hawkins wright price forecast update · source: hawkins wright, pppc 450 500 550 600 650 700 750...

HAWKINS WRIGHT PRICE FORECAST UPDATE

June 2016Confidential. For subscribers only.

TABLEOFCO

NTEN

TSCONFIDENTIAL

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Table of contents

Year‐to‐date demand review….…………………………………………………………………..3Chinese imports………………………………………………………………………………………….5Paper grade pulp as an extender.……………………………………………………………….6Year‐to‐date supply review…….……………………………………………………………….….7Inventories…………………………………………….…………………………………….………….….8End Use Markets………………………………………………………..…………………………..…..9Exchange rates……………………………………………………………………………………….….12BHKP production costs………………………………………………………………….…….…….15BSKP production costs………………………………………………………………….…….……..16Net equilibrium price model………………………………………………………………………18Baseline forecast assumptions…………………………….……………….………………...…19West European Forecast summary……………………........…………….…….…….….…20North America and China forecast………………………………………….…………..….….22

2

This interim report presents an update of ourprice forecast based upon revised supply,demand and cost assumptions. The next fullanalysis will be made available to subscribersin August.

YEAR‐TO‐DATEDEM

ANDREVIEW

Year‐to‐date demand review

World‐20 bleached chemical market pulp shipments have grown by 3.3% y‐t‐d, equal to 0.6 million t. The growth in deliveries comprises a3.6% y‐t‐d jump in shipments of softwood pulp (337,000 t), and a 3.0% y‐t‐d gain in shipments of hardwood grades (276,000 t). Amongst theindividual subgrades, shipments of NBSK have grown by 4.6% y‐t‐d, and shipments of SBSK (including fluff) have increased by 5.7% y‐t‐d.Growth in demand for both of these grades has more than offset a 4.7% contraction in deliveries of radiata pine. Amongst the individualhardwood subgrades, a 5.7% increase in shipments of BEKP has more than offset declines of 3.6% for NBHK and 20% for SBHK.The growth in softwood demand this year has been surprisingly robust. At the turn of the year, long fibre demand was being supported bysubstitution as the pricing premium commanded over hardwood grades had narrowed considerably, and in some markets had eveninverted. However, as the year has progressed, the NBSK pricing premium has been re‐established, most recently surpassing $100/t (net) inChina. Ordinarily, we would expect this to incentivise consumers to substitute once again, this time from softwood to hardwood. Anecdotesfrom the market support this but it can take several months for substitution to take hold and for order patterns to be properly reflected inthe World‐20 invoiced shipment data.Note that the strength in softwood demand this year has supported a shipment‐to‐capacity ratio of 94% y‐t‐d, which compares with 92%though the same period last year. The strength in the ratio has enabled suppliers to implement successive price increases globally.Conversely, despite the growth in hardwood deliveries through the first five months of the year, capacity has expanded at a faster pace.This has depressed the shipment‐to capacity ratio, which averaged just 87% through January‐May. The weakness of the ratio indicates abuyers market, and this is reflected in the price erosion witnessed during Q1 and Q2.

3

World‐20 BCP demand growth (Jan ‘16‐May ’16) (000s and y‐o‐y % change)

Source: Hawkins Wright, PPPC

-3.8%

-1.6%

-9.7%

-%

+0.1%

+0.5%

+7.2%

+4.5%

+12.7%

-100,000 0 100,000 200,000 300,000 400,000 500,000 600,000

Latin America

North America

Oceania

Africa

Japan

West Europe

East Europe

Other Asia

China

TOTAL

(thousand tonnes)

+3.3%

As usual, most of the demand growth thisyear has been driven by China. World‐20deliveries to this market have jumped by13% y‐t‐d, equal to 570,000 t. Meanwhileshipments to East Europe have expandedby 7% y‐t‐d (+36,000 t) and there hasbeen a 4.5% y‐t‐d increase in shipmentsto Other Asia/Africa (+100,000 t). Gains inthese markets have more than offset a1.6% y‐t‐d drop in shipments to NorthAmerica and a 4% y‐t‐d decline in LatinAmerican demand. After five months ofthe year, demand in both West Europeand Japan is relatively unchanged overthe prior year period.

WORLD‐20 SHIPM

ENTS

REVIEWWorld‐20 BSKP/BHKP shipments to West Europe World‐20 BSKP/BHKP shipments to China

4

World‐20 BSKP/BHKP shipments to North America


Source: Hawkins Wright, PPPC Source: Hawkins Wright, PPPC


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Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

(000

s t)

3 month average BHKP shipments

3 month average BSKP shipments100

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(000

s t)


3 month average BSKP shipments

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World‐20 BSKP/BHKP shipments to Other Asia

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CHIN

ESEIM

PORTS

5

• Chinese imports of market pulp grew by 1.7 million tonnes in 2015 (BSKP +0.6Mt, BHKP +0.8 Mt, BCTMP +0.2Mt), more than double therate of growth in 2014, and 60% faster than the average rate of growth during the previous ten years. We note that the principal driver ofimport demand last year was the displacement of Chinese pulp production.

• This year imports have slowed, rising by 0.4 million tonnes over the first five months. The majority of growth is accounted for by softwood(+10% vs +4% for BHKP).

Note that World‐20 shipments to China are 0.6 million tonnes higher over the first five months. In addition to the time lagsassociated with invoiced shipment and import data, the World‐20 sample excludes Indonesia whose shipments have been trendinglower over the past eighteen months

• As shown in the chart below, hardwood imports have been growing at a faster rate of growth than softwood over the past four years.However, growth has slowed considerably since November last year when imports hit 8 million tonnes on an annualised basis. Nonetheless,eucalyptus suppliers have continued to grow their market share through the displacement of other hardwood grades. So far this year it isimports from Indonesia which have declined most significantly – by 75,000t compared to 2015. This mostly reflects weaker demand, butmay also be partly related to some production issues at a couple of mills and the partial conversion of a line at Kerinci to produce dissolvingpulp. In September APRIL plans to start up a 3rd uncoated paper machine in Kerinci which will further integrate some output. Therefore,although APP OKI expects to commence operations in Q4, we would not expect to see a rise in imports from Indonesia until next year.

Chinese imports of BHKP

Source: Hawkins Wright, Chinese customs data

Chinese BSKP and BHKP imports, 12 months moving average • Growth in softwood pulp imports accelerated through lastyear, and imports continue to grow through 2016, peaking at7.6 million tonnes in May on an annualised basis. Growth insoftwood demand has been supported this year through theprocess of substitution, and consumer restocking.

• Import demand this year for both softwood and hardwoodgrades has received additional support from the viscoseindustry. We count at least four cotton linter/viscoseproducers who are buying regular and important volumes ofpaper grade pulp for use as an ‘extender’. Through the firstfour months of the year, this end‐use market has supportedpaper grade pulp demand of approximately 0.25 million t. Wecover this development in more detail in the following page.

• Note that although import demand has slowed somewhat thisyear, May BHKP imports were very close to record high. Thisperhaps reflects the big orders which were placed in Februaryand March when prices reached cyclical lows.

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PAPER

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PULP

ASAN

EXTENDER

6

Chinese paper grade pulp used as an ‘extender’

Source: Hawkins Wright estimates

Chinese cotton linter pulp (CLP) production has declined froma peak of 1 million t in 2007 to just 0.55 million t in 2015. Highcost CLP production has been gradually displaced by lower costdissolving wood pulp (DWP), most of which has beenimported. CLP production has also been suppressed byenvironmental regulations which are becoming stricter andmore rigorously enforced.This year, a 21% decline in Chinese cotton production hasfurther depressed CLP output by limiting the supply of cottonlinters. This has driven the linter price to a four year high ofRMB4,330/t (at the end of May), versus an average of justRMB2,400/t 12 months ago. Certain CLP mills have respondedby attempting to import their linter requirement, while othershave idled capacity due to the collapse in profit margins.Although cotton linter pulp prices have rallied this year, theyhave so far failed to keep pace with the increase in rawmaterial costs.

Chinese cotton linter pulp production, 2000‐2015

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2000 2002 2004 2006 2008 2010 2012 2014

CLP

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Rather than idle capacity, several cotton linter mills are increasingly using paper grade pulp to satisfy their fibre requirements. This practiceinvolves increasing the cellulose content of baled kraft pulp through further chemical processing. This higher purity cellulose pulp is thenmixed with cotton linter pulp or dissolving wood pulp to produce a hybrid grade. Because of the higher impurities, such hybrids havehistorically only be used to furnish up to 20‐25% of any viscose staple fibre, although improved refining techniques are enabling viscoseproducers to increase this proportion quite significantly.The use of paper grade pulp as a dissolving pulp extender first became prevalent during 2010, when a collapse in the global cotton harvestpropelled commodity grade dissolving wood pulp prices as high as $2,650/t. At the time, we estimate that as much as 220,000 t of papergrade pulp was consumed by the viscose industry as a dissolving pulp extender. A subsequent collapse in dissolving wood pulp and cottonlinter pulp prices had made the practice largely redundant by 2012.However, during the past 24 months, the economics of using paper grade pulp as an extender have once again become enticing. Last year,we estimate that as much as 0.25‐0.3 million t of paper grade pulp was used an extender, and recent fieldwork in China suggests that thetotal this year will reach 0.5‐0.65 million t. We count at least 4 viscose/CLP manufacturers in China who are currently buying large volumesof paper grade pulp, both softwood and hardwood grades. Although some of these manufacturers may be trading small volumes of theirpaper grade pulp purchases, we assume that the majority of the volume is being used as an extender. Through the year‐to‐date (Jan‐April),the largest buyer has been Yibin who imported 151,000 t of paper grade market pulp during this period (according to Chinese Customsdata). Of this volume, 120,000 t was softwood market pulp, (predominantly from Chile), making Yibin one of the largest importers of longfibre paper grade pulp in China this year. In the event that cotton linter supply remains constrained and the price gap between paper gradeand dissolving pulp remains elevated, we would expect other manufacturers to follow.

WORLD‐20 SU

PPLYREVIEW

World‐20 BSKP/BHKP production (3 month moving average)

7

Latin American market pulp production (BCP only)


Source: Hawkins Wright estimates, Bracelpa

World‐20 production of bleached chemical market pulp has grown by3.8% from last year, equal to 0.7 million t. Preliminary estimates showthat softwood production has jumped by approximately 250,000 t(+2.7% y‐t‐d), while hardwood production has grown by 450,000 t(+4.9% y‐t‐d). The year‐over‐year comparisons are particularlyfavourable because a number of unforeseen production outagesconspired to depress output during the first half of last year.Nonetheless, genuine production growth has also occurred, mostnotably with the start‐up of CMPC Guaiba in May last year, that ofKlabin’s PUMA mill in March this year, and the return to normaloperations at the Pols mill in Austria during January.As the maintenance season draws to a close, we would expectproduction to move significantly higher through July and August.Ordinarily, World‐20 production of BCP during these months is 2‐3%stronger than the average volume during the rest of the year. This year,the boost in production may be accentuated by the ramp up of newcapacity. We can observe the following key capacity developments:

• Klabin initiated operations on the Puma greenfield pulp mill inOrtigueira, Parana state, in March 2016. The mill has a total pulpcapacity of 1.5 million t/y, comprising 1.1 million t/y BEKP and 0.4million t/y softwood in bales and rolls (fluff). Most of theproduction thus far has been used to fill the supply chain, butmore regular deliveries to the market are expected from thismonth onwards. Klabin has reported that the ramp‐up has beenvery efficient, with production reaching 88% of the designcapacity in June.

• International Paper has converted a paperboard machine at itsRiegelwood mill in North Carolina to allow production of fluff andbaled SBSK. The project was completed in April, boostingsoftwood market pulp capacity by approximately 360,000t/y.Initial production has been of paper grade pulp, but a swing tofluff production is imminent.

• Domtar is converting an uncoated woodfree paper machine(330,000t/y) at its Ashdown mill to produce fluff pulp, andexpects to commence operations in July. We assume it willproduce 320,000t of fluff pulp or southern pine bales (SBSK). Aconversion of the existing 190,000t/y SBSK line to fluff means thatthe mill will eventually be able to produce up to 510,000t/y offluff pulp.

1,500

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1,900

2,000

2,100

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

(000

s t)

3 month average BSKP production

3 month average BHKP production

800

1,000

1,200

1,400

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2,000

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

(000

s t)

(3 month moving average)

Eldorado

Maranhao

Montes del Plata

Guaiba 2

Chilean earthquake

PUMA

WORLD‐20 SU

PPLYREVIEW

10 years seasonality of World‐20 BCP supply

8

Annual change in BCP capacity and growth by grade, 1994‐2020

Source: Hawkins Wright


• Södra is debottlenecking the Värö mill in aninvestment of around SEK4 billion ($610million). NBSK capacity is expected to increasefrom 425,000t/y to 700,000t/y when itcompletes during early July.

• Doubts remain about the start‐up date ofAPP’s 2‐line OKI mill in South Sumatra,Indonesia. We believe the 1st line will beginoperations in late October/November, withthe 2nd line starting just a few weeks later.Each line has a design capacity of 1.4 milliont/y but there is great uncertainty as to thespeed at which the pulp lines will ramp upowing to a potential fibre shortage. Althoughsome output will be shipped to affiliated millsand some may eventually be integrated withpaper and tissue capacity, the majority will bedried and shipped as market pulp.

• As noted previously, although we expect OKIto ramp up in Q4, the start may coincide withAPRIL’s start up of a 3rd uncoated papermachine in Kerinci, Indonesia. This newmachine will integrate approximately 0.25million t of market pulp, offsetting some of thenew supply from APP’s OKI mill.

• The Svetlogorsk pulp mill project in Belaruswas scheduled to commence operations in Q3‐2016, but now appears delayed once again.The 400,000 t/y BSKP/BHKP line has beendesigned as a swing mill, with the potential toproduce 90,000t/y dissolving pulp shouldmarket conditions allow. We now assume aH1‐2017 start up, with dissolving pulpproduction starting in 2018.

+1%+2%

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Jan Feb Mar Apr May June Jul Aug Sept Oct Nov Dec

Production

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1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Annual change in capacity (million tonnes)

Tota

l cap

acity

(mill

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es)

Annual change in BCP capacityBSKPBHKP

FORECAST

INVEN

TORIES

Producer inventories (days of supply)

9

Seasonality of supply and demand, 10 year average



Supply typically exceeds demand by4‐8% during July and August

At the end of May, producers held 36 days of supply,comprising 27 days for softwood and 45 days forhardwood. For comparison, in May last year softwoodproducers held 30 days of supply, and hardwoodproducers had 39 days.We assume 27‐28 days to represent a balanced marketfor BSKP and 40‐41 days for BHKP. As such, by thisstatistical measure, the market was relatively balanced atthe end of May for softwood and slightly oversupplied forthe hardwood grades.Looking a few months ahead, in the absence of anydowntime hardwood producers will struggle to balancetheir inventories. Although some quarter end stockclearing in June may provide some temporary respite, wewould expect hardwood producers stocks to move higheronce again through July and August as productionstrengthens while demand weakens.Softwood producers are more confident of maintainingbalanced levels of inventory through the Northernhemisphere summer. This confidence is mostly foundedon various supply side constraints which reducedproduction during Q2, creating meaningful order backlogsfor several producers. However, with softwoodproduction likely to rise through the remainder of theyear, at the same time as demand deteriorates on theback of substitution, BSKP suppliers may struggle tomaintain the balance much beyond August.(We note that Chinese pulp demand this August may beparticularly weak owing to the hosting of the G20 summitin Hangzhou in early September. The hosting of this eventwill result in the temporary closure of industrial complexesin and around the Hangzhou area, including several paperand board mills. The sites are mandated to close in orderto help improve the air quality).

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Pulp Demand

ENDUSE

MARKETS

10

Market pulp vs. P&W paper prices as an index, in West Europe, in euro terms

P&W paper prices as an index, in domestic terms


Source: FOEX (indexation by Hawkins Wright)

Paper prices in West Europecontinue to move sideways ormodestly lower. However, the paceof decline in pulp prices (expressedin euros) has been far greater thisyear, allowing paper producers toenjoy a 10‐20% jump in theirconverting margins. Nonetheless,margins remain low by historicalstandards and order books for thesummer are reportedly very weak,increasing the likelihood ofsignificant market relateddowntime.

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Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

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09 =

100

BHKP

BSKP

CWF

LWC

UWF

70

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130

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

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100

NA UWF

Europe CWF

China CWF

Paper markets in China remainoversupplied, and price erosioncontinues across many grades. Theclosure of obsolete capacity onenvironmental ground continues,but there is also significantreorganisation and capacityrationalisation among large,relatively modern machines. In arecent announcement, Stora Ensohas reported the planned closure ofthe 240,000t/y coated woodfreemachine in Suzhou at the end ofJune. The machine wascommissioned in 1996.

ENDUSE

MARKETS

11

Tissue markets


Tissue capacity continues to grow at a healthy rate, although moreslowly than in previous years, with several projects postponed,partly due to market conditions. Although we estimate capacitygrowth of around 4 million tonnes through 2014 and 2015, globalproduction is growing at only half this pace. The implied decline inoperating rates has been amplified by the recessions in previouslyfast growing regions such as Brazil and Russia, and by the slow‐down in China.

Nevertheless, the tissue sector remains one of the key growthdrivers for market pulp this year, particularly as virgin fibrecontinues to take share from de‐inked grades.

Over the first four months of 2016, tissue production hasincreased 1.6% in Europe (CEPI countries), 0.1% in the USA, 5% inJapan, and is flat in Brazil.

In China, although we have included up to 0.6 million tonnes ofcapacity growth in 2016 and 2017, this forecast is highlydependent on Lee & Man’s ability to realise its investment plans.We believe it will be challenging for a newcomer to enter such anover‐supplied sector and it is quite likely that machines will bedelayed or postponed to 2018 or beyond. Note also that the firstmachines will be integrated with an existing 160,000y/y pulp line.

Both Hengan and APP are adopting a more cautious approach tofurther investment due to the market over‐supply. Vinda (majorityowned by SCA) continues to report growing volumes and healthyreturns, and plans to maintain its steady capacity growth in 2016.

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Other Asia

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Middle East

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million tonn

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Vinda

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APP China

Global tissue capacity growth, by region

Chinese tissue capacity growth, by company

ECONOMIC

SUMMARY

Economic overview

12

The financial markets and economists are still reacting to the UK’s EU referendum vote on June 23rd which saw the majority of the votingpublic state their preference to leave the EU. After an initial period of extreme instability, markets have since rebounded and stabilised atlevels similar to those experienced prior to the vote. However, the pound, which fell sharply after the result was confirmed, continues to tradenear 30 year lows, reflecting the economic uncertainty that prevails.We note that the referendum result is not by itself the catalyst for Britain to leave the EU – it simply empowers the British Government toinitiate a withdrawal. The formal process can only start once the UK government invokes Article 50 of the Lisbon Treaty. Doubts remain overwhen or even if this will happen; with David Cameron stepping down as Prime Minister, the ruling Conservative Party must first elect a newPrime Minister whose first job will be to decide how to conduct the exit process. At the earliest, this is likely to be September, although there isno time limit on when Article 50 has to be invoked by. Given the elections in France, Germany and the Netherlands during 2017, there is achance that the newly elected Prime Minister may prefer to wait until after these elections to initiate an exit. Of course, this risks prolongingthe uncertainty and would likely be against the will of the other EU states. Once Article 50 has been invoked, the UK can start negotiating anexit from the EU, with a time limit of 2 years for completion.Thus far, the impact of the referendum result on the pulp market has been minimal. Although the euro has weakened by several cents, it hasso far avoided the dramatic depreciation that has impacted the pound. More likely, the impact of Brexit will be slow to take hold, and will mostlikely take shape through the negative impact it has on the European economy. Increased uncertainty in Europe will further hinder the region’salready lacklustre growth rate over the next few years, and risks triggering a recession in the short‐term. This would almost certainlyundermine paper consumption, and by implication, market pulp demand. The ECB’s inflation target of 2% is also likely to become more elusive,increasing the likelihood of even greater stimulus and further interest rates cuts. Longer term, this would almost certainly weaken the euro,improving the competiveness for Eurozone pulp mills but increasing affordability concerns for European pulp buyers, likely to the detriment ofpulp demand.

The US dollar Index

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Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

1980

=100

The US$ Index is a weighted average of the foreign exchange values of the U.S. dollar against the Euro, Yen, British Pound, CAN$, Krona and Swiss Franc

After a disappointing start to the year, the US economy seems to beon the rebound in Q2 but is growing increasingly isolated in itsmacro‐economic trajectory. Indeed, an abundance of indicatorsprovide cause for optimism, in stark contrast to those emanatingfrom other major economies worldwide. Underpinning thissentiment is the labour market, with the US jobless rate falling to just5%, bolstering labour force participation rates and wage gains. Inturn, this is boosting consumer confidence and spending, supportingrenewed activity in the housing market, and prompting anacceleration in industrial production and service sector growth.Concerns about the strength of the US dollar also seem lessprominent, with most currencies rallying against the greenback sincethe start of the year. Nevertheless, the Fed continues to exercisecaution, pointing to a fragile global outlook, and to the unrelentingcommitment to stimulus and monetary easing in other currencyblocs, particularly in China, Japan and the EU.

ECONOMIC

SUMMARY

Economic overview cont.

13

Meanwhile, the economic outlook in China remains a source of concern globally. Even though the authorities’ aggressive stimulus isstarting to pay off in the form of improved manufacturing and service sector indicators, it comes at an increasingly high price in an alreadyhighly indebted economy. Furthermore, the government’s actions are seen to delay much needed reforms to tackle excess productioncapacity and China’s dependence on industrial output and fixed‐asset investments. In the event, fixed asset investments are up almost 10%through the first five months of the year, and the credit boom is left unchecked. The People’s Bank of China has managed to restore someconfidence in its currency and put an end to capital flight by injecting over half a trillion’s worth of reserves into the economy – it maintainsits GDP growth forecast of 6.8% this year, although the IMF (amongst others) has slashed its projection to 6.5%. The currency has hit a five‐year low in recent weeks, and is currently trading at around RMB 6.66/USD.

In Japan, Prime Minister Shinzo Abe has had to rescind on his campaign promise to curb Japan’s mounting public debt by delaying a salestax increase, just as his “Abenomics” programme is failing to deliver sustained growth. The Bank of Japan remains fully committed tomonetary easing and is leading the way with its negative interest rates – and yet inflation refuses to pick up just as the Yen continues toappreciate. It is now trading at around JPY 103/USD. News from Brazil are largely unchanged on the economic front, with GDP contractingagain in Q1 this year; the size of the economy has shrunk by 5.4% from a year ago. Michel Temer’s interim government is pushing for boldand painful economic reforms, of which a draft is to be presented to Congress in the coming days. The Brazilian real is trading at aroundBRL 3.21/USD. Russia’s economy is benefiting from the uplift in energy prices, but the outlook remains largely contractionary. The rouble istrading at around RUB 65/USD.

RMB/US$ exchange rate, 2006‐2016 According to the Financial Times, China’s centralbank has spent about $473bn in foreign exchangereserves to support its currency since August lastyear. Even with the intervention, the renminbi hasdepreciated by almost 5% during the same period.

Many economists think the depreciating trend willcontinue as China’s economy slows. Others arguethat China’s consistently strong trade surpluses andlow external debt levels should ensure relativestability in the months to come. We caution thatwhatever direction the currency takes, it willinvariably have a big impact on the future directionof pulp prices. While further depreciation wouldalmost certainly raise affordability concerns forbuyers and act as a cap on additional price hikes,any appreciation would facilitate higher prices.


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Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15 Jan‐16

RMB/US$

ECONOMIC

SUMMARY

Commodity prices vs. pulp prices (2005‐2016)

14

Source: Hawkins Wright, Economist

GDP growth forecast, 2012‐2017 (as of 28th June)

Source: Capital Economics (CE)

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50

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Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Inde

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Economist commodity- price index IMF commodity price index

NBSK price (CIF Europe) index BEKP price (CIF Europe) index

(Real GDP)World Share

Av. growth 2002-'11 2012 2013 2014 2015 2016 2017

World 100% 3.9% 3.2% 3.0% 3.1% 2.5% 2.6% 2.8%

US 16% 1.7% 2.2% 1.5% 2.4% 2.4% 2.0% 2.0%Euro-zone 12% 1.1% -0.9% -0.3% 0.9% 1.6% 1.2% 1.0%Japan 4% 0.7% 1.7% 1.4% 0.0% 0.5% 0.5% 0.8%UK 2% 1.5% 1.2% 2.2% 2.9% 2.3% 1.5% 1.5%Canada 2% 2.0% 1.7% 2.2% 2.5% 1.2% 1.4% 1.0%China (official data) 18% 10.6% 7.7% 7.7% 7.3% 6.9% 6.8% 6.5%China (CE estimate) 18% 10.1% 7.0% 6.5% 5.8% 4.2% 5.0% 4.5%India 7% 7.7% 5.6% 4.7% 5.2% 5.5% 6.0% 6.5%Russia 3% 4.9% 3.5% 1.3% 0.7% -3.7% 0.0% 1.5%Latin America 8% 3.8% 3.2% 3.0% 0.9% -0.3% -0.5% 2.0%Brazil 3% 4.0% 1.9% 3.0% 0.1% -3.8% -3.0% 1.2%MENA 5% 5.0% 4.6% 3.0% 3.4% 3.0% 1.8% 2.0%

BHKP PRO

DUCTIO

NCO

STSBHKP cash costs, by region, July 2016, CIF China

15

At today’s exchange rates, our cost model shows the marginal BHKP producers are mostly concentrated in continental Europe, the US andJapan, with delivered cash costs to China of approximately $500‐550/t. However, we note that most mills within these producing regionsservice their domestic markets and have only limited shipments to China.The highest concentration of high cost mills servicing the Chinese market are those situated in China itself. We estimate that these millshave a weighted averaged cost of approximately $452/t.


US$/tonne

Brazil

Indone

siaChil

e/Urug

uay

East E

urope

Finlan

d

Iberia

Sweden

China

Other A

siaCan

adaBel/

France

US Japa

n

Weighted

Average

Wood 97 196 135 140 200 226 214 327 232 167 226 214 331 155Chemicals 45 32 59 42 44 48 55 40 51 48 49 63 59 47Energy 11 16 13 27 7 -12 9 16 30 26 -16 32 0 12Variable costs 154 244 208 209 251 262 277 383 313 240 259 309 390 215Labour 19 13 26 23 36 26 41 17 35 52 57 66 63 25Maintenance 31 20 29 31 27 28 32 16 30 44 35 43 37 29Other mill costs 35 24 34 34 32 37 36 21 34 34 42 37 27 33Fixed costs 85 57 89 87 95 91 109 54 99 129 134 146 127 87

Operating costs fob mill 239 301 297 296 346 353 386 437 412 369 392 455 518 302

Freight 55 33 46 81 45 45 56 10 31 85 83 51 37 49Marketing & Sales 20 14 10 12 10 6 9 5 9 13 16 13 11 14

TOTAL DELIVERED CASH COSTS cif 313 348 353 390 401 403 451 452 452 467 491 519 566 365

Exchange rate used:local currency per US$

3.21 13100 n/a 53 0.90 0.90 8.46 6.66 n/a 1.30 0.90 1.0 103.00 n/a

Capacity (000s t) 15275 3420 4915 1020 725 2290 345 2075 790 1105 540 1130 685 34315

BSKP PRO

DUCTIO

NCO

STS

BSKP cash costs, by region, July 2016 CIF China

16

At today’s exchange rates, our cost model shows the marginal BSKP producers are located in Japan, Eastern Canada and Coastal Canada. These mills have average delivered cash costs to China of around $510‐580/t.


US$/tonne

East E

urope

Chile

Other W

orld

Other E

urope

Sweden

US Int. W

est C

anad

aFin

land

Coasta

l BC

East C

anad

aJa

pan

Weighte

d Ave

rage

Wood 118 176 197 296 263 156 187 293 217 222 342 206Chemicals 45 64 60 31 50 68 55 47 60 58 55 56Energy 32 -9 12 -17 -8 29 15 -1 36 46 5 14Variable costs 194 231 269 309 305 254 257 338 313 327 402 276

Labour 19 43 37 46 46 74 73 38 62 71 55 56Maintenance 28 34 33 29 32 41 46 30 50 43 44 38Other mill costs 27 32 35 25 30 49 38 25 35 29 45 36Fixed costs 74 110 105 100 108 165 157 93 148 143 144 130

Operating costs fob mill 268 341 374 410 413 419 414 432 460 470 546 406

Freight 90 47 65 48 53 43 72 61 42 71 24 56Marketing & Sales 5 6 7 11 6 14 12 8 7 10 10 10

TOTAL DELIVERED CASH COSTS cif 363 394 446 468 473 476 498 501 509 551 580 472

Exchange rate used:local currency per US$

n/a 665.00 n/a 0.9 8.5 1.0 1.3 0.9 1.3 1.3 103.0 240.8

Capacity (000s t) 1845 2130 1040 1770 3010 7380 3590 3040 1170 1725 200 26900

BHKPAN

DBSKP

CASHCO

STSBSKP cash costs, CIF Europe, July 2016

BHKP cash costs, CIF Europe, July 2016

BSKP cash costs, C&F China, July 2016

BHKP cash costs, C&F China, July 2016

17


-100

0

100

200

300

400

500

600

700

US

$ pe

r ton

ne

Marketing & Sales

Freight

Other mill costs

Maintenance

Labour

Energy

Chemicals

Wood

-100

0

100

200

300

400

500

600

700

US

$ pe

r ton

ne

Marketing & Sales

Freight

Other mill costs

Maintenance

Labour

Energy

Chemicals

Wood

-100

0

100

200

300

400

500

600

US

$ pe

r ton

ne

Marketing & Sales

Freight

Other mill costs

Maintenance

Labour

Energy

Chemicals

Wood

-100

0

100

200

300

400

500

600

700

US

$ pe

r ton

ne

Marketing & Sales

Freight

Other mill costs

Maintenance

Labour

Energy

Chemicals

Wood

NET

EQUILIBRIU

MPRICE, 2016

BHKP and BSKP Net equilibrium price – 2016, CIF China

18

The BHKP equilibrium price implied by our estimates of cost, capacity and shipments is today measured at $460/t net, CIF China. Based upon current discounts, this implies a gross price of $480‐$500/t.

For BSKP, the same model shows the net equilibrium price is today $560/t, CIF China, implying a gross price of $580‐590/t.


0

100

200

300

400

500

600

700

0 5000 10000 15000 20000 25000 30000 35000 40000

US

dolla

rs p

er to

nne

cif C

hina

Annual capacity (000s t)

BHKP BSKP

BSKP net equilibrium price of $560/t implied by 2016 shipments of 24.7 million t

BHKP net equilibrium price of $460/t implied by 2016 shipments of 31.1 million t

BASELIN

EASSU

MPTIO

NS

Price forecast

19

The price indications quoted in the following pages are intended to give a broad description of market direction based on the analysispresented earlier. A more comprehensive analysis will be presented in the August Outlook report.Softwood

• The momentum in the global softwood market has eased through June, as global demand has slowed on seasonal factors and growingsubstitution of softwood for hardwood grades. The slowdown in demand has compromised suppliers’ efforts to implementwidespread price hikes, with prices in Europe and North America moving marginally higher but mostly falling someway short ofsuppliers’ targets. Reports from China suggest that some prices may even have slipped towards the end of the month, having risenduring early June.

• We expect a gradual BSKP supply imbalance to grow through the summer. Initially any price erosion will be confined to the Chinamarket but by August we expect prices to be coming off in all markets.

• Net prices CIF China are shown peaking at $620‐625/t in June, before slipping to $595/t by September. The downwards pressure isexpected to intensify during Q4 as new supply penetrates the market. By year‐end prices are shown falling to 550/t, and are expectedto fluctuate around this level during Q1‐2017. At this level, we would expect certain mills to idle capacity, which coupled with thespring maintenance season should facilitate a modest recovery through Q2‐2017.

• However, with new supply coming to market through the second half of next year, any recovery is expected to be quite shallow andthe Northern hemisphere summer will once again create an oversupplied market with further price erosion expected during H2‐2017.For the year as a whole, we forecast an average net price CIF China of $567/t.

• For 2018, we show an average net price CIF China of $576/t, rising to $597/t in 2019 and $609/t in 2020.

Hardwood

• The recovery in the Chinese hardwood market is also losing momentum, and arguably has yet to really take hold in North Americaand West Europe. As with softwood prices, there are even some reports of very minor price erosion in China at the end of June assuppliers looked to unload inventory ahead of the quarter end. Although this may have reduced producer stocks, we caution thatinventories are still elevated in certain regions and are likely to rise once again through July and August. This will almost certainlyderail producers plans to implement higher prices this summer, and more likely will facilitate some modest price erosion throughAugust.

• Net BEKP prices CIF China are forecast to slip to $490/t by September. The outlook for Q4 remains intrinsically tied to the fortunes ofAPP and their ability to ramp‐up the OKI mill. We assume a late October/November start of line 1, and a December start‐up for line 2.As noted previously, the initial volumes should not be overly disruptive to the market, especially given the increased integration atKerinci. However, the psychological impact will likely be immediate, triggering a battle for market share within Asia.

• We expect this to exert very modest downwards pressure on prices through Q4, with prices in China falling to $480/t by the year‐end.Prices are expected to come under more intense pressure through Q1 as the physical impact of the mill becomes more prominent.

• We show prices slipping to $450‐460/t during Q1, and fluctuating around this level for several months. This should be sufficiently lowso as to stimulate a supply side reaction. For the year as a whole, we forecast an average net price CIF China of $464/t.

• For 2018, we show an average net price CIF China of $479/t, rising to $506/t in 2019 and $528/t in 2020.

FORECASTSU

MMARY

Pulp price, cif Europe to 2020, before discounts, US$/t

20


2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

BKP - Northern 790 805 810 787 763 792 807 780Annual Average 800 820 850

Euro/US dollar rate 0.91 0.89 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90BKP - Northern 716 714 730 709 688 713 727 703

Annual Average

CND$/US dollar rate 1.38 1.29 1.30 1.30 1.30 1.30 1.30 1.30 1.30 1.30 1.30BKP - Northern 1091 1039 1053 1023 992 1029 1049 1014

Annual Average

2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

BEKP 737 682 672 667 653 678 707 690Annual Average 685 720 760

Euro/US dollar rate 0.91 0.89 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90BEKP 667 605 605 601 589 611 637 622

Annual Average

Reais/US dollar rate 3.90 3.52 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25BEKP 2872 2399 2183 2167 2123 2205 2297 2243

Annual Average 2226 2340 2470

+53 +123 +138 +120 +110 +113 +100 +90 +115 +100 +90

766

1105

685

2017

785

708

1021

2017

682

614

2217

SOFTWOOD MARKET PULP

US DOLLAR PRICE

CANADIAN DOLLAR PRICE

EURO PRICE

BRAZILIAN REAIS PRICE

EURO PRICE

HARDWOOD MARKET PULP

US DOLLAR PRICE

NBSK/BEKP DIFFERENTIAL (US$)

721 739

1040 1066

617 649

2016

2016

798

717

1051

689

620

2405

PULP

PRICE, US$/TO

NNE, CIFEU

ROPE

TO2017

Pulp price, US$/tonne, cif Europe to 2017 (before discounts)

21


0

50

100

150

200

250

300

400

500

600

700

800

900

1000

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17D

ifferential NB

SK vs B

EKP (U

S$/t)

US$

/tonn

e

Differential NBSK vs. BEKP (RHS) NBSK (LHS) BEKP (LHS)

- Forecast -

NORTH

AMERICA

ANDCHIN

AFO

RECASTPulp price, US$/tonne, North America, delivered, to 2020 (before discounts)

Pulp price, US$/tonne, China, c&f, to 2020

22Source: Hawkins Wright

2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4


Gross price differential +153 +175 +187 +167 +157 +148 +157 +170with Western Europe +150 +145 +140

2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4


Gross price differential +148 +165 +173 +167 +158 +145 +137 +133with Western Europe +145 +145 +140

+58 +133 +152 +120 +108 +117 +120 +127 +120 +100 +90

943

+158

2017

825

+143

2017SOFTWOOD MARKET PULP


US DOLLAR PRICE

US DOLLAR PRICE


2016

2016

968

853

+163

+170

2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4


Gross price differential -183 -173 -180 -200 -185 -183 -200 -193with Western Europe -190 -185 -195

2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4


Gross price differential -203 -162 -153 -157 -167 -188 -197 -202with Western Europe -170 -170 -180

+73 +112 +112 +77 +92 +118 +97 +98 +95 +85 +75

2018 2019 2020Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

NBSK 582 606 605 563 561 573 576 557Annual Average 576 597 609


+76 +112 +112 +79 +104 +113 +97 +98 +97 +91 +81

494

-188

2017

567

464

2017

595

-190

2017

NBSK/BEKP DIFFERENTIAL (US$)494

US DOLLAR PRICE

589

CHINA NET PRICES 2016


US DOLLAR PRICE

SOFTWOOD MARKET PULP

US DOLLAR PRICE


-169

2016

-184

2016

614

520

PRICEFO

RECAST, CIFEURO

PEPulp prices, cif Europe, €/t

Hardwood price forecast, cif Europe, different US$ scenarios

Pulp prices, cif Europe, reais/t, Canadian $/t

Softwood price forecast, cif Europe, different US$ scenarios

Note: Weak dollar scenario assumes an 20% depreciation of the US dollar before the end of 2017; strong dollar scenario assumes an 20% appreciation of the US dollar during the same time period.

23Source: Hawkins Wright

400

450

500

550

600

650

700

750

800

850

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

€/to

nne

NBSK BEKP

- Forecast -

600

1100

1600

2100

2600

3100

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

BEKP Reais

NBSK CND$

-- Forecast --

500

550

600

650

700

750

800

850

900

950

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

US$

/tonn

e

NBSK

Strong US$

Weak US$

- Forecast -

500

550

600

650

700

750

800

850

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

US$

/tonn

e

BEKP

Strong US$

Weak US$

- Forecast-

hawkins wright price forecast update · source: hawkins wright, pppc 450 500 550 600 650 700 750...

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