… • The recovery from a macro perspective • The recovery from a micro perspective • Prospects for 2010 HAWKINS WRIGHT
  3. 3. The big picture • We believe that as much as two thirds of any changes in pulp prices can be explained by macro-economic factors which affect all commodity markets to a greater or lesser extent. − Economic growth, exchange rates etc • Micro-economic factors (decisions and developments from within the pulp and paper industry itself) are responsible for only about one third of any change in pulp prices − Supply side discipline etc HAWKINS WRIGHT
  4. 4. A ‘V’ shaped recovery – so far 300 1800 The Economist Industrial Commodity (US$) Price Index - Left scale Industrial Commodity Price Index 2000=100 NBSK Market Pulp Price - Right Scale NBSK price: US$/tonne cif West Europe 250 1500 200 1200 150 900 100 600 50 300 02 96 00 04 06 08 10 94 98 90 92 88 80 82 84 86 n- n- n- n- n- n- n- n- n- n- n- n- n- n- n- n- Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Source: Hawkins Wright, the Economist HAWKINS WRIGHT
  5. 5. Key drivers of the recovery • Near zero interest rates and quantitative easing (cheap money) • Chinese demand • Weakening US dollar HAWKINS WRIGHT
  6. 6. Key drivers of the recovery Expansion of the US Monetary base 2,000 The US monetary 1,800 base = all physical 1,600 banknotes and coins held by both the 1,400 public and by the (US$ billions) banks as cash 1,200 reserves. Newly 1,000 printed dollars are being used to 800 replace the capital 600 losses of America's corporations 400 200 0 96 98 00 02 04 06 08 10 84 86 88 90 92 94 b b b b b b n n n n n n n n Ja Ja Ja Ja Ja Ja Ja Ja Fe Fe Fe Fe Fe Fe Source: Hawkins Wright, US Federal Reserve HAWKINS WRIGHT
  7. 7. Key drivers of the recovery China Bank Loans 500,000 New yuan-denominated loans in the first nine months stood at 8.67 400,000 RMB 100 million yuan trillion yuan, 5.19 trillion yuan more than the same period last year. 300,000 200,000 100,000 0 07 8 8 09 10 9 08 07 9 07 0 -0 -0 -0 n- n- n- n- - p- - ep ep ay ay ay Ja Ja Ja Ja Se M M M S S Source: Hawkins Wright, Peoples Bank of China HAWKINS WRIGHT
  8. 8. Chinese commodity demand • Chinese commodity demand driven by: > Restocking > Dollar hedge > China share of global demand rose from around 32% for a basket of commodities in 2008 to 44% in the first half of the year • Pulp demand also driven by: > Substitution of domestic wood pulp due to costs > Substitution for non-wood pulp lines due to costs AND environmental reasons > Stock-building for new machines HAWKINS WRIGHT
  9. 9. Pulp imports • Imports of BSKP will be 4.9 million t this year, +38% (1.3Mt) on 2008 > Increase comprises +0.6Mt substitution of domestic BSKP (now restarted), +0.7Mt of inventory build of pulp (some for new paper machines) AND finished paper at traders, paper mills, and paper merchants • Imports of BEKP/BHKP will be 5.8 million t this year. +56% (2.1Mt) on 2008 > Increase comprises 1.4 million t substitution of domestic BHKP and BCTMP (now restarted) and non-wood pulp (most remains closed), +0.7Mt of inventory build of pulp (some for new paper machines) AND finished paper at traders, paper mills, and paper merchants HAWKINS WRIGHT
  10. 10. Demand pull from China World-20 shipments by destination, 9 months 2008 vs. 9 months 2009 Total -1% West Europe -15% North America -14% Japan -19% Africa -22% East Europe -11% Oceania - Latin America +6% Other Asia +4% China +75% -3000 -2000 -1000 0 1000 2000 3000 thousand tonnes Source: Hawkins Wright Estimates, PPPC HAWKINS WRIGHT
  11. 11. A weakening US$ increased the cost base, and helped support prices 1000 1.60 900 800 1.36 euro/dollar exchange rate NBSK prices (US$/t) 700 600 1.12 500 400 0.88 300 200 NBSK price 0.64 100 Exchange rate 0 0.40 0 2 4 6 8 6 8 0 2 4 0 2 4 6 8 0 18 18 18 18 18 19 19 19 19 10 10 10 10 10 11 19 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Hawkins Wright, OANDA HAWKINS WRIGHT
  12. 12. Micro drivers: production discipline World-20 production-to-capacity ratio 120% 110% 100% % 90% 80% 70% World-20 60% Jan-08 Jul-08 Jan-09 Jul-09 Source: Hawkins Wright Estimates, PPPC HAWKINS WRIGHT
  13. 13. World-20 BCP production vs. shipments 3,750 3 month average BCP production 3,500 3 month average BCP shipments 3,250 (000s t) 3,000 2,750 2,500 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: Hawkins Wright Estimates, PPPC HAWKINS WRIGHT
  14. 14. World-20 BHKP & BSKP producer inventories 65 60 55 50 45 40 35 30 25 BSKP 20 BHKP 15 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: PPPC HAWKINS WRIGHT
  15. 15. All this, despite very weak paper shipments.. Global Printing and Writing Shipments by Quarter Note: Sample size is for North America, Western Europe, Korea and Japan 20,000 19,000 18,000 17,000 thousand tonnes 16,000 15,000 14,000 13,000 12,000 11,000 10,000 Q305 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q409est Q110est Q104 Q204 Q304 Q404 Q105 Q205 Q405 Q209 Q309 Source: Hawkins Wright Estimates, AFPA, KPA, JPA, PPPC HAWKINS WRIGHT
  16. 16. The outlook for 2010 HAWKINS WRIGHT
  17. 17. The Outlook: Beware of the positive headlines… Much analysis will be based on year-on-year growth rates Those growth rates will improve even with no further rise month-on- month Pulp demand up 45%! Strongest demand growth since 2001! HAWKINS WRIGHT
  18. 18. The Outlook: Beware of the positive headlines… <It's the level, stupid -- it's not the growth rates, it's the levels that matter here> Mervyn King, Governor of the Bank of England Take a close look at volume levels through 2010! HAWKINS WRIGHT
  19. 19. The outlook: some leading indicators point to a rebound in the next 5-6 months …. OECD leading indicators show strong signs of recovery 106 104 China 102 CLI (average = 100) 100 US 98 Euro Area 96 94 92 90 8 6 9 7 06 07 08 09 10 06 07 09 8 -0 -0 -0 -0 -0 p- n- n- n- n- n- p- p- ep ay ay ay ay Ja Ja Ja Se Se Se Ja Ja M M M M S Source: OECD HAWKINS WRIGHT
  20. 20. Return to growth in 2010 World Economic Outlook, Year-over-year GDP growth 2008 2009 2010(f) World 3.0% -1.1% 3.1% USA 0.4% -2.7% 1.5% Canada 0.4% -2.5% 2.1% Euro Area 0.7% -4.2% 0.3% Germany 1.2% -5.3% 0.3% France 0.3% -2.4% 0.9% Italy -1.0% -5.1% 0.2% Spain 0.9% -3.8% -0.7% Japan -0.7% -5.4% 1.7% UK 0.7% -4.4% 0.9% Brazil 5.1% -0.7% 3.5% China 9.0% 8.5% 9.0% Source: IMF HAWKINS WRIGHT
  21. 21. Key risks remain, mainly on the downside • Unemployment • Premature withdrawal of fiscal/monetary support • New financial disaster: ‘Cheap money’ has started to create asset bubbles in equities, commodities, credit and emerging markets <Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals. I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.> Prof. Nouriel Roubini UPSIDE: we may have underestimated the effects of reduced uncertainty/greater confidence (IMF) HAWKINS WRIGHT
  22. 22. And will history repeat itself? • Over the past 40 years, every US ‘slump’ has been interrupted by at least one quarter of positive growth, followed by a renewed downturn HAWKINS WRIGHT
  23. 23. US dollar splits opinion The US debt burden is HUGE. The government has only three choices to meet these liabilities: • Raise taxes • Cut spending • Allow inflation to rise from money printing, diluting the debt burden The enormity of the Fed’s quantitative easing increases the chances of a longer term depreciation of the US$. HAWKINS WRIGHT
  24. 24. US dollar splits opinion Euro Exchange rate: €/US$ 0.60 0.65 Consensus Opinion 0.70 0.75 Societe 0.80 General Forecast 0.85 0.90 Commerzbank Forecast 0.95 Forecast 1.00 7 9 0 7 8 7 8 8 9 0 07 08 09 10 11 0 9 r/0 /0 /0 r/0 r/0 /0 r/1 /1 l/0 l/0 l/ 1 l/0 n/ n/ n/ n/ n/ ct ct ct ct Ju Ju Ju Ju Ap Ap Ap Ap Ja Ja Ja Ja Ja O O O O But, there are two reasons why there is likely to be more volatility during the next few quarters: • End of loose monetary policy • Unwinding of the carry trade HAWKINS WRIGHT
  25. 25. The dollars impact on pulp prices • At today's pulp prices, a 10 US cent change in the exchange rate against the euro translates into approximately a $40/t change in the price of pulp, all other things being equal HAWKINS WRIGHT
  26. 26. Market pulp supply outlook 35,000 3500 Annual change in BCP capacity BSKP 30,000 3000 BHKP Annual change in capacity (thousand tonnes) Total capacity (thousand tonnes) 25,000 2500 20,000 2000 15,000 1500 10,000 1000 5,000 500 0 0 FORECAST -5,000 -500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Hawkins Wright HAWKINS WRIGHT
  27. 27. New pulp supply in 2010 Softwood: Restarts? Crofton, Harmac, Enocell,…Mackenzie and Terrace Bay remain down Incremental expansions in Chile and Russia Further closures? Hardwood: China April, Rizhao Q2 2010 +1.3 million t/y BAKP/BEKP Sun Paper Q4 2009 +170,000t/y Iberia Altri/Ence Indonesia APP/APRIL +1.2 million t/y BAKP? Canada Thurso (idle) France Alizay (idle) High Yield: China APP, Guangxi 2010 + 300,000t/y BCTMP (captive) HAWKINS WRIGHT
  28. 28. Indonesian market pulp exports Indonesian BHKP shipments by destination 3000 Japan 2500 India 2000 thousand tonnes Other Asia 1500 Europe 1000 Korea 500 China 0 2003 2004 2005 2006 2007 2008 2009f Despite Indonesian pulp capacity increasing by >1.2 million t since 2008, Indonesian exports have not grown. Will this new capacity reach the market in 2010? Source: Hawkins Wright Estimates, Various customs statistics HAWKINS WRIGHT
  29. 29. But don’t forget the lower level of producer stocks 65 60 55 50 45 40 35 30 25 BSKP 20 BHKP 15 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: PPPC HAWKINS WRIGHT
  30. 30. Market pulp demand outlook • A Demand rebalancing - given weak demand in the mature economies, demand gains elsewhere (e.g. China) are needed to sustain the global recovery − Unclear how weaker consumption in US and WE will be compensated for by stronger demand elsewhere in 2010 − Can China continue to drive the demand recovery? HAWKINS WRIGHT
  31. 31. Market pulp demand to improve? Global Printing and Writing Shipments by Quarter. ‘V’, ‘U’ or ‘L’ shaped recovery? 20,000 19,000 18,000 17,000 thousand tonnes 16,000 15,000 14,000 13,000 12,000 11,000 10,000 Q305 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q409est Q110est Q104 Q204 Q304 Q404 Q105 Q205 Q405 Q209 Q309 Source: Hawkins Wright Estimates, AFPA, KPA, JPA, PPPC HAWKINS WRIGHT
  32. 32. NA P&W paper demand 12 month moving total 16 34 Total P&W 14 metric tonnes (individual grades) 32 Uncoated 12 mechanical metric tonnes (Total) 30 Uncoated 10 woodfree 28 Coated woodfree 8 26 Coated 6 mechanical 24 4 2 22 0 20 05 06 07 08 09 5 6 7 8 9 l-0 l-0 l-0 l -0 l -0 n- n- n- n- n- Ju Ju Ju Ju Ju Ja Ja Ja Ja Ja Source: Hawkins Wright Estimates, AFPA, PPPC HAWKINS WRIGHT
  33. 33. WE P&W paper demand 12 month moving total 10 30 Total P&W 9 25 Coated 8 mechanical metric tonnes (Total) 7 20 SC metric tonnes 6 5 15 Uncoated woodfree 4 10 Coated 3 woodfree 2 5 1 0 - 08 05 06 07 09 5 9 6 7 8 l -0 l-0 l -0 l -0 l-0 n- n- n- n- n- Ju Ju Ju Ju Ju Ja Ja Ja Ja Ja Source: Hawkins Wright Estimates, CEPIFINE, CEPIPRINT HAWKINS WRIGHT
  34. 34. BCP end-uses, 2008 Other 6% Specialty 13% P&W 48% Tissue 25% Fluff 8% Source: Hawkins Wright HAWKINS WRIGHT
  35. 35. What about demand in China? • Will the import demand drivers continue? > Chinese stimulus plan, loans and liquidity. POSSIBLY > Substitution of domestic wood pulp due to costs. NO > Substitution for non-wood pulp lines due to costs AND environmental reasons. NO and YES > Stock-building for new machines. NO HAWKINS WRIGHT
  36. 36. Structural change or short-term phenomenon? P&B demand will no longer benefit from 20% growth of export sector and will be more reliant on local consumption If operating rates are to be maintained, net exports will need to rise • Most indicators suggest that Chinese imports will not be maintained over 1 million t/month through Q4 and into 2010 • Market will remain price sensitive and volatile… HAWKINS WRIGHT
  37. 37. Chinese pulp imports by value Although straw pulp closures may support import demand long term, price is the most important factor… BCP import volumes and market values (6 month moving average) 1200 Im port volumes (000s t) 800 400 Im port value ($ million) September 2009 0 03 06 09 08 04 05 07 10 n- n- n- n- n- n- n- n- Ja Ja Ja Ja Ja Ja Ja Ja Source: Hawkins Wright Estimates, Chinese Customs Data HAWKINS WRIGHT
  38. 38. Other important considerations • Protectionist developments not encouraging • Subsidies HAWKINS WRIGHT
  39. 39. Conclusion: the recovery has started, but the t challenge is to sustain it • Good news: we avoided a great depression • Bad news: we had a great recession and we now have to pay for it • Macro drivers that supported the pulp market are likely to fade during the coming quarters • Micro factors are also likely to be less supportive HAWKINS WRIGHT
  40. 40. Thank you HAWKINS WRIGHT

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