Market pulp Outlook, and impact of India

Utipulp meeting Barcelona, 18 th September 2014

HAWKINS WRIGHT

Pulp prices versus other commodities

250

BEKP and NBSK price indices against other commodity indices (2005=100)

Economist commodity price index 200 IMF commodity price index 150 100 NBSK price (CIF Europe) index 50 BEKP price (CIF Europe) index 0

HAWKINS WRIGHT

NBSK v BHKP list price differential

European PIX 250 200 150 100 50 0 -50 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

Source: FOEX, Hawkins Wright

HAWKINS WRIGHT

Current problem is demand, rather than supply

World-20 BCP Shipments, by region, 7 months 2014 v 2013

thousand tonnes and % TOTAL North America West Europe Other Asia Latin America Africa Oceania Japan East Europe China -100 -1.4% -0.5% -50 -0..3% -0.7% +0.4% 0 50

(thousand tonnes)

Demand averages 1.2 million tpa over past ten years, but has slowed over past 2 years

+14.2% 100 150 +0.9%

includes India , Thailand, Indonesia, Vietnam. Also Korea, Taiwan. And Turkey

200 +3.9% 250

HAWKINS WRIGHT

Chinese monthly import

0.6

0.4

0.2

0.0

1.6

1.4

1.2

1.0

0.8

+5% v 2013= 0.4Mt in 7 months Russia +38% Indonesia +7% Brazil +33%

Indian imports July 2014

HAWKINS WRIGHT

• • Net capacity additions average 1.4 million tpa for next five years. Mostly BHKP Recent closures of Huelva and Old Town reduce the surplus for 2014 and 2015, but further closures will be necessary to restore balance

Capacity surplus based on current plans:

Over supply 2,500 2,000 1,500 1,000 500 0 -500 -1,000 Forecast Under supply -1,500 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Where? When? Who?

HAWKINS WRIGHT

Impact of exchange rates - softwood

1200 1000 800 600 400 NBSK price ($) 0.6

0.5

0.4

0.3

200 €/$ exchange rate 0.2

0.1

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0.0

1.8

1.7

1.6

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8

0.7

HAWKINS WRIGHT

Impact of exchange rates - hardwood

1000 800 600 400 200 BHKP price ($) 1.8

1.7

1.6

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

€/$ exchange rate 0.2

0.1

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0.0

HAWKINS WRIGHT

Impact of exchange rates

PIX indices for NBSK and BHKP, in €

500 450 400 350 300 250 200 900 850 800 750 700 650 600 550 BHKP €/tonne NBSK €/tonne

Source: FOEX, HAwkins Wright

• • Since January, NBSK PIX has risen by $24 but European dollar denominated costs €55 are falling with weaker euro…

HAWKINS WRIGHT

Defining the Indian market for Pulp & Paper

• • Hawkins Wright published mullti client report on India in 2008 and 2013  Similar approach to China research… • Market remains relatively small in absolute terms, but has been developing steadily Furthermore, analysis is useful in understanding the drivers of China and other emerging markets

HAWKINS WRIGHT

Comparisons with China…population

1,600 1,400 1,200 1,000 800 600 400 200 0

India v China population, 1990-2019(f)

China India • • • • Indian population is only 31% urbanised compared to 45% in China, 44% Indonesia, 78% in Mexico, 87% in Brazil.

Urbanisation should further boost economic growth, but lack of investment in infrastructure such as transport, housing, and

basic sanitation

is a major problem.

Of the 1 billion people in the world who have no toilet, India accounts for nearly 600m. Problem is partly economic, partly cultural.

HAWKINS WRIGHT

Comparisons with China…GDP

India v China GDP growth, 1990-2014(f)

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

China India

India v China GDP, 1990-2012

16000 14000 China 12000 10000 8000 6000 4000 India 2000 0

HAWKINS WRIGHT

India is world’s 3

rd

(10th in absolute dollar terms)

largest economy by PPP

GDP compared, 2012 (PPP basis):

20,000 Other Household final consumption 15,000

In 2013, IMF estimates China $13.4 trillion and India $5.1 trillion

10,000 5,000 0 Brazil Canada China Germany India Japan Other components of GDP include investment, government spending, net trade, inventory +/ USA

HAWKINS WRIGHT

So, why is paper production lagging??

Paper production, 2013

80 70 60 50 40 Other Tissue Cartonboard Containerboard Printing & Writing Newsprint 30 80 70 60 50 40 Mixed furnish International standard 30 20 20 10 10 0 0 India China

Indian tissue demand <150,000tpa compared to 6 million t in China

India China

HAWKINS WRIGHT

Importance of China’s export sector

• India runs a current account deficit of -1.99 per cent of GDP in 2013, whilst China has a surplus of +2.06 per cent.

• China exported $2.2 TRILLION (=$2,200,000 MILLION) in last twelve months…textiles, footwear, furniture, toys, electronics. i.e. Mostly packaged goods. (Spanish GDP is $1.3 trillion. German GDP $3.6trn).



China exports ~17 million tonnes of P&B in converted form

• India exported $320 MILLION. Mostly engineering goods, gems and jewellery, chemicals, agricultural products and textiles (9%)….this sector is not a driver of P&B demand

HAWKINS WRIGHT

Services account for 56 per cent of the Indian economy (43 per cent in China), whilst industry accounts for just 26 per cent (47 per cent in China).

60.0

Composition of GDP, India

50.0

40.0

Agriculture Industry Services 30.0

20.0

10.0

0.0

60.0

Composition of GDP, China

20.0

10.0

0.0

50.0

40.0

30.0

Agriculture Industry Services These differences explain the different scale and structure of the paper industries….

e.g. Packaging grades account for two thirds of Chinese consumption, compared to only 40% in India.

HAWKINS WRIGHT 16

Paper consumption is related to spending

(rather than population or GDP)

GDP compared, 2012 (PPP basis):

20,000 Other Household final consumption 15,000 10,000 5,000 0 Brazil Canada China Germany India Japan Other components of GDP include investment, government spending, net trade, inventory +/ USA

HAWKINS WRIGHT

Paper consumption is related to spending

(rather than population or GDP)

Spend ~$115,000 to generate 1 tonne of paper demand, and the “yield” is falling

30.0

Japan 25.0

Germany 20.0

15.0

10.0

5.0

0.0

0.0

India Indonesia Russia Mexico Italy Brazil Canada Turkey Spain UK France 0.5

1.0

1.5

2.0

2.5

Private consumption, $ trillion

3.0

3.5

4.0

HAWKINS WRIGHT

Paper consumption is related to spending

(rather than population or GDP) 120.0

100.0

China, per CPA 80.0

USA 60.0

Thailand Indonesia 40.0

20.0

India Germany France 0.0

0.0

1.0

2.0

3.0

Japan 4.0

5.0

6.0

7.0

Private consumption, $ trillion

8.0

9.0

10.0

11.0

HAWKINS WRIGHT

Geography & Industry fragmentation

(China development was concentrated in coastal provinces) • • • • • • 17 Indian companies have annual capacity >100,000t/y. Combined output is 4.6 million t/y.

Remaining 6 million tonnes of production is very small scale and impossible to measure output accurately Largest paper machines are 200,000t/y or less Average order size = 1/3 container Lack of merchants and intermediaries. Difficult to build brand Geographically dispersed across 35 locations (opposite)  Average distance for BILT CWF: 1200km

HAWKINS WRIGHT

Fibre demand, 2013

4 2 0 12 10 8 6 RCF import RCF local Non-wood pulp Pulp import Domestic wood & bamboo • Forestry – Industrial plantations are prohibited. Farm forestry schemes with local farmers.

• Even so, BILT, JK Paper, ITC, Century, West coast have installed 1 million t/y pulp capacity since 2009. Most pursue a strategy of integration • Fibre deficit…wood chip imports are expected to reach 1 million BDMT in 2014.

• Low wastepaper recovery rate (<30%) 2013

HAWKINS WRIGHT

Pulp imports

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0

UKP BCTMP Other BHKP Indonesia BSKP • • • • BSKP imported from North America, Nordic, and Chile APRIL controls BHKP market. BILT brings in tied volume from Malaysia BEKP import ~50,000t/y Limited opportunity to displace local non-wood and wood pulp (less than in China)

HAWKINS WRIGHT

Opportunities and challenges

⁺ ⁺ ⁺ India’s population is young and growing, and less urbanised Income per capita remains very low even compared to China, Indonesia Positive economic outlook ⁻ ⁻ ⁻ ⁻ Investment in infrastructure is crucial. Roads, ports, warehouses. Also power generation and network, drainage & sanitation. Access to capital? Restrictive labour laws and bureaucracy discourage industry and labour intensive manufacturing…bold reforms required Land reform (plantation ownership) Fragmentation, opportunities for consolidation are limited

Big things are expected of Mr Modi …GDP has started to rise, rupee has stabilised, and BSE is at record highs.

Can he deliver?

HAWKINS WRIGHT

Outlook

• • P&B grew by 7% 2007-2012 = 3.2Mt in 5 years Pulp imports grew by 0.4Mt

• Assuming Indian paper demand grows by 0.8 million tpa, how is this achieved?  What percentage of P&B growth taken by imports? (over-supply globally)  Of local P&B production, what percentage of fibre is virgin v recycled?

 Of virgin fibre, what proportion is imported pulp v local pulp; local plantations v imported chips and logs?

• Outside of China, India remains an important emerging market for pulp. However, fundamentals of population, geography, culture, and economy suggest a very different path to China. Slow and steady rather than explosive?

HAWKINS WRIGHT