World Pulp Outlook - Fastmarkets RISI...6 Exchange rates matters, and not just on the margin 2019 |...

1

2019 | Fastmarkets | World Pulp Outlook 1

David Fortin

VP, Fiber Economic Analysis

World Pulp OutlookCautious optimism for the latter half of 2019

2

Agenda

2019 | Fastmarkets | World Pulp Outlook

• Review of current market conditions

• Supply and demand outlook

• Forecast summary and risks to the forecast

2

Recent market conditions

Supply disruptions ease as demand falters

After the strong uptick in supply disruptions through much of 2018,

markets adjust as supply normalizes

End-user margins remain squeezed

Rapid rise in input costs drive margins for non-integrated paper

and board producers lower while still facing pockets of oversupply

Weak demand and high inventories weigh on prices

Inventories remain elevated heading into the weak summer

months and demand has yet to show meaningful improvement


Impact of Chinese import policies behind us for pulp

China is expected to continue toward zero imports of recovered

paper by the end of 2020, but the impacts on the fiber markets are

heavily weighted toward recovered paper and recycled pulp

Chinese wood pulp import growth slows

WOOD PULP IMPORTS

ACCELERATE IN 2017

• Growth was steady and strong

during the last decade plus

• Ratcheted higher in 2017 as

markets reacted to new Chinese

policies

• Settled back lower once limited

market share gains were made

• Weak demand and high stocks

resulted in 1Q19 imports down 16%

from 2018

• Only marginal upward pressure on

wood pulp imports moving forward


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

06 07 08 09 10 11 12 13 14 15 16 17 18 19

Th

ou

sa

nd

to

nn

es

Monthly bleached kraft pulp imports to China

BSK BHK

3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2017 2018 2019 Annualized

Dow

ntim

e,

millio

n tonnes

Unexpected downtime settles at a lower rate


Pulp markets recently completed an historical run…


0

100

200

300

400

500

600

700

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Cu

mu

lative

price

ch

an

ge

, U

S d

olla

rs p

er

ton

ne

Consecutive months

Cumulative price change

Mar-16 to Oct-18Dec-85 to Mar-90

Dec-93 to Nov-95

0.75

0.95

1.15

1.35

1.55

1.75

1.95

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Ne

t p

rice /

hig

h a

ve

rag

e v

aria

ble

cost

Consecutive months

Net price / high average variable cost

Mar-16 to Oct-18

Dec-85 to Mar-90

4

Meanwhile, paper and board producers margins remain squeezed

PRODUCT PRICES NOT ABLE

TO KEEP PACE WITH PULP

• Margins increasingly tight

• Some paper markets already weak

due to oversupply

• Tissue producers especially

challenged


0.30

0.35

0.40

0.45

0.50

0.55

0.60Ratio of BEK to tissue parent roll prices in the US

Net BEK/Parent Roll

China stalls as global economic growth slows

SYNCHRONIZED GLOBAL

GROWTH DECELERATING

• Developed countries still growing

but at a slower rate

• This is not unexpected given the

length of this business cycle

• New leaders, policies and the rise

of protectionism have both

stimulated growth and created

headwinds

• The Chinese economy has not

regained upward momentum yet


45.0

46.0

47.0

48.0

49.0

50.0

51.0

52.0

53.0

54.0

55.0

12 13 14 15 16 17 18 19

Purchasing manager’s indices

Official Caixin Global

5

Inventory cycle is key to price inflection point

INVENTORIES BUILD IN

CHINA AS DEMAND SLOWS

• Record pulp production by some

producers in the third quarter

arrived just as demand faltered in

China

• Inventory data always difficult to

read accurately

• Not just pulp inventories that have

grown, also paper and board

• Key to change in price direction is

timing of inventory correction


0

200

400

600

800

1,000

1,200

1,400

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

Inventories at key Chinese portsThousand tonnes

Qingdao Changshu

15

20

25

30

35

40

45

50

55

60

65

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Days o

f supply

BHK AVG BHK (2004-10 = 36.4, 2011-18 = 41.6) BSK AVG BSK (29.5)

Global producer inventories remain bloated


Source: PPPC, Fastmarkets RISI.

6

Exchange rates matters, and not just on the margin


0.70

0.90

1.10

1.30

1.50

1.70

1.90

1 =

Jan

ua

ry 2

01

7

BEK delivered to China

BRL USD RMB

0.70

0.90

1.10

1.30

1.50

1.70

1.90

2.10

2.30

1 =

Ja

nu

ary

20

17

BEK delivered to Europe

BRL USD EUR

Domestic pulp prices in China searching for a bottom


* Reflects net renminbi domestic resale price converted to US dollars, excluding VAT and logistics costs.

500

550

600

650

700

750

800

850

900

950

1,000

12 13 14 15 16 17 18 19

NBSK prices in China, $/tonne

NBSK domestic resale* NBSK net import

450

500

550

600

650

700

750

800

850

12 13 14 15 16 17 18 19

BEK prices in China, $/tonne

BEK domestic resale* BEK net import

7

NBSK premium to BEK falls as prices tumble

THE OUTSIZED SPREAD

BETWEEN NBSK AND BEK

HAS CORRECTED

• The large spread allowed BSK to

fall harder and faster at first

• The spread is now below the cash

cost differential, making NBSK

more attractive on the margin

• There is a chance that NBSK may

firm and move higher before BEK

if/when prices meaningfully recover


-100

0

100

200

300

400

500

0

100

200

300

400

500

600

700

800

900

1,000

10 11 12 13 14 15 16 17 18 19

Effective list prices delivered to ChinaUS dollars per tonne

Spread BSK-BHK (R) NBSK BEK Average spread

Spread between US and China remains wide


-200

-100

0

100

200

300

400

500

0

100

200

300

400

500

600

700

800

900

1,000

10 11 12 13 14 15 16 17 18 19

Net NBSK pricesUS dollars per tonne

Spread US-CN (R) Del. US Del. China Average spread

-200

-100

0

100

200

300

400

500

0

100

200

300

400

500

600

700

800

900

1,000

09 10 11 12 13 14 15 16 17 18

Net BEK pricesUS dollars per tonne

Spread US-CN (R) Del. US Del. China Average spread

8

Shanghai futures contract trends higher in 2019

4,400

4,600

4,800

5,000

5,200

5,400

5,600

5,800

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Shanghai Futures June pulp contract, volume and price (RMB)

Volume Price (R)


But what goes up must come downNBSK delivered to Northern Europe


-500

-400

-300

-200

-100

0

0 5 10 15 20

Cu

mu

lative

price

ch

an

ge

, U

S d

olla

rs p

er

ton

ne

Consecutive months

Oct-18 topresent

Mar-90 to Oct-91

Nov-95 to Apr-96

0.0

0.5

1.0

1.5

2.0

2.5

0 5 10 15 20

Ne

t p

rice

/ h

igh

ave

rag

e v

aria

ble

co

st

Consecutive months

Oct-18 topresent

Mar-90 to Oct-91

Nov-95 to Apr-96

9

Outlook for market pulp

Minimal new capacity expected through 2020

Anticipation of new supply, which has since been delayed,

resulted in dearth of projects ready to break ground

Many project announcements after price run

The list of proposed projects for the 2021-2022 time frame is

growing, but only a few projects will actually move forward

Tighter markets expected in the near term

Assuming China reaccelerates, the increase in demand against

modest capacity gains should result in tighter markets, placing

upward pressure on prices in the latter part of 2019


Growth in end-use markets is slow and steady

Production of paper and board expected to grow moderately,

but the grades matter for type of fiber consumed and the

impact on fiber demand

17

Modest growth in paper and paperboard production masks divergent trends

PACKAGING AND TISSUE DRIVE

GROWTH

• Packaging paper accounts for two-thirds of

paper production and its share is growing

• Tissue accounts for just 9% of production,

but its share is growing as well

• Graphic paper will continue its secular

decline due to substitution to electronic

media

• China is and will remain the largest paper

and board producing region in the world

• The pulp and paper industry in China now

faces challenges due to a lack of fiber

because of both natural and policy reasons-1%

0%

1%

2%

3%

0

50

100

150

200

250

300

2016 2017 2018 2019 2020

World paper and board production by gradeMillion tonnes

Paper packaging and specialties Graphic papers

Tissue % Ch total paper and board (R)


10

Emerging markets drive market pulp demand growth


Average annual growth, 2019-2023

19

0.1 %

-0.8 %

PAB Q PLP APCM0.0 %

2.5 %

PAB Q PLP APCM

2.7 %

3.7 %

PAB Q PLP APCM

3.4 %

3.1 %

PAB Q PLP APCM

1.3 %

0.9 %

PAB Q PLP APCM

1.6 %

2.6 %

PAB Q PLP APCM

North America

Western Europe

China

Other AsiaRest of World

Latin America

PAB Q = Paper and board production.

PLP APCM = Apparent consumption of market pulp.

Market pulp supply growth focused in Latin America


11

BHK cash cost curve from Mill Intelligence

LATIN AMERICAN

PRODUCERS DOMINATE THE

LOW END OF THE COST

CURVE

• Latin American producers benefit

from low-cost wood and the

exchange rate

• Higher-cost facilities tend to be

much smaller and located in Asia

and the Northern Hemisphere


■ Africa ■ Asia ■ Europe ■ Latin America ■ North America

BSK cash cost curve from Mill Intelligence

EASTERN EUROPEAN AND

LATIN AMERICAN PRODUCERS

ARE AT THE LOW END OF THE

COST CURVE

• Latin American producers benefit

largely from the exchange rate

• Pine can be grown in other regions of

the world just as well as in Latin

America


■ Asia ■ Europe ■ Latin America ■ North America ■ Oceania

12

Pulp market still expected to grow tighter


0.860

0.870

0.880

0.890

0.900

0.910

0.920

0.930

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

11 12 13 14 15 16 17 18 19 20

Th

ou

sa

nd

to

nn

es

Market pulp consumption Market pulp capacity Shipment/Capacity ratio (R)

Forecast summary

▪ Base case forecast calls for China to reaccelerate

in the second half of 2019

▪ Demand will move ahead of supply again in the

second half of 2019

▪ This will result in tighter markets and upward

pressure on prices into 2020

▪ Risks remain and largely revolve around inventory

levels, the health of Chinese economy, the

escalating trade war with the US and a looming

recession


13

Thank you for your attention


David Fortin, VP Fiber Economic Analysis

[email protected]

Fastmarkets RISI

25

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World Pulp Outlook - Fastmarkets RISI...6 Exchange rates matters, and not just on the margin 2019 |...

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