HAWKINS WRIGHT

Market pulp Outlook, and impact of IndiaUtipulp meetingBarcelona, 18th September 2014

HAWKINS WRIGHT

Pulp prices versus other commodities

0

50

100

150

200

250

Ind

ex

, 20

05

=1

00

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

Economist commodity-price index

IMF commodity priceindex

NBSK price (CIFEurope) index

BEKP price (CIFEurope) index

HAWKINS WRIGHT

-50

0

50

100

150

200

250

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

US

$/t

NBSK v BHKP list price differentialEuropean PIX

Source: FOEX, Hawkins Wright

HAWKINS WRIGHT

Current problem is demand, rather than supply

-100 -50 0 50 100 150 200 250

China

East Europe

Japan

Oceania

Africa

Latin America

Other Asia

West Europe

North America

TOTAL

(thousand tonnes)

+0.4%

-0.7%

+0.9%

-1.4%

+14.2%

+3.9%

-0..3%

-0.5%

World-20 BCP Shipments, by region, 7 months 2014 v 2013thousand tonnes and %

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

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

HAWKINS WRIGHT

Chinese monthly import

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

mill

ion

tonn

es

July 2014

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

Indian imports

HAWKINS WRIGHT

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

000'

s t

Forecast

Over-supply

Under-supply

• 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:

Where? When? Who?

HAWKINS WRIGHT

Impact of exchange rates - softwood

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

0

200

400

600

800

1000

1200

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

euro/dollar exchange rate

NB

SK

pric

es (

US

$/t)

NBSK price ($)

€/$ exchange rate

HAWKINS WRIGHT

Impact of exchange rates - hardwood

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

0

200

400

600

800

1000

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

euro/dollar exchange rate

BH

KP

pric

es (

US

$/t)

BHKP price ($)

€/$ exchange rate

HAWKINS WRIGHT

Impact of exchange rates

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

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

Eur

o/t

onn

e c

if N

W E

uro

pe

BHKP €/tonne

NBSK €/tonne

PIX indices for NBSK and BHKP, in €

Source: FOEX, HAwkins Wright

HAWKINS WRIGHT

Defining the Indian market for Pulp & Paper

DEFINING THE INDIAN MARKET FOR PULP, PAPER & BOARD

July 2013

• 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

0

200

400

600

800

1,000

1,200

1,400

1,600

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

F20

1620

18

China

India

India v China population, 1990-2019(f)

• 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

0

2000

4000

6000

8000

10000

12000

14000

16000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

F

Mill

ion

US$

(PPP

)

China

India

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

F

perc

ent c

hang

e

China

India

India v China GDP growth, 1990-2014(f) India v China GDP, 1990-2012

HAWKINS WRIGHT

0

5,000

10,000

15,000

20,000

Brazil Canada China Germany India Japan USA

$ tr

illio

n

Other

Household final consumption

Other components of GDP include investment, government spending, net trade, inventory +/-

India is world’s 3rd largest economy by PPP(10th in absolute dollar terms)

GDP compared, 2012 (PPP basis):

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

HAWKINS WRIGHT

So, why is paper production lagging??

0

10

20

30

40

50

60

70

80

India China

mil

lio

n t

on

ne

s

Mixed furnish

International standard

0

10

20

30

40

50

60

70

80

India China

mil

lio

n t

on

ne

s

Other

Tissue

Cartonboard

Containerboard

Printing & Writing

Newsprint

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

Paper production, 2013

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

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.

Composition of GDP, India Composition of GDP, China

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

% o

f GD

P

Agriculture

Industry

Services

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

% o

f GD

P Agriculture

Industry

Services

16

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).

HAWKINS WRIGHT

0

5,000

10,000

15,000

20,000

Brazil Canada China Germany India Japan USA

$ tr

illio

n

Other

Household final consumption

Other components of GDP include investment, government spending, net trade, inventory +/-

Paper consumption is related to spending(rather than population or GDP)

GDP compared, 2012 (PPP basis):

HAWKINS WRIGHT

Paper consumption is related to spending(rather than population or GDP)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Pape

r dem

and,

mill

ion

tonn

es

Private consumption, $ trillion

Germany

France

Japan

India

Canada

Russia

ItalyUK

Brazil

Spain

Mexico

Indonesia

Turkey

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

HAWKINS WRIGHT

Paper consumption is related to spending(rather than population or GDP)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0

Pape

r dem

and,

mill

ion

tonn

es

Private consumption, $ trillion

Germany

France

Japan

USA

India

Indonesia

Thailand

China, per CPA

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

0

2

4

6

8

10

12

2013

mil

lio

n t

on

ne

s

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%)

HAWKINS WRIGHT

Pulp imports

• 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)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

mill

ion

tonn

es

UKP

BCTMP

Other BHKP

Indonesia

BSKP

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?