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PULP MARKET REVIEW
Heikki Vappula
President
Energy and Pulp Business Group
10 May, 2011
| © UPM
Contents
• Strategy and priorities
• UPM in Uruguay
• Pulp market outlook
• Financials Q1 2011
• Summary
2
STRATEGY AND PRIORITIES
| © UPM
Energy and Pulp Paper Engineered materials
• Expand in cost
competitive low-
emission energy
• Develop second-
generation biofuels
• Grow in cost
competitive pulp
• Focus on European
profitability
• Consolidation in
Europe
• Growth in China and
other growth markets
• Profitable growth in
self-adhesive label
materials
• Plywood renewal
• Drive product renewal
and develop new
businesses
STRATEGY AND PRIORITIES Market-driven business model increases insight and promotes action
Group level synergies from resource integration and global functions
4
| © UPM
STRATEGY AND PRIORITIES
Diversified sources of operating profit – Pulp is a significant source of cash flow and major source of operating profit
Forest and Timber 3%
Pulp 19%
Energy 14%
Label 6%
Plywood 2%
Cumulative
EBITDA 2007-2010
Paper 56%
Forest and
Timber 15%
Pulp 30%
Energy 25%
Label 7%
Plywood 0%
Paper 23%
Cumulative
Operating profit 2007-2010
excluding special items
5
| © UPM
STRATEGY AND PRIORITIES
Weight in strategic capex is on value
enhancing acquisitions
6
0
200
400
600
800
1 000
05 06 07 08 09 10 11e
€ million
Operational investments
350
Capital expenditure
Strategic investments
Depreciation
Uruguay
acquisition
6
Estimate
Myllykoski
acquisition
| © UPM
7
Chemical pulp capacity 1,000 tons
Fray Bentos 1,100 Start-up 2007
Kymi 570 Rebuild 2008
Pietarsaari 790 Rebuild 2004
Kaukas 740 Rebuild 1996
Total own capacity 3,200
17% of Botnia's capacity 403
Total 3,603
STRATEGY AND PRIORITIES
Pulp capacity 3.2 million tons – produced at four modern mills
Fray Bentos pulp mill
Forestal Oriental plantations
UPM IN URUGUAY • Forestal Oriental
• Fray Bentos Pulp Mill
| © UPM
9
UPM IN URUGUAY
Uruguay as a location for investment
• Availability of good quality raw material
- Ideal growing conditions for eucalyptus
• Logistics
- Access to river and sea transport
• Political, economic and legal conditions
- Politically stable country
- Transparency Index: second in Latin-America
• Professionals and qualified labour force
- Good standard of basic education
- High standard of university education, education free for students
FORESTAL ORIENTAL
11
UPM IN URUGUAY
Forestal Oriental - History
1987 1990 1995 2000 2005 2009
1st pulplog export
from UY
UPM Kymmene
founded
Forestal Oriental SA
Plantations started
1st harvesting
operations
Botnia acquires stock from
Shell, one of the largest forest
owners in UY
Joint venture FOSA-Tile SA to
set up a company responsible
for all logistic and wood export
activities for both-largest
exporter in UY
Tile Forestal merges into
Forestal Oriental
UPM acquires
Botnia mill and
Forestal
Oriental
11
12
UPM IN URUGUAY
Forestal Oriental secures pulpwood supply
to UPM Fray Bentos pulp mill
• Forestal Oriental in Uruguay
– 225,000 ha of land owned and controlled
– 135,000 ha used for plantations
About 70% of the Fray Bentos pulp mill's wood
raw material comes from own plantations, largely
self-sufficient in the future
About 30% from private farmers through the
partnership programme FOMENTO
12
UPM IN URUGUAY
Uruguayan wood basket
13
14
Protected areas Plantable area
Infrastructure Grazing
Native forests
60 %28 %
7 %2 %3 %
UPM IN URUGUAY
Sustainable land use
14
15
Nursery annual capacity for 20 million clonal seedlings
UPM IN URUGUAY
Technologically advanced nursery
15
| © UPM
16
UPM FRAY BENTOS PULP MILL
| © UPM
UPM IN URUGUAY
UPM Fray Bentos pulp mill
• Capacity 1,1 million tons of bleached eucalyptus pulp a year
• Start-up in November 2007
• Total investment 1.2 billion USD, machinery 700 MUSD
• Technology: BAT; Best Available Techniques (IPPC-BAT) securing minimum environmental impact
• Bleaching: ECF light
• High efficiency production
• High pulp quality
• Biomass Power generation for own consumption and external sales
• Low chemical, water and energy consumption
17
| © UPM
18
150
250
350
450
550
650
750
0 10 000 20 000 30 000 40 000 50 000 60 000
Cumulative capacity, 1000 t/a
UPM IN URUGUAY
Significant cost benefits with plantation based pulp
€/t Market pulp producers' delivered cash costs to Frankfurt, EUR/t
UPM Finland
UPM Uruguay
Metsä-Botnia Finland
Plantation based pulp
Source: Pöyry estimate Q4/2010
World softwood
market pulp
World hardwood
market pulp
PULP MARKET OUTLOOK
| © UPM
20
PULP MARKET OUTLOOK
World fiber balance
million tonnes
Source Pöyry 2009
Total
Chemical pulp
Bleached Market
0
50
100
150
200
250
300
350
400
Sulphite
Recycled paper
Mechanical pulp
Un-bleached
Non-wood
Integrated
Market BHKP
Market BSKP
| © UPM
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
2003
2004
2005
2006
2007
2008
2009
2010
2011e
2012e
2013e
2014e
BHKP BSKP UKP Sulphite
21
PULP MARKET OUTLOOK
Chemical pulp demand is growing driven by various end-uses
Fine Papers, mature markets
Tissue
Packaging
Other
Source: PPPC, Pöyry, UPM
Publication Papers
Fine Papers, growth markets
Market pulp demand development 2003-2014
‘000 tonnes
Forecast
Chemical pulp demand by end-use
| © UPM
22
PULP MARKET OUTLOOK
Capacity growth focus on regions with increasing wood availability and cost efficient plantation operations
Wood availability
Increasing
Stable / decreasing
Source: Pöyry
0
2000
4000
6000
8000
Total Latin
America
Asia North
America
Eastern
Europe
Western
Europe
'000 tonnes
2.4%
4.7%
4.3%
1.2%
1.8% 0.2%
Chemical market pulp capacity growth by region
2009 - 2014
Source: PPPC
| © UPM
PULP MARKET OUTLOOK
New BEKP pulp lines – estimated start-ups by 2016
Year Quarter Country Company Mill Capacity
Mt/a
2011 Q3 China Shandong Chenming Zhanjiang 0.7
2012 Q4 Brazil Eldorado Tres Lagoas 1.5
2013 Q1 Uruguay Montes del Plata Punta Pereira 1.3
2013 Q1 China Oji Paper Nantong 0.7
2013 Q2 Brazil Suzano Maranhao 1.5
2014 Brazil Fibria Tres Lagoas II 1.5
20XX Australia Southern Star Bell Bay 1.1
20XX Brazil CMPC Guaiba II 1.5
20XX Others
23
The investment decision has been made concerning the lines in green colour.
| © UPM
PULP MARKET OUTLOOK
Market BHKP trade flows 2009 – Latin America has become a major source of BHKP
24
Total 20 million tons
0.2 1.1
3.0
0.4
0.5
0.4
3.8 1.3
4.6
2.2
0.4
0.5
0.2
0.2 0.3
0.2 0.3
0.1
0.1
0.2
Source: Pöyry
| © UPM
PULP MARKET OUTLOOK
World chemical market pulp demand shipments by region 3 months 2011 vs. 2010
Shipments rose sharply for Q1 compared to last year, and particularly to China. Notable is the strong development in Western Europe which comes on top of good growth numbers in 2010 too.
Source: PPPC
1000 t
25
| © UPM
PULP MARKET OUTLOOK
World chemical market pulp demand shipments by grade 3 months 2011 vs. 2010
26
Shipments of all grades increased compared to Q1 of 2010, softwood most noticeable with Northern Softwood at a shipment-to-capacity ratio of 98% for Q1 this year.
1000 t
Source: PPPC
| © UPM
PULP MARKET OUTLOOK
World chemical market pulp shipments – driven by strong sales to China
27
2750
3000
3250
3500
3750
4000
4250
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010
2011
Mar +17.3 % Ytd +6.1 %
Source: PPPC
Shipments jumped to record level in March mainly due to very strong Chinese buying.
1000 t
| © UPM
28
PULP MARKET OUTLOOK
Global chemical market pulp producer inventories – tight in softwood and balanced in hardwood
Source: PPPC
| © UPM
PULP MARKET OUTLOOK
Chemical pulp market prices
300
400
500
600
700
800
900
1 000
1 100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
29
USD/ton
NBSK
Northern Bleached Softwood Kraft
Source: FOEX Indexes Ltd.
BHKP
Bleached Hardwood Kraft
USD 1009/t
USD 876/t
BHKP
NBSK
FINANCIALS Q1 2011
| © UPM
FINANCIALS
Q1 2011 – margins improved despite
challenging cost environment
**) from the beginning of the year
Gearing
44% -2 pp (**
EBITDA margin
16.1% +2 pp
Operating cash flow
EUR 166 m -43 m
Net debt
EUR 3,197 m -89 m (**
31
Sales
EUR 2,356 m +16%
EBITDA
EUR 379 m +32%
Operating profit (*
EUR 198 m +71%
EPS (*
EUR 0.32 +113%
*) excluding special items
| © UPM
FINANCIALS
EBITDA improved by 32%,
main improvement in Pulp and Paper
32
0
50
100
150
200
250
300
350
400
450
500
EBITDA
Q1/10
EBITDA
Q1/11
EUR million
288 14.1%
Pulp Forest
and
Timber
Label Other
operations
Paper
379 16.1%
Energy
Plywood
| © UPM
FINANCIALS
Pulp Q1/11 vs. Q1/10 – profitability improved
clearly due to higher sales price and deliveries
-100
-50
0
50
100
150
200
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11
-30
-15
0
15
30
45
60
34% Q1 2011 457 Q1 2010 341
Sales EUR million
+76 Q1 2011 160 Q1 2010 84
Operating profit EUR million*)
Operating profit excluding special items
EUR million
€ million % of sales
33
*) excluding special items
SUMMARY
| © UPM
Summary
• UPM seeks to grow in cost competitive pulp
• UPM's pulp production portfolio results in excellent
operational performance
• Versatile international footprint provides a solid
platform to grow
• Pulp market outlook is strong – demand and share of
market pulp continues to grow
35
| © UPM
36