World Pulp Outlook All Eyes on Inventories David Fortin VP, Fiber - - PowerPoint PPT Presentation

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World Pulp Outlook All Eyes on Inventories David Fortin VP, Fiber - - PowerPoint PPT Presentation

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World Pulp Outlook All Eyes on Inventories David Fortin VP, Fiber Economic Analysis 1 2019 | Fastmarkets | World Pulp Outlook Agenda Review of current market conditions Supply and demand outlook Forecast summary and risks to the

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2019 | Fastmarkets | World Pulp Outlook 1

World Pulp Outlook

All Eyes on Inventories

David Fortin

VP, Fiber Economic Analysis

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Agenda

2019 | Fastmarkets | World Pulp Outlook

  • Review of current market conditions
  • Supply and demand outlook
  • Forecast summary and risks to the forecast
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Recent market conditions

Demand falters as supply disruptions ease

After the strong uptick in supply disruptions through much of 2018, the markets are adjusting as supply normalizes

Producer inventories reach record levels

The combination of weak demand and additional supply keeping inventories near record levels

What goes up must come down

Demand improvement and inventory correction are key to the next swing in pulp prices

2019 | Fastmarkets | World Pulp Outlook 3

Impact of Chinese import policies behind us for pulp

China is expected to continue toward zero imports of RCP by the end of 2020, but the impacts on the fiber markets are heavily weighted toward RCP and recycled pulp

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Pulp markets completed an historical run into 2018…

2019 | Fastmarkets | World Pulp Outlook 4

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 Cumulative price change, US dollars per tonne 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 52 Net price / high average variable cost Consecutive months

Net price / high average variable cost

Mar-16 to Oct-18 Dec-85 to Mar-90

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500 1,000 1,500 2,000 2,500 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Thousand tonnes

Monthly bleached kraft pulp imports to China

BSK BHK

Chinese wood pulp import growth slows in 2018

WOOD PULP IMPORTS ACCELERATED 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

  • Weak demand and high stocks

resulted in first quarter 2019 imports falling 16% from 2018

  • Only marginal upward pressure on

wood pulp imports moving forward from China RCP policies

2019 | Fastmarkets | World Pulp Outlook 5

1.1 million tonnes/year 2.2 million tonnes/yr 0.6 million tonnes/yr

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SLIDE 6

China stalls as global economic growth slows

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
  • f protectionism have both

stimulated growth and created headwinds

  • The Chinese economy has not

regained upward momentum yet

2019 | Fastmarkets | World Pulp Outlook 6

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 managers indices

Official Caixin Global US announces first round of tariffs against China

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SLIDE 7

Weak paper and board production weighs on pulp consumption in 2019

Thousand tonnes

2019 | Fastmarkets | World Pulp Outlook 7

1,200 1,000 800 600 400 200 200

United States

Printing & writing Cartonboard and specialties Tissue

World-20 Pulp shipments August YTD

1.8% 10.4% 5.7%

1,400 1,200 1,000 800 600 400 200 200 400 600

Western Europe

Printing & writing Cartonboard and specialties Tissue 1,200 1,000 800 600 400 200 200 400 600

China

Printing & writing Cartonboard and specialties Tissue

90 1,007 582

  • 911 mt
  • 766 mt
  • 347 mt
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0.70 0.90 1.10 1.30 1.50 1.70 1.90 2.10 2.30 1 = January 2017

Price index of BEK delivered to Europe

BRL USD EUR

Exchange rates matter, and not just on the margin

2019 | Fastmarkets | World Pulp Outlook 8

0.70 0.90 1.10 1.30 1.50 1.70 1.90 1 = January 2017

Price index of BEK delivered to China

BRL USD RMB

0.87 0.82 0.90 6.43 6.94 7.06

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2017 2018 2019 Estimate Demand growth, million tonnes Downtime, million tonnes Downtime Average Demand growth (R)

Unexpected downtime accelerates in the second half of 2019, but demand stalls

2019 | Fastmarkets | World Pulp Outlook

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Producer inventories remain near record highs

2019 | Fastmarkets | World Pulp Outlook 10 Source: PPPC, Fastmarkets RISI.

15 25 35 45 55 65 75 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Produce inventories, days of supply

BHK Average BHK (2004-10 = 36.4, 2011-18 = 43.1) BSK Average BSK (29.8)

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Brazil reduces shipments to China in second half of 2019

2019 | Fastmarkets | World Pulp Outlook

100 200 300 400 500 600 700 800 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Brazilian BHK exports to China, thousand tonnes

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Inventory correction is key to the next price swing

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 12

200 400 600 800 1,000 1,200 1,400 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

Chinese port inventories, thousand tonnes

Qingdao Changshu

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Domestic pulp prices in China searching for a bottom

2019 | Fastmarkets | World Pulp Outlook 13 * 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 11 12 13 14 15 16 17 18 19

NBSK prices in China, US dollars per tonne

NBSK domestic resale* NBSK net import 400 450 500 550 600 650 700 750 800 850 11 12 13 14 15 16 17 18 19

BEK prices in China, US dollars per tonne

BEK domestic resale* BEK net import

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NBSK premium to BEK returns as hardwood slips further

THE OUTSIZED SPREAD BETWEEN NBSK AND BEK HAS CORRECTED

  • The large spread allowed BSK to

fall harder and faster at first

  • The spread is now above the cash

cost differential, making BEK more attractive on the margin

  • The larger the NBSK premium gets,

the more impetus for consumers to utilize more BEK on the margin

2019 | Fastmarkets | World Pulp Outlook 14

  • 100

100 200 300 400 500 100 200 300 400 500 600 700 800 900 1,000 10 11 12 13 14 15 16 17 18 19

Effective list prices delivered to China

US dollars per tonne NBSK-BEK (R) NBSK BEK

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Spread between US and China remains large

2019 | Fastmarkets | World Pulp Outlook 15

  • 200
  • 100

100 200 300 400 500 100 200 300 400 500 600 700 800 900 1,000 10 11 12 13 14 15 16 17 18 19

Net NBSK prices

US dollars per tonne US-China (R) US China

  • 200
  • 100

100 200 300 400 500 100 200 300 400 500 600 700 800 900 1,000 10 11 12 13 14 15 16 17 18 19

Net BEK prices

US dollars per tonne US-China (R) US China

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Futures market moves slightly ahead of import prices

4,000 4,200 4,400 4,600 4,800 5,000 5,200 5,400 5,600 5,800 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 16-Jan-19 16-Feb-19 16-Mar-19 16-Apr-19 16-May-19 16-Jun-19 16-Jul-19 16-Aug-19 16-Sep-19

Shanghai Futures January 2020 pulp contract, volume and price (RMB)

Volume Price (R)

2019 | Fastmarkets | World Pulp Outlook 16

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What goes up…

2019 | Fastmarkets | World Pulp Outlook 17

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 Cumulative price change, US dollars per tonne 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 52 Net price / high average variable cost Consecutive months

Net price / high average variable cost

Mar-16 to Oct-18 Dec-85 to Mar-90

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…Must come down

NBSK delivered to Northern Europe

2019 | Fastmarkets | World Pulp Outlook 18

  • 500
  • 400
  • 300
  • 200
  • 100

5 10 15 20 Cumulative price change, US dollars per tonne Consecutive months Oct-18 to present

Mar-90 to Oct-91 Nov-95 to Apr-96

0.0 0.5 1.0 1.5 2.0 2.5 5 10 15 20 Net price / high average variable cost Consecutive months Oct-18 to present

Mar-90 to Oct-91 Nov-95 to Apr-96

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Outlook for market pulp

End-use markets remain relatively weak

Secular decline in graphic papers, weak macroeconomic environment and RCP policy changes are weighing on global paper and board production.

Limited capacity gains until 2021

The list of proposed projects for the 2021-2022 time frame is long, but only a few projects will actually move forward and no large capacity additions are expected until 2021.

Pulp markets could remain soft into 2020

There is plenty of uncertainty around the demand outlook. However, if the global economy slows further, the pulp market may not grow much tighter until 2021.

2019 | Fastmarkets | World Pulp Outlook

Prices hit the high end of the industry cost curve

Prices of both BSK and BHK have fallen to the cash costs of high-cost producers and have started to result in market- related downtime.

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BHK cash cost curve from Mill Intelligence

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 20

■ Africa ■ Asia ■ Europe ■ Latin America ■ North America

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BSK cash cost curve from Mill Intelligence

EASTERN EUROPEAN AND LATIN AMERICAN PRODUCERS ARE 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

  • NBSK producers in British Columbia

will face the combined challenges of weak pulp prices, a lack of fiber availability and higher fiber costs

2019 | Fastmarkets | World Pulp Outlook 21

■ Asia ■ Europe ■ Latin America ■ North America ■ Oceania

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Fiber sourcing challenges for pulp mills in British Columbia

2019 | Fastmarkets | World Pulp Outlook 22

2 4 6 8 10 12 2018 Supply after sawmill closures Million BDMT per year

Pulp mill fiber supply sources

Sawmill residuals Whole log chips Implied chip imports

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World paper and board production remains weak

  • 5.0%
  • 3.0%
  • 1.0%

1.0% 3.0% 5.0%

  • 3,000
  • 2,000
  • 1,000

1,000 2,000 3,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Growth in world paper and board production by grade

Thousand tonnes Graphic papers Cartonboard, wrapping and other paper and board Tissue % Ch market pulp demand

2019 | Fastmarkets | World Pulp Outlook 23

  • 2.0%
  • 1.5%
  • 1.0%
  • 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Growth in world paper and board production

% Ch total paper and board (R)

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2017 2018 2019 2020 2021 Market pulp capacity growth

Limited market pulp capacity expansion until 2021

2019 | Fastmarkets | World Pulp Outlook

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Pulp market could remain weaker for longer

2019 | Fastmarkets | World Pulp Outlook 25

0.86 0.87 0.88 0.89 0.90 0.91 0.92 0.93 11 12 13 14 15 16 17 18 19 20 21 Shipment/capacity ratio Shipment/capacity adj.

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Forecast summary

▪ Base case forecast calls for soft landing in China ▪ Demand expected to inch ahead of supply again in 2020 as inventory correction winds down ▪ This will result in slightly tighter markets and limited upward pressure on prices into 2020 ▪ Risks largely revolve around inventory levels, the health of the Chinese economy, the escalating trade war with the US and a looming recession

2019 | Fastmarkets | World Pulp Outlook

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Thank you for your attention

2019 | Fastmarkets | World Pulp Outlook

David Fortin, VP Fiber Economic Analysis dfortin@fastmarkets.com

Fastmarkets RISI

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