Clash of the TitansThe competition between the pulp and paper and the energy industry for woody biomass in the US South.

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© 2014, Forest2Market, Inc.

Who Am I?

Carl Dahl • Invented the kraft pulp

process in 1884• First US kraft mill –

Pensacola, FL in 1911• Same basic process used

in most all pulp mills today

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What Am I?Recovery Boiler

• Equipment that revolutionized the pulp and paper industry

• Invented by G.H. Tomlinson in 1931

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Southern Industry Took Off

US Pulp Fiber Consumption1980-2007

Source : FRA and F2M

180

200

220

240

260

280

1980 1985 1990 1995 2000 2005

mil

lio

n g

ree

n t

on

s

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What’s the Point?

• The pulp and paper industry is OLD.—The first suppliers are still in business.

• The pulp and paper industry is ENTRENCHED.—Long-term relationships abound.

• The pulp and paper industry OWNS THE SUPPLY CHAIN.—They receive 9.5 million trucks of trees annually.—$10 billion business.

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What’s New? The Greening of the World.Here

and There

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US South DemandTons of wood required at various co-firing rates

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FL GA NC SC VA AL MS TN AR LA OK

tons

x 1

000

1%

5%

Based upon current technology and estimates, every 1% of co-firing requires 10MM tons of wood.

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European Demand• To meet green energy targets of 20%

renewables by 2020, the UK must import 20 million tons of pellets annually.

• If 1/3 is sourced from eastern US, then 8-12 new pellet plants are needed.

• Total EU demand is expected to be 120 million tons by 2020 – more than 10x the world’s installed manufacturing capacity.

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Why the US South?

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Pulp and Paper• Economic drivers: GDP,

demographics, population growth

• Largest producer of biomass energy in US

• Conflict: Customer of utility; compete for same raw material – woodfuel

Renewable Energy

• Economic drivers: none – mandate driven

• Highly regulated and subsidized

• Conflict: Vendor to pulp/paper mill; compete for same raw material – woodfuel

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Pulp/Paper Mills Have a Strong Desire to Limit Competition for Wood Fiber

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• Fixed mill locations• High capital investment• No new greenfield permits likely• Wood fiber makes up 25-40% cost of goods sold• Earnings sensitive to movement in raw material price

It’s a good business!

US Pulp/Paper Mills Have a Strong Worldwide Cost Position

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Current Economics Favor Pulp Mills over Bioenergy Markets

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Southern Bleached Softwood Kraft• Price: $1,000 per ton• Cost : $670 per ton

Manufacture - $500 per ton (includes woodfiber)G&A - $50 per tonDistribution - $70 per tonDepreciation - $50 per ton

• Profit: $330 per ton

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US Energy Economics• Bioenergy is not terribly competitive:

– 25-35 MW plant – $0.13-0.16/KwH – 50 MW plant -– $0.11-0.13/KwH– 100 MW plant – $0.10-0.12/KwH– 300 MW plant – $0.09/KwH (maybe?)

• Wholesale power rates in US are $0.06-0.12/KwH.

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Economics – Pellets to EUForest2Market estimates that pellets manufactured in the US South and shipped to Europe are currently a break-even proposition.

• 350,000 tonnes production ($85 million in capital)

• Rail pellets to port

• European customers

• Based upon March 2007 ENDEX pricing, approximate price FAS US Port is 130 USD/tonne

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Delivered wood cost 30 USD / Ton

Equivalent dry fiber cost in pellets 68 USD / TonneManufacturing & transportation costs to port 67 USD / Tonne

Total Cost - FAS 135 USD / Tonne

F2M Analysis of Pellet Costs

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Even with economic disadvantage, new demands are undeniable.

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Export Pellet Market is Port DependentWhere are the pulp mills? Near ports.

• Only a handful of US ports have the infrastructure to accommodate wood pellet exports– Depth– Port storage and handling

• Favorable growth/drain ratios in surrounding timber basin• Space for expansion• Favorable freight rates to EU

How will it play out?

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Two-Tiered Markets

• Export-driven coastal markets near deep water ports with bulk handling capabilities.

• Domestic market will likely be more biomass/bio-electic centric.

Pulp and Paper

• Will become increasingly effective at acquiring subsidies to offset effects of new demand

• Grades will change— Uncoated free sheet (copy

paper) demand will continue to erode

— Fluff pulp and containerboard demand will increase

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Read Clash of the Titans: Competition for Woody Biomass in the US South