Perspectives on the global crisis and opportunities for pulp in - PowerPoint PPT Presentation

Perspectives on the global crisis and opportunities for pulp in Europe Kirsten Lange, The Boston Consulting Group 17 September 2009

Disclaimer This document has been prepared for a presentation to Europulp and Utipulp on September 17 2009 Analyses have been based on public information and hypotheses fit at system level, but no access has been provided to entities' reserved information. This deck has been prepared for an oral presentation. Therefore, it will be incomplete without the appropriate supplementary comments This document contains The Boston Consulting Group's intellectual property resulting from the investments made in concept development and from the experience accumulated throughout other similar projects The Intellectual Property Act bans any third party from accessing this document or mentioning it in the media without the relevant express authorization by BCG 1 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

Agenda The situation pre-crisis: dark clouds ahead The crisis explained: in the middle of the storm The implications for pulp players: mixed weather New strategies for value creation: here comes the sun 2 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

Europe under pressure – industry structure changing? 1 Demand 2 Cost increases Low demand growth in core • Competition for raw markets materials • Stagnant or declining in Price • Russian wood tariffs some grades in WE Cost • Additional environmental • Despite improving operating (€) requirements rates in some grades still over-capacities European supply (M tons) 5 Loss of financial flexibility for 3 4 "Financial" shifts in many players "Natural" shifts in competitiveness • Share price developments competitiveness US-$/EUR Share index • P&L effects 1,7 • Ratings • Strong capacity growth of 250 • Trade flows • Debt/equity low-cost fiber 1,6 1,5 200 1,4 1,3 150 1,2 100 1,1 Cost 1 (€) 50 0,9 0,8 0 '99 '00 '01 '02 '03 '04 '05 '06 '07 Jan 02 Jan 04 Jan 06 Jan 08 Low-cost pulp supply (M tons) Sappi Stora Enso M-Real UPM Holmen Norske Skog MSCI MSCI World World Materials 3 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

1 Cost increases Significant recent cost increases in Europe — and more to come CAGR (%) CAGR (%) Excluding effects of Russian wood tariffs Cost of production factors 02–07 07–12 02–07 07–12 (actual) (outlook) (actual) (outlook) Index prices 1 Germany (2000 = 100) 250 Virgin fibre 9.9 7.9 Actual Outlook Energy 7.6 6.3 200 Recycled fibre 2 1.8 8.0 150 Labour 1.8 3.9 100 Chemicals 2.2 1.6 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1. Year end prices 2. Mixed P&B sorted/Mixed Paper or Soft Mixed Paper Source: Destatis; VEA; VCI; RISI; BCG analysis 4 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

1 Cost increases Stronger demand for wood EU-25 targets to achieve 20% share of renewable in total energy consumption by 2020 Renewables share in final energy consumption EU -25 1 ,TWh Share of renewables in total final energy 4% 12% 20% consumption EU-25, 2020 % 603 1,727 3,000 100 CAGR 2004-20 80 52 60 Other RES 3 8% 3 60 84 40 25 24 Other solid biomass 4 22% 20 5 23 Forest biomass 13% 16 11 (wood) 2 0 2004 2012 2020 Fast increase of forest biomass 1. Based on existing and projected penetration of RES technologies in Green-X least cost scenario 2. Assume 50% share of forest biomass in 2004 in RES-E and RES-H grid and 100% in RES-H non grid-estimates based on Green-X report 3. Assuming significant further growth in wind (550TWh, 60.000 windmills), 2006: ~100 TWh installed in EU25 4. e.g. corn, sugar cane, wheat, etc. Source: CEPI, Green-X model 5 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

1 Cost increases Gap in EU wood supply could further drive demand for South American pulp Projected wood demand and supply 2020, CEPI-16 1 (Mm 3 ) Supply view Demand view 800 ~720–800 ~340–420 200–260 7 Transportation 65–130 Electricity 50% lower assumptions than 600 Green-X model 51 ~515–540 245–310 Heat 40 70–80 30–35 Forest residues 400 178 355–370 40–45 Roundwood 65–70 Fuel wood 81 280 Pulpwood and 125–130 other industrial 200 round wood 165–170 Sawlogs 0 Current forest Technical Net wood Recovered Estimated Estimated gap Estimated Bio-energy Pulp and Saw mill by- Solid wood removals potential imports wood supply demand production paper products to products mobilized based on production market production forest biomass Estimated supply of forest biomass (RW and residues) in 2020 1. CEPI-16 include Austria, Belgium, Czech Republic, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, UK Source: CEPI; Energy demand forecast based on EU-Commission Green-X model 6 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

2 Low demand growth Paper demand growth fuelled by Asia while WE/NA stagnates CAGR 2004–15 (%) 16 Ø9.0% 12 Ø4.8% Ø5.1% 8 Ø4.2% Ø3.4% Ø3.3% 4 0 Ø1.0% Ø0.2% Ø0.4% -4 New China Eastern Other Latin Western NAFTA Japan Rest of the China 1 Europe Asia America Europe World Uncoated Coated Uncoated Coated 10 M t Demand Tissue Corrugated Carton board Newsprint 2004 Woodfree Woodfree Mechanical Mechanical Are existing forecasts even too optimistic? Independent BCG research suggests even lower growth for WE/NA 1. Mills with capacity > 50k t Source: Pöyry; BCG analysis 7 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

3 Natural shifts Pulp supply shifts significantly to low-cost countries and cost differential increases Low/high cost country capacity share Low/high cost country cost differential Low/high cost country capacity share Low/high cost country cost differential +304 23 33 Global (%) ($/ton) +249 capacity (Mt) 100 800 High cost 19 612 countries 1 39 499 50 400 308 BHKP Low cost 250 81 61 countries 2 0 0 2006 2015 2006 2015 Low cost country 5 High cost country 5 +274 +248 Global 22 25 (%) ($/ton) capacity (Mt) 100 800 706 577 High cost 63 432 BSKP countries 3 81 329 50 400 Low cost 37 countries 4 19 0 0 2006 2015 2006 2015 Low cost country 5 High cost country 5 Shift more critical for integrated players from high cost countries 1. Portugal, Spain, France, Belgium, Sweden, Finland, Canada, USA 2. Brazil, Indonesia, South Africa, Russia, Chile (countries below global average production cost 2015) 3. Canada, USA, Germany, Sweden, Finland 4. Chile, Russia (countries below global average production cost 2015) 5. BHKP: 2006: Brazil versus Canada East — 2015: S Africa versus Spain; BSKP: 2006: Chile versus Canada East; 2015: Chile versus Sweden Source: Hawkins Wright; Pöyry; Valois Vision; BCG analysis 8 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

3 Natural shifts The impact of this might go beyond market pulp BHKP market pulp supply scenarios (2015) BHKP market pulp supply scenarios (2015) Potential impact Potential impact US$ European (integrated) mills become uncompetitive 33Mt 13Mt Demand 800 Base Announced and South American players currently with superior confirmed capacity case: 262 profitability and low cost fibre access according to Hawkins Wright +10Mt plus necessary 400 Some risk of flattening BHKP supply curve endangers capacity extrapolations margins (in high case) – depending on development of 2006-2015 integrated European mills 0 Other growth option could be in paper: integrated mills NA WE Brazil to serve overseas market US$ 40Mt 800 Increasing commoditization and low transport costs Demand 20Mt High might facilitate process Low cost capacities case: 49 increase due Highest likelihood in fine paper (CWF, UCWF), less in to additional 400 +17Mt announced but packaging/tissue (which are more local) capacity unconfirmed capacity 2006-2015 Impact could go far beyond market pulp 0 Brazil NA WE Note: Prices including 10% rebates Source: Hawkins Wright, Pöyry, RISI; BCG analysis 9 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

4 Financial shifts Backup High value of Euro puts profit under pressure directly and indirectly Ongoing strong Euro affects European Ongoing strong Euro affects European players players US-$ / Euro 1,7 1,6 1,5 Direct P&L effects 1,4 1,3 Indirect effects on trade flows and 1,2 competitiveness 1,1 1 0,9 0,8 31.12.1999 31.12.2000 31.12.2001 31.12.2002 31.12.2003 31.12.2004 31.12.2005 31.12.2006 31.12.2007 1. According to Stora Enso Annual Report 2007 2. Calculation before currency hedges Source: BCG analysis, Stora Enso Annual Report 2007 10 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt

5 Limited financial flexibility Backup European share prices under pressure Falling share prices Polarization of European industry Falling share prices Polarization of European industry Share index 250 Few strong players 200 • Low D/E ratio • Recent restructurings/divestitures • Investors confidence 150 • Waiting for best timing to buy 100 Many weak players • High D/E ratio 50 • Mixed assets • Deteriorating debt rating 0 • Hoping for fast consolidation Jan 02 Jan 04 Jan 06 Jan 08 Sappi Stora Enso M-Real UPM Holmen Norske Skog MSCI MSCI World World Materials 1. Indexed since January 2005 Source: Thomson Reuters; Broker reports; BCG analysis 11 Presentation Europulp-Utipulp-17Sep09-KL-if-MUN.ppt