2019 | Fastmarkets | World Pulp Outlook 1
David FortinVP, Fiber Economic Analysis
World Pulp OutlookGrowing Uncertainty Leads to Cautious Optimism
2
Agenda
2019 | Fastmarkets | World Pulp Outlook
• Review of current market conditions• Supply and demand outlook• Outlook for market tightness• Forecast summary and risks to the forecast
Recent Market Conditions
Supply disruptions ease, but risks remainAfter the strong uptick in supply disruptions through much of 2018, markets adjust as supply normalizes
End-user margins squeezed by rising input costsRapid rise in pulp prices and other inputs drive margins for non-integrated paper and board producers lower
Demand in China falters and prices plummetAbsence of seasonal improvement in demand this fall, along with more normalized supply, pushes pulp prices lower
2019 | Fastmarkets | World Pulp Outlook 3
Impact of Chinese import policies behind us for pulp Review the latest policies implemented in China for recovered paper imports and their impact on global fiber markets
China policy changes disrupt world fiber markets
RCP IMPORT POLICIES RESULT IN FIBER DEFICIT FOR PRODUCERSChina has already issued 5 million tonnes of import licenses for 2019, but purchasing remains measured
• China inspecting ALL containers from the USA since early May
• CCIC now performing pre-inspection of ALL exports to China
• 25% RCP import tariff since August
• Port congestion a growing concern
• More stringent rules for exporters even in Europe
• China continues to lower RCP imports
2019 | Fastmarkets | World Pulp Outlook 4
8,7000.5%
Contamination standard
Mixed paper ban
Domestic collections
Finished P&B
Virgin pulp
0
2,000
4,000
6,000
8,000
10,000
12,000
2018 RCP Loss Fiber needed Solution
Thou
sand
tonn
es2018 RCP fiber loss
Other RCPOther RCP
Other RCP
Mixed
0
5,000
10,000
15,000
20,000
25,000
30,000
2017 2018 2019 (E)Th
ousa
nd to
nnes
Total Chinese RCP imports
China wood pulp import growth slows
WOOD PULP IMPORTS ACCELERATE IN 2017• Growth was steady and strong
during the last decade plus
• Ratcheted higher in 2017 as markets reacted to new Chinese policies
• Settled back lower once limited market share gains were made
• Only marginal upward pressure on wood pulp imports moving forward
2019 | Fastmarkets | World Pulp Outlook 5
0
500
1,000
1,500
2,000
2,500
06 07 08 09 10 11 12 13 14 15 16 17 18
Wood pulp imports to China, thousand tonnes
South America Canada Asia/Oceania/Africa United States Russia Europe
Unexpected downtime continues at a lower rate
ROLLING WAVES OF UNEXPECTED DOWNTIME LIMIT THE IMPACT OF NEW SUPPLYThe large capacity additions, including APP OKI, Fibria Tres Lagoas, MetsaFibre Aanekoski and SCA Ostrand, had minimal impact on the pulp market in 2017-2018 as unexpected downtime counterbalanced the additional supply. Meanwhile, suppliers seem more willing to take offsetting steps as new supply starts up.
2019 | Fastmarkets | World Pulp Outlook
Company Mill Country Grade (Comment) Days Capacity/day Total
Fibria Aracruz Brazil BEK (proactive downtime) — — 50
Hyogo Pulp Tanigawa Japan USK (recovery boiler) — — 43
WestRock Panama City USA FLF (Hurricane Michael) — — 42
WestRock Panama City USA SBSK (Hurricane Michael) — — 6
WestRock Panama City USA SBHK (Hurricane Michael) — — 1
Georgia-Pacific Foley USA FLF (Hurricane Michael) 3 0.6 2
International Paper Riegelwood USA SBSK (Hurricane Florence) 7 1.1 8
International Paper Riegelwood USA FLF (Hurricane Florence) 7 0.9 6
Suzano Imperatriz Brazil BEK (extended maintenance) 2 4.5 9
IGIC Woodland USA NBHK (extended maintenance) — — 18
Canfor Systemwide Canada NBSK (Enbridge gas pipeline explosion) — — 25
Canfor Northwood Canada NBSK (#5 recovery boiler) 68 1 60
Net total 2018 Q4 270
Total 2018 1,540
Total 2017 1,270
Pulp markets recently completed an historical run
2019 | Fastmarkets | World Pulp Outlook 7
0
100
200
300
400
500
600
700
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
Cum
ulat
ive
pric
e ch
ange
, USD
/tonn
e
Consecutive months
Cumulative price change
Mar-16 to Oct-18 Dec-85 to Mar-90
Dec-93 to Nov-95
0.75
0.95
1.15
1.35
1.55
1.75
1.95
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52N
et p
rice
/ hig
h av
erag
e va
riabl
e co
st
Consecutive months
Net price / high average variable cost
Mar-16 to Oct-18Dec-85 to Mar-90
Meanwhile, paper and board producers margins squeezed
PRODUCT PRICES NOT ABLE TO KEEP PACE WITH PULP• Margins increasingly tight
• Some paper markets already weak due to oversupply
• Tissue producers especially challenged
2019 | Fastmarkets | World Pulp Outlook 8
0.30
0.35
0.40
0.45
0.50
0.55
0.60Ratio of BEK to tissue parent roll prices in the US
Net BEK/Parent Roll
China stalls as global economic growth slows
SYNCHRONIZED GLOBAL GROWTH DECELERATING• Developed countries still growing,
but at a slower rate
• This is not unexpected given the length of this business cycle
• New leaders, policies and the rise of protectionism have both stimulated growth and created headwinds
• The Chinese economy has decelerated markedly
2019 | Fastmarkets | World Pulp Outlook 9
45.0
46.0
47.0
48.0
49.0
50.0
51.0
52.0
53.0
54.0
55.0
12 13 14 15 16 17 18 19
Purchasing manager’s indices
Official Caixin Global
Inventory cycle is key to price inflection point
INVENTORIES BUILD IN CHINA AS DEMAND SLOWS• Record pulp production by some
producers in the third quarter arrived just as demand faltered in China
• Inventory data always difficult to read accurately
• Not just pulp inventories that have grown, also paper and board
• Key to change in price direction is timing of inventory correction
2019 | Fastmarkets | World Pulp Outlook 10
0
200
400
600
800
1,000
1,200
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
Inventories at key Chinese ports, thousand tonnes
Qingdao Changshu
Global producer inventories bloated
2019 | Fastmarkets | World Pulp Outlook 11
15
20
25
30
35
40
45
50
55
60
65
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Day
s of
Sup
ply
BHK AVG BHK (2004-10 = 36.4, 2011-18 = 41.2) BSK AVG BSK (29.4)
Source: PPPC, RISI
Domestic pulp prices in China plummet
2019 | Fastmarkets | World Pulp Outlook 12
* Reflects net renminbi domestic resale price converted to US dollars, excluding VAT and logistics costs.
500
550
600
650
700
750
800
850
900
950
1,000
12 13 14 15 16 17 18 19
NBSK prices in China, $/tonne
NBSK domestic resale* NBSK net import
450
500
550
600
650
700
750
800
850
12 13 14 15 16 17 18 19
BEK prices in China, $/tonne
BEK domestic resale* BEK net import
NBSK premium to BEK falls as prices tumble
THE OUTSIZED SPREAD BETWEEN NBSK AND BEKHAS CORRECTED• The large spread allowed BSK to
fall harder and faster at first
• Spread is now below cash cost differential, placing additional downward pressure on BEK
• There is a chance that NBSK may firm and move higher before BEK if/when prices recover
2019 | Fastmarkets | World Pulp Outlook 13
-100
0
100
200
300
400
500
0
100
200
300
400
500
600
700
800
900
1,000
10 11 12 13 14 15 16 17 18 19
Effective list prices delivered to China, US dollars per tonne
Spread BSK-BHK (R) NBSK BEK Average spread
The strong US dollar matters on the margin
2019 | Fastmarkets | World Pulp Outlook 14
0.70
0.90
1.10
1.30
1.50
1.70
1.90
2.10
2.30
1 =
Janu
ary
2017
BEK delivered to Europe
BRL USD EUR
0.70
0.90
1.10
1.30
1.50
1.70
1.90
1 =
Janu
ary
2017
BEK delivered to China
BRL USD RMB
Outlook for market pulp
Minimal new capacity expected through 2020Anticipation of new supply, which has since been delayed, resulted in dearth of projects ready to break ground
Many project announcements after price runThe list of proposed projects for the 2021-2022 time frame is growing, but only a few projects will end up moving forward
Tighter markets expected in the near termAssuming China reaccelerates, the increase in demand against modest capacity gains should result in tighter markets placing upward pressure on prices
2019 | Fastmarkets | World Pulp Outlook
Growth in end-use markets is slow and steady
Production of paper and board expected to grow moderately, but the grades matter for type of fiber consumed and the impact of fiber demand
15
Modest growth in paper and paperboard production masks divergent trends
PACKAGING AND TISSUE DRIVE GROWTH • Packaging paper accounts for two-thirds of
paper production and its share is growing
• Tissue accounts for just 9% of production, but its share is growing as well
• Graphic paper will continue its secular decline due to substitution to electronic media, with its share falling from 40% as recently as 2006 to 26% in 2020
• The largest paper and board producing region in the world is China with more than 110 million tonnes of production
• Production growth in China will fall due to lack of fiber because of both natural and policy reasons, with the US and Other Asia the main benefactors
-1%
0%
1%
2%
3%
0
50
100
150
200
250
300
2016 2017 2018 2019 2020
World paper and paperboard production by grade
Paper packaging and specialties Graphic papersTissue % Ch total paper and board
2019 | Fastmarkets | World Pulp Outlook 16
GROWTH RATES BY SEGMENT 2017 2018 2019 2020 2021
Total paper and paperboard 1.7% 0.5% 1.3% 1.4% -0.2%Paper packaging and specialties 3.3% 1.2% 2.2% 2.4% 0.7%Graphic papers -2.5% -2.1% -1.8% -1.8% -3.4%Tissue 4.0% 3.9% 3.9% 3.8% 2.7%
Little growth in BHK supply through 2020
2019 | Fastmarkets | World Pulp Outlook
Company Mill Country Project CapacityThousand Tonnes
Suzano Maranhão Brazil Incremental growth, net of integration to tissue 90
ENCE, Altri, Navigator Systemwide Iberia Incremental growth, net of integration to tissue 250
APRIL Kerinci Indonesia Further conversion dissolving pulp, 2018-19 -500
UPM Kaukas & Kymi Finland Debottleneck, 2017-18 150
Oji Nantong China Debottleneck, 2018 70
Yongxin Huatang China Conversion from nonwood, 2018 40
Sun Paper Savannakhet Laos Greenfield BHK/DP, started 2018 Q2 300
Eldorado Três Lagoas Brazil Additional environmental permit 55
Montes del Plata Montes del Plata Uruguay Debottleneck 100
Chenming Huanggong China Greenfield BHK/DP, started 2018 Q4 600
Net Total 2017-2020 1,155
Chenming Shouguang China Integrated BHK to 1 mm MT UFS 1,200
BHK cash cost curve from cost benchmarking
LATIN AMERICAN PRODUCERS DOMINATE THE LOW END OF THE COST CURVE• Latin American producers benefit
from low-cost wood and the exchange rate
• Higher-cost facilities tend to be much smaller and located in Asia and the Northern Hemisphere
2019 | Fastmarkets | World Pulp Outlook 18
Similar for BSK with minimal growth through 2020
2019 | Fastmarkets | World Pulp Outlook
Company Mill Country Project Capacity Thousand Tonnes
UPM Kaukas & Kymi Finland Debottleneck, 2017-18 50Bellesbumprom Svetlogorsk Belarus New line started 2017 Q4 400SCA Östrand Sweden New line started 2018 Q2 470Resolute FP Saint Felicien Canada Rebuild, 2018 30Mondi Steti Czechia Rebuild, 2018 70Oji Tasman New Zealand Convertion to UKP, 2019 -125BillerudKorsnäs Gruvön Sweden Integration to new BM, 2019 -130Arauco Valdivia Chile Conversion to DP, 2019 -500Stora Enso Enocell Finland Conversion to DP, 2019 -320
Net Total 2017-2020 -55
BSK cash cost curve from cost benchmarking
EASTERN EUROPEAN AND LATIN AMERICAN PRODUCERS AT THE LOW END OF THE COST CURVE• Latin American producers benefit
largely from the exchange rate
• Pine can be grown in other regions of the world just as well as in Latin America
2019 | Fastmarkets | World Pulp Outlook 20
Pulp market still expected to grow tighter
2019 | Fastmarkets | World Pulp Outlook 21
0.86
0.87
0.88
0.89
0.9
0.91
0.92
0.93
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
11 12 13 14 15 16 17 18 19 20
Thou
sand
tonn
es
Market pulp consumption Market pulp capacity Shipment/Capacity ratio (R)
Forecast Summary ▪ Base case forecast calls for China to regain
growth trajectory in second quarter 2019, after the Chinese New Year
▪ Demand will move ahead of supply again in 2H19
▪ This will result in tighter markets and upward pressure on prices into 2020
▪ Risks remain and revolve largely around the health of Chinese economy, the escalating trade war with the US and a looming recession
2019 | Fastmarkets | World Pulp Outlook