london pulp week conference files

1. HAWKINS WRIGHT
The Outlook for Market Pulp
Supply and demand through 2010
BWPA / Hawkins Wright Symposium
12 November 2009
HAWKINS WRIGHT

2. Agenda…
• The recovery from a macro perspective
• The recovery from a micro perspective
• Prospects for 2010
HAWKINS WRIGHT

3. The big picture
• We believe that as much as two thirds of any changes in pulp
prices can be explained by macro-economic factors which affect
all commodity markets to a greater or lesser extent.
− Economic growth, exchange rates etc
• Micro-economic factors (decisions and developments from within
the pulp and paper industry itself) are responsible for only about
one third of any change in pulp prices
− Supply side discipline etc
HAWKINS WRIGHT

4. A ‘V’ shaped recovery – so far
300 1800
The Economist Industrial Commodity (US$) Price Index - Left scale
Industrial Commodity Price Index 2000=100
NBSK Market Pulp Price - Right Scale
NBSK price: US$/tonne cif West Europe
250 1500
200 1200
150 900
100 600
50 300
02
96
00
04
06
08
10
94
98
90
92
88
80
82
84
86
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Source: Hawkins Wright, the Economist HAWKINS WRIGHT

5. Key drivers of the recovery
• Near zero interest rates and quantitative easing (cheap money)
• Chinese demand
• Weakening US dollar
HAWKINS WRIGHT

6. Key drivers of the recovery
Expansion of the US Monetary base
2,000
The US monetary
1,800 base = all physical
1,600
banknotes and coins
held by both the
1,400 public and by the
(US$ billions)
banks as cash
1,200
reserves. Newly
1,000 printed dollars are
being used to
800
replace the capital
600 losses of America's
corporations
400
200
0
96
98
00
02
04
06
08
10
84
86
88
90
92
94
b
b
b
b
b
b
n
n
n
n
n
n
n
n
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Fe
Fe
Fe
Fe
Fe
Fe
Source: Hawkins Wright, US Federal Reserve HAWKINS WRIGHT

7. Key drivers of the recovery
China Bank Loans
500,000 New yuan-denominated
loans in the first nine
months stood at 8.67
400,000
RMB 100 million yuan
trillion yuan, 5.19 trillion
yuan more than the same
period last year.
300,000
200,000
100,000
0
07
8
8
09
10
9
08
07
9
07
0
-0
-0
-0
n-
n-
n-
n-
-
p-
-
ep
ep
ay
ay
ay
Ja
Ja
Ja
Ja
Se
M
M
M
S
S
Source: Hawkins Wright, Peoples Bank of China HAWKINS WRIGHT

8. Chinese commodity demand
• Chinese commodity demand driven by:
> Restocking
> Dollar hedge
> China share of global demand rose from around 32% for a basket of
commodities in 2008 to 44% in the first half of the year
• Pulp demand also driven by:
> Substitution of domestic wood pulp due to costs
> Substitution for non-wood pulp lines due to costs AND
environmental reasons
> Stock-building for new machines
HAWKINS WRIGHT

9. Pulp imports
• Imports of BSKP will be 4.9 million t this year, +38% (1.3Mt) on 2008
> Increase comprises +0.6Mt substitution of domestic BSKP (now restarted), +0.7Mt
of inventory build of pulp (some for new paper machines) AND finished paper at
traders, paper mills, and paper merchants
• Imports of BEKP/BHKP will be 5.8 million t this year. +56% (2.1Mt) on 2008
> Increase comprises 1.4 million t substitution of domestic BHKP and BCTMP (now
restarted) and non-wood pulp (most remains closed), +0.7Mt of inventory build of
pulp (some for new paper machines) AND finished paper at traders, paper mills,
and paper merchants
HAWKINS WRIGHT

10. Demand pull from China
World-20 shipments by destination, 9 months 2008 vs. 9 months 2009
Total -1%
West Europe -15%
North America -14%
Japan -19%
Africa -22%
East Europe -11%
Oceania -
Latin America +6%
Other Asia +4%
China +75%
-3000 -2000 -1000 0 1000 2000 3000
thousand tonnes
Source: Hawkins Wright Estimates, PPPC HAWKINS WRIGHT

11. A weakening US$ increased the cost base, and
helped support prices
1000 1.60
900
800 1.36
euro/dollar exchange rate
NBSK prices (US$/t)
700
600 1.12
500
400 0.88
300
200 NBSK price 0.64
100 Exchange rate
0 0.40
0
2
4
6
8
6
8
0
2
4
0
2
4
6
8
0
18
18
18
18
18
19
19
19
19
10
10
10
10
10
11
19
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Source: Hawkins Wright, OANDA HAWKINS WRIGHT

12. Micro drivers: production discipline
World-20 production-to-capacity ratio
120%
110%
100%
%
90%
80%
70%
World-20
60%
Jan-08 Jul-08 Jan-09 Jul-09
Source: Hawkins Wright Estimates, PPPC HAWKINS WRIGHT

13. World-20 BCP production vs. shipments
3,750
3 month average BCP
production
3,500 3 month average BCP
shipments
3,250
(000s t)
3,000
2,750
2,500
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: Hawkins Wright Estimates, PPPC HAWKINS WRIGHT

14. World-20 BHKP & BSKP producer inventories
65
60
55
50
45
40
35
30
25 BSKP
20
BHKP
15
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: PPPC
HAWKINS WRIGHT

15. All this, despite very weak paper shipments..
Global Printing and Writing Shipments by Quarter
Note: Sample size is for North America, Western Europe, Korea and Japan
20,000
19,000
18,000
17,000
thousand tonnes
16,000
15,000
14,000
13,000
12,000
11,000
10,000
Q305
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q409est
Q110est
Q104
Q204
Q304
Q404
Q105
Q205
Q405
Q209
Q309
Source: Hawkins Wright Estimates, AFPA, KPA, JPA, PPPC
HAWKINS WRIGHT

16. The outlook for 2010
HAWKINS WRIGHT

17. The Outlook: Beware of the positive headlines…
Much analysis will be based on year-on-year growth rates
Those growth rates will improve even with no further rise month-on-
month
Pulp demand up 45%!
Strongest demand growth since 2001!
HAWKINS WRIGHT

18. The Outlook: Beware of the positive headlines…
<It's the level, stupid -- it's not the growth rates, it's the levels that
matter here>
Mervyn King, Governor of the Bank of England
Take a close look at volume levels through 2010!
HAWKINS WRIGHT

19. The outlook: some leading indicators point to a
rebound in the next 5-6 months ….
OECD leading indicators show strong signs of recovery
106
104 China
102
CLI (average = 100)
100 US
98
Euro Area
96
94
92
90
8
6
9
7
06
07
08
09
10
06
07
09
8
-0
-0
-0
-0
-0
p-
n-
n-
n-
n-
n-
p-
p-
ep
ay
ay
ay
ay
Ja
Ja
Ja
Se
Se
Se
Ja
Ja
M
M
M
M
S
Source: OECD
HAWKINS WRIGHT

20. Return to growth in 2010
World Economic Outlook, Year-over-year GDP growth
2008 2009 2010(f)
World 3.0% -1.1% 3.1%
USA 0.4% -2.7% 1.5%
Canada 0.4% -2.5% 2.1%
Euro Area 0.7% -4.2% 0.3%
Germany 1.2% -5.3% 0.3%
France 0.3% -2.4% 0.9%
Italy -1.0% -5.1% 0.2%
Spain 0.9% -3.8% -0.7%
Japan -0.7% -5.4% 1.7%
UK 0.7% -4.4% 0.9%
Brazil 5.1% -0.7% 3.5%
China 9.0% 8.5% 9.0%
Source: IMF HAWKINS WRIGHT

21. Key risks remain, mainly on the downside
• Unemployment
• Premature withdrawal of fiscal/monetary support
• New financial disaster: ‘Cheap money’ has started to create asset bubbles
in equities, commodities, credit and emerging markets
<Risky asset prices have risen too much, too soon and too fast
compared with macroeconomic fundamentals. I see the risk of a
correction, especially when the markets now realize that the recovery is
not rapid and V-shaped, but more like U- shaped. That might be in the
fourth quarter or the first quarter of next year.>
Prof. Nouriel Roubini
UPSIDE: we may have underestimated the effects of reduced
uncertainty/greater confidence (IMF)
HAWKINS WRIGHT

22. And will history repeat itself?
• Over the past 40 years, every US ‘slump’ has been interrupted by at
least one quarter of positive growth, followed by a renewed downturn
HAWKINS WRIGHT

23. US dollar splits opinion
The US debt burden is HUGE.
The government has only three choices to meet these liabilities:
• Raise taxes
• Cut spending
• Allow inflation to rise from money printing, diluting the debt burden
The enormity of the Fed’s quantitative easing increases the chances of a
longer term depreciation of the US$.
HAWKINS WRIGHT

24. US dollar splits opinion
Euro
Exchange rate: €/US$
0.60
0.65 Consensus
Opinion
0.70
0.75
Societe
0.80 General
Forecast
0.85
0.90
Commerzbank
Forecast
0.95
Forecast
1.00
7
9
0
7
8
7
8
8
9
0
07
08
09
10
11
0
9
r/0
/0
/0
r/0
r/0
/0
r/1
/1
l/0
l/0
l/ 1
l/0
n/
n/
n/
n/
n/
ct
ct
ct
ct
Ju
Ju
Ju
Ju
Ap
Ap
Ap
Ap
Ja
Ja
Ja
Ja
Ja
O
O
O
O
But, there are two reasons why there is likely to be
more volatility during the next few quarters:
• End of loose monetary policy
• Unwinding of the carry trade HAWKINS WRIGHT

25. The dollars impact on pulp prices
• At today's pulp prices, a 10 US cent change in the exchange rate
against the euro translates into approximately a $40/t change in
the price of pulp, all other things being equal
HAWKINS WRIGHT

26. Market pulp supply outlook
35,000 3500
Annual change in BCP capacity
BSKP
30,000 3000
BHKP
Annual change in capacity (thousand tonnes)
Total capacity (thousand tonnes)
25,000 2500
20,000 2000
15,000 1500
10,000 1000
5,000 500
0 0
FORECAST
-5,000 -500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Hawkins Wright HAWKINS WRIGHT

27. New pulp supply in 2010
Softwood:
Restarts? Crofton, Harmac, Enocell,…Mackenzie and Terrace Bay remain down
Incremental expansions in Chile and Russia
Further closures?
Hardwood:
China April, Rizhao Q2 2010 +1.3 million t/y BAKP/BEKP
Sun Paper Q4 2009 +170,000t/y
Iberia Altri/Ence
Indonesia APP/APRIL +1.2 million t/y BAKP?
Canada Thurso (idle)
France Alizay (idle)
High Yield:
China APP, Guangxi 2010 + 300,000t/y BCTMP
(captive)
HAWKINS WRIGHT

28. Indonesian market pulp exports
Indonesian BHKP shipments by destination
3000
Japan
2500
India
2000
thousand tonnes
Other Asia
1500
Europe
1000
Korea
500
China
0
2003 2004 2005 2006 2007 2008 2009f
Despite Indonesian pulp capacity increasing by >1.2 million t since 2008, Indonesian
exports have not grown. Will this new capacity reach the market in 2010?
Source: Hawkins Wright Estimates, Various customs statistics
HAWKINS WRIGHT

29. But don’t forget the lower level of producer
stocks
65
60
55
50
45
40
35
30
25 BSKP
20
BHKP
15
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: PPPC
HAWKINS WRIGHT

30. Market pulp demand outlook
• A Demand rebalancing - given weak demand in the mature economies,
demand gains elsewhere (e.g. China) are needed to sustain the global
recovery
− Unclear how weaker consumption in US and WE will be
compensated for by stronger demand elsewhere in 2010
− Can China continue to drive the demand recovery?
HAWKINS WRIGHT

31. Market pulp demand to improve?
Global Printing and Writing Shipments by Quarter. ‘V’, ‘U’ or ‘L’ shaped recovery?
20,000
19,000
18,000
17,000
thousand tonnes
16,000
15,000
14,000
13,000
12,000
11,000
10,000
Q305
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q409est
Q110est
Q104
Q204
Q304
Q404
Q105
Q205
Q405
Q209
Q309
Source: Hawkins Wright Estimates, AFPA, KPA, JPA, PPPC
HAWKINS WRIGHT

32. NA P&W paper demand
12 month moving total
16 34
Total P&W
14
metric tonnes (individual grades)
32
Uncoated
12 mechanical
metric tonnes (Total)
30 Uncoated
10 woodfree
28 Coated woodfree
8
26 Coated
6 mechanical
24
4
2 22
0 20
05
06
07
08
09
5
6
7
8
9
l-0
l-0
l-0
l -0
l -0
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Source: Hawkins Wright Estimates, AFPA, PPPC
HAWKINS WRIGHT

33. WE P&W paper demand
12 month moving total
10 30
Total P&W
9
25 Coated
8
mechanical
metric tonnes (Total)
7
20 SC
metric tonnes
6
5 15 Uncoated
woodfree
4
10 Coated
3 woodfree
2
5
1
0 -
08
05
06
07
09
5
9
6
7
8
l -0
l-0
l -0
l -0
l-0
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Source: Hawkins Wright Estimates, CEPIFINE, CEPIPRINT
HAWKINS WRIGHT

34. BCP end-uses, 2008
Other
6%
Specialty
13%
P&W
48%
Tissue
25%
Fluff
8%
Source: Hawkins Wright
HAWKINS WRIGHT

35. What about demand in China?
• Will the import demand drivers continue?
> Chinese stimulus plan, loans and liquidity. POSSIBLY
> Substitution of domestic wood pulp due to costs. NO
> Substitution for non-wood pulp lines due to costs AND
environmental reasons. NO and YES
> Stock-building for new machines. NO
HAWKINS WRIGHT

36. Structural change or short-term phenomenon?
P&B demand will no longer benefit from 20% growth of export
sector and will be more reliant on local consumption
If operating rates are to be maintained, net exports will need to
rise
• Most indicators suggest that Chinese imports will not be maintained
over 1 million t/month through Q4 and into 2010
• Market will remain price sensitive and volatile…
HAWKINS WRIGHT

37. Chinese pulp imports by value
Although straw pulp closures may support import demand long term, price is the most
important factor…
BCP import volumes and market values (6 month moving average)
1200
Im port volumes
(000s t)
800
400 Im port value ($
million)
September 2009
0
03
06
09
08
04
05
07
10
n-
n-
n-
n-
n-
n-
n-
n-
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Source: Hawkins Wright Estimates, Chinese Customs Data
HAWKINS WRIGHT

38. Other important considerations
• Protectionist developments not encouraging
• Subsidies
HAWKINS WRIGHT

39. Conclusion: the recovery has started, but the
t
challenge is to sustain it
• Good news: we avoided a great depression
• Bad news: we had a great recession and we now have to pay for
it
• Macro drivers that supported the pulp market are likely to fade
during the coming quarters
• Micro factors are also likely to be less supportive
HAWKINS WRIGHT

40. Thank you
HAWKINS WRIGHT