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NC State University
Global Dynamicsof the Pulp and Paper Industry
2017
Richard B. PhillipsNorth Carolina State University
Raleigh, North [email protected]
NC State University
Four Main Points1. Global Dynamics drive local decisions
• Decisions made by P&B companies in one part of the world impact decisions in all other parts of the world
2. Global paper and board consumption increasing …1% per Year
• Continues to grow globally, but declining in most of the Western World
• Tissue and containerboard relatively strong, printing papers very weak
3. Recycled Fiber availability will become more critical and costly
• Abundant wood – not an issue, but …
• … Long fiber products from virgin fiber not increasing
• Recovered paper supply and quality will be under significant stress
4. The “Bioeconomy” will make little impact on Pulp and Paper Industry
• The “Nano” developments that are promising represent high price but …
• Low volume products
2
Wealth drives Paper and
Board Consumption
National Wealth drives National P&B Consumption
Global Production =
Global Consumption
Future growth depends on future GDP
growth
Virgin Pulp produced where the trees are
P&B Produced where the jobs
are
Recovered waste paper
use far exceeds virgin fibers
Must see growth in
virgin fiber production
1. Global Dynamics
3
Global Dynamics drive Local Decisions
4
Global Production =
Global Consumption Virgin Pulp
produced where the trees are
P&B Produced where the jobs
are
2015 Global Production / Consumption27% of Production is Exported
82,992
76,632
Production
Consumption
21709
26.279
3,415
8,076
84,817
71,923
4,634
9,005
184,690
186,047
21,673
28,543
3,762
4,288
North America and Asia account for >50% of Production and Consumption 5
Source: RISI 2017
Wood Pulp Balance
P&B Wood Pulp Bleached Softwood Bleached Hardwood Recovered Paper
World -1,033 -1,216 -491 -145 -771
North America 5,856 8,633 8,066 -1,199 19,775
Western Europe 13,978 -4,132 701 -4,764 7,508
Eastern Europe -4,879 -446 -131 -762 806
Africa -5,088 -424 -449 77 164
Asia -89 -19,681 -9,747 -6,414 -30,053
Oceania -566 581 232 -176 1,698
Latin America -7,303 14,900 1,203 13,354 -1,044
Middle East -4,647 -648 -367 -260 375
Global -2,736 -1,216 -491 -145 -771
Exports minus Imports
6
Wood Pulp Balance
P&B Wood Pulp Bleached Softwood Bleached Hardwood Recovered Paper
World -1,033 -1,216 -491 -145 -771
North America 5,856 8,633 8,066 -1,199 19,775
Western Europe 13,978 -4,132 701 -4,764 7,508
Eastern Europe -4,879 -446 -131 -762 806
Africa -5,088 -424 -449 77 164
Asia -89 -19,681 -9,747 -6,414 -30,053
Oceania -566 581 232 -176 1,698
Latin America -7,303 14,900 1,203 13,354 -1,044
Middle East -4,647 -648 -367 -260 375
Global -2,736 -1,216 -491 -145 -771
Exports minus Imports
Wood pulp is manufactured where the trees are
7
Softwood Pulp Balance
P&B Wood Pulp Bleached Softwood Bleached Hardwood Recovered Paper
World -1,033 -1,216 -491 -145 -771
North America 5,856 8,633 8,066 -1,199 19,775
Western Europe 13,978 -4,132 701 -4,764 7,508
Eastern Europe -4,879 -446 -131 -762 806
Africa -5,088 -424 -449 77 164
Asia -89 -19,681 -9,747 -6,414 -30,053
Oceania -566 581 232 -176 1,698
Latin America -7,303 14,900 1,203 13,354 -1,044
Middle East -4,647 -648 -367 -260 375
Global -2,736 -1,216 -491 -145 -771
Exports minus Imports
Canada (NBSK) and USA (SBSK) account for long fiber production
8
Hardwood Pulp Balance
P&B Wood Pulp Bleached Softwood Bleached Hardwood Recovered Paper
World -1,033 -1,216 -491 -145 -771
North America 5,856 8,633 8,066 -1,199 19,775
Western Europe 13,978 -4,132 701 -4,764 7,508
Eastern Europe -4,879 -446 -131 -762 806
Africa -5,088 -424 -449 77 164
Asia -89 -19,681 -9,747 -6,414 -30,053
Oceania -566 581 232 -176 1,698
Latin America -7,303 14,900 1,203 13,354 -1,044
Middle East -4,647 -648 -367 -260 375
Global -2,736 -1,216 -491 -145 -771
Exports minus Imports
Brazil, Chile, Argentina and Uruguay (BEK) account for mostof world short fiber. Brazil has abundant land for 25 more mills.
9
Recovered Paper Balance
P&B Wood Pulp Bleached Softwood Bleached Hardwood Recovered Paper
World -1,033 -1,216 -491 -145 -771
North America 5,856 8,633 8,066 -1,199 19,775
Western Europe 13,978 -4,132 701 -4,764 7,508
Eastern Europe -4,879 -446 -131 -762 806
Africa -5,088 -424 -449 77 164
Asia -89 -19,681 -9,747 -6,414 -30,053
Oceania -566 581 232 -176 1,698
Latin America -7,303 14,900 1,203 13,354 -1,044
Middle East -4,647 -648 -367 -260 375
Global -2,736 -1,216 -491 -145 -771
Exports minus Imports
The imbalance in Recovered Paper will cause major problemsto be discussed later.
10
Wealth drives Paper and Board
Consumption
National Wealth drives National
P&B Consumption
Future growth depends on future GDP
growth
Wealth drives consumption
NC State University
Consumption
• Paper and Board Consumption are driven by wealth
– Manufacturing activity drives containerboard
– Business activity drives printing papers
– Consumer activity drives containerboard and others other
• Local consumption is driven by local wealth
– Global consumption can be predicted by Global GDP growth
– National consumption is not so predictable
• Paper and Board are recovered at increasing rates
– Paper is recovered locally and shipped globally
12
Global P&B Consumption related to Wealth
R² = 0.9217
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
$30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0
P&
B C
on
sum
pti
on
, Mill
ion
t
GDP, $ Trillions
Global P&B vs GDP
y = 2E-09x + 72940R² = 0.9578
0
50,000
100,000
150,000
200,000
250,000
$30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0
P&
B C
on
sum
pti
on
, Mil
lio
n t
GDP, $ Trillions
Global PKG vs GDP
y = 8E-10x + 94966R² = 0.7523
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
$30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0
P&
B C
on
sum
pti
on
, Mil
lio
n t
GDP, $ Trillions
Global PAPER vs GDP
• Gross Domestic Product the best indicator
• Better correlation with packagingthan paper
13
P&B Consumption v GDP per Capita
P&B consumption predictable for Developing nations
Not so much for Developed:Decline related to
Printing Papers and Newsprint
14
Extremes in Global Product Demand Forecast
15
• Packaging more than 50% of P&B consumed, growing ~2% per year• Tissue growth ~3.5% per year• Both products highly dependent on the growth of wealth• Printing Papers decline leveled off at -2.5% per year, but faster in Developed economies
Source: RISI 2017
Selected Countries GDP vs P&B Consumption
AUS
SWE
USA
IND
CHI
SAU
National Consumption Depends on Structure of the economy and wealth Distribution
16
China View
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
(000
) To
nn
es p
er Y
ear
China Consumption
Packaging Paper Tissue Other
• A “Forecast” is an educated guess
• My guess in 2014 and my guess in 2017 are both based on RISI numbers for 2 years earlier (that’s the best you can get from RISI)
• All economists were more bullish in 2014 about the World and the Chinese economy in 2017 than today
17
2017Forecast`
2014Forecast`
China View
• Continued overall growth of paper and board consumption, leveling off to still good numbers
• Packaging board continues to grow ~4% per year
• No growth in paper
• Tissue continues to grow, but volumes are small 18
USA View
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
(000
) To
nn
es p
er Y
ear
USA Consumption
Packaging Paper Tissue Other
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
An
nu
al G
row
th R
ate
, YO
Y, %
USA Growth
Total Paper Board Tissue
• Paper and board consumption continues to decline, perhaps at slower rate
• Packaging board continues to grow ~2% per year
• Continued shrinkage in paper consumption
• Tissue continues to grow, but volumes are small 19
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
An
nu
al G
row
th R
ate
, YO
Y, %
ROW Growth
Total Paper Board Tissue
0
50,000
100,000
150,000
200,000
250,000
300,000
1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
(000
) To
nn
es p
er Y
ear
ROW Consumption
Packaging Paper Tissue Other
Rest of the World View
• Slow growth of paper and board consumption
• Packaging board continues to grow ~2% per year, about same as USA
• Continued shrinkage in paper consumption
• Tissue continues to grow, but volumes are small 20
NC State University
3. Fiber Availability
Recovered waste paper use far exceeds virgin
fibers
Must see growth in virgin fiber production
NC State University
2015 Global Production / Consumption of Recovered Paper24% of Production is Exported
51,587
30,686
Production
Consumption
12,912
11,999
3,415
8,076
53,345
45104
3,162
3,038
99,519
130,845
13,053
13,994
3,472
1,743
North America accounts for >20% of Global Export of Recovered Paper 23
NC State University
Why do we care what happens in China?
• China consumes more than 50% of the waste paper recovered in the world– Pressures local pricing
• China has several board machines producing over 1 MM t per year of product– Those machines will always outbid local producers in the USA and
elsewhere to assure their supply
• Chinese companies now own 50% of the Canadian NBSK supply– To ensure their machines have the premium fiber they need
24
Production of Fiber
• Western World Wood Pulp Production declining• Global RCP production exceeds virgin fiber by 40%• Practical limit of ~70% recovery of domestic waste• Practical limit on number of times fiber can be recycled
Source: RISI25
China Packaging
• China production of P&B continues to grow at 2.5% per year
• China Production of Containerboard grows at 3% per year• Chinese Containerboard 100% Recycled fiber
Source: RISI26
China Packaging
• Not all Recovered Fiber goes to containerboard manufacture, but machine scales are enormous and willbe satisfied as first priority
• Consume ~ 50% of all World exports of Recovered Paper,forecast to go to 55%
• How can P&B be recovered from Western Europe and North America when regional demand is declining?
Source: RISI
27
The largest Chinese Mill produces 5 Million tonnes of 100% recycled liner per year
28
7% of the Mills produce50% of total Production
50% of all Mills produce 10% of total Production
Source: FisherSolve database on mills producing more than 50 tonnes per day
Asia currently imports 35 Million Tonnes of wasteCurrent collection rate of ~50%
Waste for Asia comes principally from North America and Western Europe 29
Shortage
Excess20,036
8,124
(35,110)
Source: RISI
Shortage grows to 37 Million Tonnes in 2020If recovery rate grows to 64%
Waste availability from North America and Western Europecannot grow because local consumption of P&B declines 30
Shortage
Excess
(37,065)
22,077
8,306
Source: RISI
Demand / Supply Imbalance partly reflected in pricing trends
31Source: RISI
343362
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 10 20 30 40 50
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
0
Kraft Liner
Recycled Liner
343362
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 10 20 30 40 50
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
0
China
United States
Linerboard Cost Curve, FOB Mill
32
Linerboard Cost Curve, FOB Mill
Source: FisherSolve
343362
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 10 20 30 40 50
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
0
China
United States
Delivered to Beijing
33
Linerboard Cost Curve, FOB Mill
431
Total Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 10 20 30 40 50
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
0
Kraft Liner
Recycled LinerLinerboard Cost Curve, Delivered Beijing
Source: FisherSolve
20% Increase in OCC
34
431
Total Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 10 20 30 40 50
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
0
Kraft Liner
Recycled LinerLinerboard Cost Curve, Delivered Beijing
Total Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 10 20 30 40 50
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
700
0
Mark (300)
Packaging Linerboard Kraft Liner Unbleac
Packaging Linerboard Recycled Liner Unbl
Source: FisherSolve
World will not run out of Wood fiber…
35
• Global Growth exceeds removals, evenaccounting for fuel wood harvest
• But only by small margin
• Planted forests versus natural forests arethe key to future growth
• Grow 5-10 times faster• But grown only for a profit
Source: FAO
2015 Global Production / Consumption of Bleached Softwood Pulp61% of Production is Exported
18,624
9,628
Production
Consumption
2,312
2,435
0
393
9,590
8,939
3
509
1,167
11,372
2,574
1,463
432
240
North America accounts for 33% of World Exports36
Global Production of Softwood Market Pulp not the same as Global availability
37
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 5 10 15 20 25
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
700
800
900
0Mark (0)
453
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 3 5 8 10 13 15 18 20 23
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
700
800
900
0Mark (0)
30 Million ST per Year Global Production
26 Million ST per Year Production in
3 Regions
WesternEurope
NorthAmerica
LatinAmerica
1/3 of Softwood Pulp Sold as Fluff½ Canadian Production owner by Asians
38
453
350
271286 296
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0 2 4 6 8 10 12 14 16
Co
st,
US
D p
er
FS
T
0
100
200
300
400
500
600
0Mark (0)
WesternEurope
NorthAmerica
LatinAmerica
18 Million ST per Year Production of non-fluff pulp
316 320330 332 332 333 339 344 344 349 350 352 357 362 362
372 378 380 386
434448
Mfg. Cash Cost and Cumulative Production
Cumulative Production, FST per Year (x1,000,000)
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00
Co
st,
US
D p
er
FS
T
0
50
100
150
200
250
300
350
400
450
0Mark (0)
Canada
7 Million ST per Year Production in Canada:
50% ofCapacity ownership is Chinese or Japanese
Purchased Softwood Pulp in BalanceToday’s supply adequate but little capacity being built
Shortage
Excess
Softwood well–balanced today globally with North American Surplus supplying Asia Deficit 39
8,996
(10,205)
1,111
Purchased Softwood Pulp Must GrowSoftwood Pulp will likely be in shortfall
Shortage in Asia not balanced by Excess produced elsewhere
40
Shortage
Excess
(13,893)
10,339
1,544
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
Ca
pa
cit
y (
00
0 m
etr
ic t
on
s)
Recycled Capacity
Virgin capacity
Little growth in virgin liner capacity…
41
… And won’t be until a jump in Virgin Liner price is established
42
$700 per FT
NPV (10%) ($43,816,267)
% IRR 9.4%
$750 per FT
$800 per FT
NPV (10%) $252,717,588
% IRR 16.5%
NPV (10%) $404,493,563
% IRR 19.9%
NPV (10%) $100,941,612
% IRR 12.7%
NPV (10%) $157,308,675
% IRR 12.1%
$630 per FT
$675 per FT
$720 per FT
NCSU Model of Greenfield Liner Mills startup in 2020
U.S. SBSK moving to Fluff PulpSlightly lower return but faster growing market
43
2020Price
FT per Year
Capex IRR –US MW
IRR –Far East
SBSK $867 918,441 $1,666,684 11.8% 10.3%
Fluff $927 957,381 $1,867,239 11.0% 9.5%
NC State University
Technology Impacts
NC State University
Technology Impacts
• For Greenfield Mills– In the 5-Year Horizon – None, other than new mills are getting bigger
– In the 10-Year Horizon – possibly
• Black Liquor Gasification
• Production of “Nano” materials with a small part of production
• For Existing Mills– Conversion to Bioproducts by Repurposing Kraft Mill equipment
• In general, minor impacts
45
NC State University
4. Survival of Western Paper Mills requires radical solutions fueled by Innovation
Greenfield nvestment cost not supported by Market Price
Mill Economics don’t supporthigher Market Price
Innovation Required
ChipPile
Chipping DebarkingRoundwood
Receiving
SawmillChips
PulpWood
Kraft Pulp Millintegrated withBioenergy andBiomaterials
Chemicals Extraction
Chipping
Extraction
47
Chemicals Extraction
ChipPile
Chipping DebarkingRoundwood
Receiving
SawmillChips
PulpWood
Extraction
Kraft Pulp Millintegrated withBioenergy andBiomaterials
ChipScreens
Pre Treatment
EnzymeHydrolysis
Purify
Ferment
Sawdust
Wood Chips
Residue
Biomaterials
48
Succinic AcidLactic Acid2,3-Diol
Chemicals Extraction
ChipPile
Chipping DebarkingRoundwood
Receiving
SawmillChips
PulpWood
Extraction
Kraft Pulp Millintegrated withBioenergy andBiomaterials
ChipScreens
Pre Treatment
EnzymeHydrolysis
Purify
Ferment
Sawdust
Wood Chips
Residue
Pelletizer
49
Chemicals /Materials
Phenolation to PF-Adhesive
Carbon Fiber
Chemicals Extraction
ChipPile
Chipping DebarkingRoundwood
Receiving
SawmillChips
PulpWood
Extraction
Kraft Pulp Millintegrated withBioenergy andBiomaterials
ChipScreens
Pre-Cook
Wood Chips
KraftCook
HemicelluloseExtraction
Bioethanol,Foams/ Gels
50
Chemicals Extraction
ChipPile
Chipping DebarkingRoundwood
Receiving
SawmillChips
PulpWood
Extraction
Kraft Pulp Millintegrated withBioenergy andBiomaterials
ChipScreens
Pre-Cook
Wood Chips
KraftPulp
Chemical / Mechanical Treatment
MF – CelluloseNano Crystalline Cellulose
51
Debarking
Pre-Cook
LimeKiln
Biomass Gasifier
PowerGeneration
KraftCook
CausticPlant
RecoveryBoiler
PulpWashing
EvaporatorPlant
Tall OilProduction
Power
LigninPlant
X
Kraft Pulp Millintegrated withBioenergy andBiomaterials
Tall OilProduction
TallOil
BiomassBoiler
Natural Gas
BiomassBoiler
Lignin Recovery - Energy
52
$90 per BDt
Debarking
Pre-Cook
LimeKiln
Biomass Gasifier
PowerGeneration
KraftCook
CausticPlant
RecoveryBoiler
PulpWashing
EvaporatorPlant
Tall OilProduction
Power
LigninPlant
X
RecoveredLignin
Kraft Pulp Millintegrated withBioenergy andBiomaterials
Tall OilProduction
TallOil
BiomassBoiler
Natural Gas
BiomassBoiler
Lignin Recovery - Chemicals
53
Phenol Extender inPhenol-Formaldehyde Adhesives
- $600 per BDt
Example – Lignin Products
54
Selling lignin in pellets better than burning and selling power
Example – Lignin Products
55
Selling lignin for chemical value can turn an unattractivepulp mill investment into one that can attract investor funding
Chemical
NC State UniversitySumming Up
What does this mean for you?
• Tissue and Containerboard good growth and excellent returns
• Graphic papers (coated, uncoated, newsprint) will stabilize at about 50% of peak consumption
• Users of recovered papers be prepared for shortage and to pay more
• Users of bleached softwood pulp be prepared to pay more
• Freight will always provide a barrier to imports, but can be substantially lower cost difference than fiber
• No substitute for being low cost in the domestic market as protection against imports and potential for export
56
Final thing to keep in mind …
57
Latin America has had the best EBITDA Margin for the last 10 Years
USA has done the best job ofinvesting while shareholders inLatin America are banks makingslim margins
