trends and developments in the chinese pulp and paper industry · world demand for paper and...

Trends and Developments in the Chinese Pulp and Paper Industry

International Forum on Investment and Finance in China’s Forestry SectorSeptember 22-23, 2004, Beijing, ChinaIlkka KuusistoAssociate PrincipalJaakko Pöyry Consulting, Shanghai

2

Agenda

Paper and paperboard consumption

Production and capacity additions

Future fibre supply

Will the growth continue?

Where will the production be located and who will operate it?

Is there enough fibre? Where will it come from?

3

Global Consulting and Engineering Group

Client- and technology-oriented globally operating consulting and engineering firmCore operations based on three know-how clusters:1. forest industry2. energy, and 3. infrastructure & environmentGlobal market leader in forest industryStrong international position

4



Future fibre supply

Will the growth continue?

5

Global Paper and Board ConsumptionOver the past 23 years, global paper and paperboard consumption has grown 3.0% a year or a total of 165 million tons.

0

50

100

150

200

250

300

350

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

North America

Europe

Japan

Non-Japan Asia+ 3.4 %/a

+ 3.1 %/a Rest of World

Million tons

6

Co-existence of Media

103TTS01

Historically, electronic media has not threatened the growth of paper based communication – in many cases the paper industry has benefited from it.

0

10

20

30

40

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

0

10

20

30

40- Paper consumption, million t/a -

Newsprint

Printing and writing papers

Expansion ofInternet/WWW

PCs

MiniComputers

RadioCinemaTV

Laser PrintersCD-ROMs

MainframeComputers

ColourTV

Cable TVVCR

SatelliteTV

Newsprint and pr/wr paperconsumption in Western Europe

7

Innovations and Paper-based Packaging

103TTS01

Paper remains a very competitive packaging material. New innovations and applications help maintain its position against other materials and systems.

0

50

100

150

200

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

- Consumption, million t/a -

World consumption of packaging paper and board

Barrier technology

Lightweighting

Smart packaging

Aseptic liquid packaging

Microflutes

Digital printingNon-impact printing

8

GDP Growth by Region

Source: Consensus Forecasts and OECD

Asia (excl. Japan and China) China

4.4

0.4

5.9

5.3

3.8

4.4

5.9

5.8

5.6

5.5

5.5

5.7

5.4

0 2 4 6 8

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

L-t trend

8.8

7.8

7.1

8.0

7.3

8.0

9.1

8.3

7.7

7.6

7.0

7.3

7.7

0 2 4 6 8 10

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

L-t trend

Japan

00

1.6

0.8

2.8

0.4

0.2

2.5

4.2

1.8

1.9

1.8

2.1

1.3

00

0 2 4 6 8

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

L-t trend

% change in GDP

…and the rapid economic growth in Asia will underpin the growth in paper consumption.

9

World Demand for Paper and PaperboardWorld demand for paper and paperboard continues to grow. With an average growth rate of 2.2 percents a year, it will reach 450 million tons by the year 2015.

0

100

200

300

400

500

1980 1985 1990 1995 2000 2005 2010 2015

Million tons

Rest of Asia

North America

Western Europe

JapanEastern Europe

China

Latin America

ForecastRest of the World

10

Growth of Paper and Paperboard Demand

Eastern Europe

Latin America

Africa

Asia excl.Japan & China

China

JapanNorth America

Western EuropeOceania

Average 2.2 %/a

Demand growth %/a Emerging Growth Markets

Traditional Strongholds

0

1

2

3

4

5

0 20 40 60 80 100

Share of consumption in 2000 (325 million tons), %

Most of the growth will take place in more volatile emerging markets.

11

Growth of Paper and Paperboard DemandWoodfree papers and tissue show highest growth rates, packaging boards account for substantial volume growth.

Othergrades

Tissue

Newsprint

Uncoatedmechanical

Coatedmechanical

Uncoatedwoodfree

Corrugating materials

Cartonboards

Sackpaper

Coatedwoodfree

Average 2.2%/a

0

1

2

3

4

0 20 40 60 80 100

Share of consumption in 2000, %

Demand growth %/a

12



Future fibre supply

Where will the production be located and who will operate it?

13

Consolidation and Globalization

Market growth

Resource availability Globalization of customers

Trade policy &legislation

Competitive pressureRegional costadvantages

Search forimprovedefficiency

Search fornew markets

& growth

Search forstrategic assets& capabilities

Search for markets, assets and competitive advantage drive consolidation and globalization

14

Leading Global Paper and Paperboard ProducersTruly global companies are yet to emerge but many companies have by now established Asian presence.

- Capacity, 1000 t/a -

Regional Capacity Distribution, 2004/IIQ

0 2000 4000 6000 8000 10000 12000 14000 16000 18000

Stora EnsoInternational Paper

UPMOji

Georgia-PacificWeyerhaeuser

Nippon Unipac HoldingSmurfit-Stone Container

Abitibi-ConsolidatedSCA

M-realAsia Pulp & Paper

Norske SkogMeadWestvaco

Mondi

North AmericaWestern EuropeEastern EuropeLatin AmericaAsiaOther

15

Paper Industry Concentration 1997 vs. 2002

0

20

40

60

NorthAmerica

WesternEurope

Asia LatinAmerica

World

1997

2002

Combined capacity share of top five firms (%)

The pulp and paper industry is still relatively fragmented with top five firms controlling only 20-40% of regional capacity.

16

Industry-level Benefits of ConsolidationConsolidation helps to bring price stability.

Price volatility vs. industry concentration

0

2

4

6

8

10

12

14

16

20 40 60 80 100- Concentration of Top 5, % -

Global price, regional concentration for pulp- Standard deviation, % -

Testliner

Newsprint

Uncoated woodfree

LWCSC

Kraftliner

BSKP

BHKP

17

Changes in Investment Conduct

20.7%

12.3%

1.5%

6.9%

0 %

5 %

10 %

15 %

20 %

25 %

Totalinv.

Acq. Newlines

Othercapex

Totalinv.

Acq. Newlines

Othercapex.

1991 - 1995 1996 - 2000

- Investment spend, % of sales -

11.2%

2.4%

1.8%

7.0%

The past 10 years has been a decade of acquisitions.

18

Acquisition and Investment ActivityConsolidation has mainly taken place in developed, slow growing, mature markets. Asian companies are still growing through new investments.

North America, Europe and Japan China and Rest of Asia

Acquisitions

Fixed Investments

55 % 45 %90 %

10 %Acquisitions

Fixed Investments

Source: JP Research

19

Global Capacity Growth

Source: JP Research

Non-Japan Asia’s share of global capacity investments has grown significantly

0

20

40

60

80

100

1970s 1980s 1990s 2001-2006

North America

Europe

Japan

Asia

China

Rest of World

%

20

Capacity Expansion Projects in ChinaOver the next five years, China will lead the world in capacity growth.

Company Capacity 1000 t/a Grade Location TimeAPP Ningxing Zhonghua 700 Duplex board Zhejiang 2004APP Hainan Jinhai Pulp 1000 Bl hardwood pulp Hainan 2005APP Gold East Paper 700 Coated woodfree Jiangsu 2005/2006APRIL 400 Uncoated woodfree Guangdong 2006/2007APRIL 1000 Bl hardwood pulp Shandong n.a.Daewoo Paper 300 Coated woodfree Heilongjiang 2006Dongguang Jia Hui (Sun) 300 Duplex board Guangdong June 2004Dongguang Jia Hui (Sun) 300 Duplex board Guangdong August 2005Foshan Huafeng 300 Duplex board Guangdong 2005Hebei Pan Asia Long-Teng 330 Newsprint Hebei 2005Jiangxi Chenming Paper 400 LWC Jiangxi 2004Lee & Man Paper Mfg. 250 Unbl testliner Jiangsu 2004Lee & Man Paper Mfg. 350 Recycled medium Jiangsu September 2004Lee & Man Paper Mfg. 400 Testliner/medium Guangdong 2005Nine Dragons 250 Recycled medium Guangdong August 2004Nine Dragons 250 Recycled medium Guangdong August 2004Nine Dragons 300 Unbl testliner Guangdong 2005Ningxia Meili Paper Industry 300 Folding boxboard/duplex Ningxia 2005Oji Paper 400 Coated woodfree Jiangsu 2006Shandong Cheming 400 Folding boxboard Shandong 2005Shandong Cheming Qihe 300 Recycled medium Shandong n.a.Shandong Huatai 450 Newsprint/LWC Shandong 2005Shandong Jin Feng Yuan 450 Duplex board Shanghai/Fengxian n.a.Shanghai Zhonglong Paper 300 Testliner/medium Shanghai/Pudong 2004StoraEnso Suzhou Paper 450 Coated woodfree Jiangsu n.a.UPM-Kymmene 450 Uncoated woodfree Jiangsu 2005Wuhan Chenming 300 Cartonboard Hubei n.a.Wuxi Long Chen Paper 400 Testliner/medium Jiangsu 2007Yuen Foong Yu Paper 500 Testliner/medium Jiangsu 2006Yuen Foong Yu Paper 500 Testliner/medium n.a. n.a.Yueyang Paper 300 Folding boxboard Hunan n.a.Zhanjiang Wood Pulp Mill 700 Bl hardwood pulp Guangdong n.a.TOTAL ABOVE 13730

21



Future fibre supplyIs there enough fibre? Where will it come from?

22

Global Consumption of Papermaking Fibre

0

100

200

300

400

500

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Million tons

Non-wood pulps

Mechanical/semichemical

BSKP

UKP

BHKP

Sulphite pulps

Recovered paper

Forecast

World consumption of papermaking fibre is forecast to grow from 350 million tons in 2003 to 460 million tons by the year 2015, or 2.3%/a on average.

23

Average Papermaking Fibre Furnish in the WorldWood pulp is still the most important papermaking raw material, but recovered paper continuously increases its share of the total – today about 48% of the total

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Percent

Non-wood pulps

Mechanical/semichemical

BSKP

UKP

BHKP

Sulphite pulps

Recovered paper

Forecast

Recovered Paper Collection and Consumption – 2003North America is the great provider of recovered paper for Asia.

0

5

10

15

20

25

30

35

40

45

50

Western Europe North America Non-Japan Asia Japan

Million tons

ConsumptionCollection

58% 50%

40%

65%

Recovery rate

6.9 4.1

1.5

9.32.7

0.7

0.4

2.0

25

New Capacity in China11 million tons of new papermaking capacity came on stream in China during the past three years. To keep these machines running requires nearly 8 million tons of recycled fibre as well as virgin wood pulp.

0

2

4

6

8

10

12

2002 2003 2004 RCF required

Newsprint

Cartonboard

Printing and writing

Containerboard

ONP

OCC

Mixed

Pulp

&

fillers

Million tons

26

Recovered Paper Imports into Mainland ChinaLarge part of the increase in consumption has come from imports.

0

2

4

6

8

10

12

14

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04

OCC

ONP

Mix

White

Million tons

Note: 2004 estimated based on Jan-Jul statistics

27

Recovered Paper Imports into Mainland ChinaUSA, Europe and Japan are the largest import sources, but they have just about reached their limits. Other countries cannot export more, either.

Million tons

0

2

4

6

8

10

12

14

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04

USA

Europe

Japan

Others Korea Canada Australia Hong Kong

Note: 2004 estimated based on Jan-Jul statistics

28

Paper Recycling Water Wheel

Other Uses of Old Paper

Collectionof Paper

Paper TradeProcess Losses(deinking)

Recovered Paper Trade

Continuous additions of fibre are needed to offset losses.

Used for PaperProduction

Consumption ofPaper

Production ofPaper

Virgin Wood Pulp

Minerals and Additives

Not Collected(tissue, library books, burned, etc.)

Trade in Paper Products

29CALCMOD2/ILE

Days

- Volume of raw material -

0 20 40 60 80 100 120 140 160 180 200 220 2400

20

40

60

80

100

120

Collection 45%/Round 20 Days




Without virgin fibre injection,paper & paperboard industrywould run out of raw material

within 6 months.

Paper and Paperboard Collection CycleFibre quality decreases over time until it disappears in the recycling process.

30

Growing Stock of ForestsThere is plenty of wood in the World. It is just not all in the right places.China must secure a reliable and sustainable source of wood for its industry.

22.6

6.8

12.7 9.5

13.07.5

63.7

16.9

1.8 1.1

4.9 4.9

3.8

37.1

2.0

107.4

0.5

55.1

0.97.9

-billion m3-

Total 380 billion m3

Softwood 126 billion m3

Hardwood 254 billion m3

31

ConclusionsThe global demand for paper and paperboard continues to growThe industry growth is shifting outside traditional supply areas, especially to Asia and increasingly to ChinaThe industry remains fragmented, especially in AsiaAcquisitions have become an important driver of corporate growth, but capacity growth continues in ChinaRecycled fibre will soon constitute over 50% of global paper industry’s fibre raw materialsTraditional supply sources cannot continuously increase their exports of recovered paperDomestic collection must be developed and improved to meet a growing part of the fibre mixNon wood pulp must be developed into a viable alternativeWorld has enough wood to meet the growing demand but it is not all located in the right places.China will have to develop sustainable source of wood to help meet its growing demand for fibre.

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