World Pulp Outlook All Eyes on Inventories David Fortin VP, Fiber Economic Analysis 1 2019 | Fastmarkets | World Pulp Outlook
Agenda • Review of current market conditions • Supply and demand outlook • Forecast summary and risks to the forecast 2 2019 | Fastmarkets | World Pulp Outlook
Impact of Chinese import policies behind us for pulp China is expected to continue toward zero imports of RCP by the end of 2020, but the impacts on the fiber markets are heavily weighted toward RCP and recycled pulp Demand falters as supply disruptions ease After the strong uptick in supply disruptions through much of 2018, the markets are adjusting as supply normalizes Recent market conditions Producer inventories reach record levels The combination of weak demand and additional supply keeping inventories near record levels What goes up must come down Demand improvement and inventory correction are key to the next swing in pulp prices 3 2019 | Fastmarkets | World Pulp Outlook
Pulp markets completed an historical run into 2018… Cumulative price change Net price / high average variable cost 700 1.95 Dec-93 to Nov-95 Cumulative price change, US dollars per tonne Dec-85 to Mar-90 600 Mar-16 to Oct-18 Net price / high average variable cost 1.75 500 Dec-85 to Mar-90 Mar-16 to Oct-18 1.55 400 1.35 300 1.15 200 0.95 100 0 0.75 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 Consecutive months Consecutive months 4 2019 | Fastmarkets | World Pulp Outlook
Chinese wood pulp import growth slows in 2018 Monthly bleached kraft pulp imports to China 2,500 WOOD PULP IMPORTS 1.1 million 2.2 million 0.6 million ACCELERATED IN 2017 tonnes/year tonnes/yr tonnes/yr 2,000 • Growth was steady and strong during the last decade plus Thousand tonnes • Ratcheted higher in 2017 as 1,500 markets reacted to new Chinese policies • Settled back lower once limited 1,000 market share gains were made • Weak demand and high stocks resulted in first quarter 2019 imports 500 falling 16% from 2018 • Only marginal upward pressure on wood pulp imports moving forward 0 from China RCP policies 06 07 08 09 10 11 12 13 14 15 16 17 18 19 BSK BHK 5 2019 | Fastmarkets | World Pulp Outlook
China stalls as global economic growth slows Purchasing managers indices US announces first round of GLOBAL GROWTH 55.0 tariffs against DECELERATING China 54.0 • Developed countries still growing 53.0 but at a slower rate 52.0 • This is not unexpected given the length of this business cycle 51.0 • New leaders, policies and the rise 50.0 of protectionism have both 49.0 stimulated growth and created headwinds 48.0 • The Chinese economy has not 47.0 regained upward momentum yet 46.0 45.0 12 13 14 15 16 17 18 19 Official Caixin Global 6 2019 | Fastmarkets | World Pulp Outlook
Weak paper and board production weighs on pulp consumption in 2019 Thousand tonnes United States Western Europe China 200 600 600 400 400 0 200 200 200 0 0 200 400 200 -347 mt 400 -766 mt 400 600 600 -911 mt 600 800 800 800 1,000 1,000 1,000 1,200 1,200 1,400 1,200 Printing & writing Printing & writing Printing & writing Cartonboard and specialties Cartonboard and specialties Cartonboard and specialties Tissue Tissue Tissue World-20 Pulp 1.8% 10.4% 5.7% shipments August 90 1,007 582 YTD 2019 | Fastmarkets | World Pulp Outlook 7
Exchange rates matter, and not just on the margin Price index of BEK delivered to Europe Price index of BEK delivered to China 2.30 1.90 2.10 1.70 1.90 0.82 6.43 1.50 1 = January 2017 1 = January 2017 1.70 1.50 1.30 6.94 1.30 1.10 0.87 1.10 0.90 0.90 7.06 0.90 0.70 0.70 BRL USD EUR BRL USD RMB 8 2019 | Fastmarkets | World Pulp Outlook
Unexpected downtime accelerates in the second half of 2019, but demand stalls 1.8 3.0 1.6 2.5 Demand growth, million tonnes 1.4 Downtime, million tonnes 1.2 2.0 1.0 1.5 0.8 0.6 1.0 0.4 0.5 0.2 0.0 0.0 2017 2018 2019 Estimate Downtime Average Demand growth (R) 2019 | Fastmarkets | World Pulp Outlook
Producer inventories remain near record highs Produce inventories, days of supply 75 65 55 45 35 25 15 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 BHK Average BHK (2004-10 = 36.4, 2011-18 = 43.1) BSK Average BSK (29.8) Source: PPPC, Fastmarkets RISI. 10 2019 | Fastmarkets | World Pulp Outlook
Brazil reduces shipments to China in second half of 2019 Brazilian BHK exports to China, thousand tonnes 800 700 600 500 400 300 200 100 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 2019 | Fastmarkets | World Pulp Outlook
Inventory correction is key to the next price swing INVENTORIES BUILD IN Chinese port inventories, thousand tonnes CHINA AS DEMAND SLOWS 1,400 • Record pulp production by some 1,200 producers in the third quarter arrived just as demand faltered in 1,000 China 800 • Inventory data always difficult to read accurately 600 • Not just pulp inventories that have grown, also paper and board 400 • Key to change in price direction is 200 timing of inventory correction 0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Qingdao Changshu 12 2019 | Fastmarkets | World Pulp Outlook
Domestic pulp prices in China searching for a bottom NBSK prices in China, US dollars per tonne BEK prices in China, US dollars per tonne 1,000 850 950 800 900 750 850 700 800 650 750 600 700 550 650 500 600 450 550 500 400 11 12 13 14 15 16 17 18 19 11 12 13 14 15 16 17 18 19 NBSK domestic resale* NBSK net import BEK domestic resale* BEK net import * Reflects net renminbi domestic resale price converted to US dollars, excluding VAT and logistics costs. 13 2019 | Fastmarkets | World Pulp Outlook
NBSK premium to BEK returns as hardwood slips further Effective list prices delivered to China US dollars per tonne THE OUTSIZED SPREAD 1,000 500 BETWEEN NBSK AND BEK 900 HAS CORRECTED 400 800 • The large spread allowed BSK to 700 fall harder and faster at first 300 600 • The spread is now above the cash cost differential, making BEK more 500 200 attractive on the margin 400 • The larger the NBSK premium gets, 100 300 the more impetus for consumers to utilize more BEK on the margin 200 0 100 0 -100 10 11 12 13 14 15 16 17 18 19 NBSK-BEK (R) NBSK BEK 14 2019 | Fastmarkets | World Pulp Outlook
Spread between US and China remains large Net NBSK prices Net BEK prices US dollars per tonne US dollars per tonne 1,000 500 1,000 500 900 900 400 400 800 800 300 300 700 700 600 600 200 200 500 500 100 100 400 400 300 300 0 0 200 200 -100 -100 100 100 0 -200 0 -200 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 US-China (R) US China US-China (R) US China 15 2019 | Fastmarkets | World Pulp Outlook
Futures market moves slightly ahead of import prices Shanghai Futures January 2020 pulp contract, volume and price (RMB) 900,000 5,800 800,000 5,600 700,000 5,400 600,000 5,200 500,000 5,000 400,000 4,800 300,000 4,600 200,000 4,400 100,000 4,200 0 4,000 16-Jan-19 16-Feb-19 16-Mar-19 16-Apr-19 16-May-19 16-Jun-19 16-Jul-19 16-Aug-19 16-Sep-19 Volume Price (R) 16 2019 | Fastmarkets | World Pulp Outlook
What goes up… Cumulative price change Net price / high average variable cost 700 1.95 Dec-93 to Nov-95 Cumulative price change, US dollars per tonne Dec-85 to Mar-90 600 Mar-16 to Oct-18 Net price / high average variable cost 1.75 500 Dec-85 to Mar-90 Mar-16 to Oct-18 1.55 400 1.35 300 1.15 200 0.95 100 0 0.75 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 Consecutive months Consecutive months 17 2019 | Fastmarkets | World Pulp Outlook
…Must come down NBSK delivered to Northern Europe Consecutive months 2.5 0 5 10 15 20 0 Cumulative price change, US dollars per tonne 2.0 Oct-18 to Net price / high average variable cost present -100 1.5 Mar-90 to Oct-91 -200 1.0 -300 Nov-95 to Apr-96 0.5 Mar-90 to Oct-91 -400 Oct-18 to present 0.0 Nov-95 to Apr-96 0 5 10 15 20 -500 Consecutive months 18 2019 | Fastmarkets | World Pulp Outlook
Prices hit the high end of the industry cost curve Prices of both BSK and BHK have fallen to the cash costs of high-cost producers and have started to result in market- related downtime. End-use markets remain relatively weak Secular decline in graphic papers, weak macroeconomic environment and RCP policy changes are weighing on global Outlook for market pulp paper and board production. Limited capacity gains until 2021 The list of proposed projects for the 2021-2022 time frame is long, but only a few projects will actually move forward and no large capacity additions are expected until 2021. Pulp markets could remain soft into 2020 There is plenty of uncertainty around the demand outlook. However, if the global economy slows further, the pulp market may not grow much tighter until 2021. 19 2019 | Fastmarkets | World Pulp Outlook
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