Softwood Market Development European Production

10/17/2016 INTERNATIONAL SOFTWOOD CONFERENCE 2016 PARIS // OCT 12‐13‐14 // www.isc2016.fr Softwood Market Development – European Production Sampsa J...
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10/17/2016

INTERNATIONAL SOFTWOOD CONFERENCE 2016 PARIS // OCT 12‐13‐14 // www.isc2016.fr

Softwood Market Development – European Production Sampsa J. Auvinen CEO, Norvik Timber Industries Board Member, Bergs Timber AB (publ) President, European Organization of the Sawmill Industry

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Situation in October 2015 at the Amsterdam ISC Although it seems that the European political situation has stabilized, ✔ unpredictability is likely to continue with slow economic growth. Demand from overseas markets is not likely to increase in the short ✖ term. Exchange rate fluctuations will continue to affect the industry.



Financial performance of the European sawmilling industry will be poor ✖ during H2 2015 and H1 2016 . As the European sawmilling industry is more and more dependent on volatile emerging economies it will need to react faster to changes in ✖ demand. In the short term further supply restrictions will be needed or…



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Sawn softwood production

m3

In the EOS member countries*, total production of sawn softwood increased by  0,3% in  2015 and reached 80.3 million m3. In 2016, production is expected to increase 1,9 % to  81,8 million m3.  *EOS countries: Austria Belgium Denmark Finland France Germany Latvia Norway Romania Sweden Switzerland United Kingdom

140 000

120 000

100 000

80 000

60 000

40 000

20 000

0 2005

2006

2007

2008

Source: European Organization of the Sawmill Industry

2009

2010 EOS

2011

2012

2013

2014

2015 2016 est. 2017 Forecast

ISC: Above+ Italy Spain Netherlands Russia

ISC Europe

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Sawn softwood production

Germany

Austria

23 000

9 600

22 500

9 400

22 000

9 200 9 000

21 500

8 800

21 000

8 600 20 500

8 400

20 000

8 200

19 500

8 000

19 000

7 800

18 500

7 600 2010

2011

2012

2013

2014

2015 2016 est. 2017 forecast

2010

2011

2012

2013

2014

2015

2016 est.

2017 forecast

Source: European Organization of the Sawmill Industry

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Sawn softwood production

France

Switzerland

7 400

1 600

7 200

1 400

7 000

1 200

6 800

1 000

6 600

800

6 400

600

6 200 6 000

400

5 800

200

5 600

0 2010

2011

2012

2013

2014

2015

2016 est.

2017 forecast

2010

2011

2012

2013

2014

2015

2016 est.

2017 forecast

Source: European Organization of the Sawmill Industry

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Sawn softwood production

Sweden

Finland

18 500

11 000

18 000 10 500

17 500 17 000

10 000

16 500 9 500

16 000 15 500

9 000

15 000 14 500

8 500 2010

2011

2012

2013

2014

2015 2016 est. 2017 forecast

2010

2011

2012

2013

2014

2015 2016 est. 2017 forecast

Source: European Organization of the Sawmill Industry

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Sawn softwood production

Norway

Romania 4 500

2 600

4 000

2 500

3 500 2 400

3 000

2 300

2 500

2 200

2 000 1 500

2 100

1 000 2 000

500

1 900

0 2010

2011

2012

2013

2014

2015

2016 est.

2017 forecast

2010

2011

2012

2013

2014

2015

2016 est.

2017 forecast

Source: European Organization of the Sawmill Industry

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Sawn softwood production

Latvia

UK

2 720

4 000

2 700

3 500

2 680

3 000

2 660 2 640

2 500

2 620

2 000

2 600

1 500

2 580

1 000

2 560

500

2 540 2 520

0 2010

2011

2012

2013

2014

2015 2016 est. 2017 forecast

2010

2011

2012

2013

2014

2015

2016 est.

2017 forecast

Source: European Organization of the Sawmill Industry

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Raw material supply  Softwood log availability survey by EOS 1 = low; 2 = medium low; 3 = normal; 4 = medium high; 5 = high    6

  5

  4

  3

  2

  1

 ‐ 2013

2014

2015

2016

2017

AT

BE

CH

DE

DK

FR

FI

LV

NL

NO

RO

SE

UK

Average

IT

Source: EOS

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European Sawlog Price Index (ESPI-€) 1Q/99 - 2Q/16 95 90 85

Euro/m3

80 75 70 65 60 Source: Wood Resource Quarterly

Sweden, Finland, Norway, Poland, Latvia,  Estonia, Czech republic, Austria and Germany

55 50

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2016 Q2 GDP up by 0.3% in the euro area and by 0.4% in the EU28

EU28, euro area and United States GDP growth rates % change over the previous quarter

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Change in % (euro at 2015 prices) New residential construction

2015

2,9

2016 (f) 5,7

2017 (f) 4,2

2018 (o) 3,0

3,0 Million housing starts

Total Construction output for the 19 Euroconstruct countries1.

Housing starts* in the EC area

2,5 2,0 1,5 1,0 0,5 0,0

Residential renovation

1465

1,3

1562

1,4

1623

1,6

1658

1,4

Total residential construction

1,9

3,1

2,7

2,1

Non-residential construction

-0,2

2,5

2,5

1,9

Civil engineering

2,9

1,5

3,0

3,8

*=”housing permits” in Germany and the Netherlands

Total construction

1,4

1Austria,

2,6

2,7

2,4

Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,, United Kingdom, Czech Republik, Hungary, Poland, Slovak Republik

Building renovations in the EC area 1.000 Million Euro at 2014 prices

Housing starts* in 1.000units

700 600 500 400 300 200 100 0 2012

2013

2014

2015

2016

2017

2018

Source: EUROCONSTRUCT, June 2016

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BREXIT – it’s happened before

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BREXIT BREXIT’s effect on the European or UK economy is unclear at this stage. Business activity has been very good first 8 months with housing starts being very strong but order books of the  construction industry are getting thinner. Need for house building in the UK has not disappeared but the BREXIT  negotiation, or lack of it is creating uncertainty. The BREXIT negotiations are scheduled to start by end March 2017. Sawntimber prices in GBP have been unsatisfactory due the drop of the GBP. Prices have started to increase and will  continue to increase. Some contracts made recently in EUR. It was announced 4th October that the UK Government pledges £5bn of public money to accelerate building of tens of  thousands of houses.

Source: The Royal Institute of British Architects

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Sawn softwood sales & demand ‐ Europe Demand has been improving slowly. The bottom has been  reached and passed. Although it seems that the worst political crisis is behind us,  uncertainty prevails.  BREXIT’s impact on the British and European economy is  unclear. Demand in Europe is expected to continue grow but slowly. Demand from overseas markets is followed by European  customers. This is a global business.

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European Softwood Industry Development  European Softwood Industry’s Indexed Development 2010 = 100  110

105

100

95

90

85 2010

2011 Softwood Production

2012

2013

Softwood Consumption

2014 Softwood Imports

2015

2016

Softwood Exports

Source: EOS

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Global Softwood Supply Demand Balance The world production of sawn softwood in 2015 (315 million m3), divided by continent

10% (Russia)

33%

31%

2%

13%

1%

7% 3%

Source: FAO/Skogsindustrierna

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Global Softwood Supply Demand Balance The world consumption of sawn softwood in 2015 divided by continent

26%

29%

4% (Russia)

4%

24%

4%

7% 2%

Source: FAO/Skogsindustrierna

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Global Softwood Supply Demand Balance The global flow of trade in softwood 2014/2015

4 mill. m3 8 mill. m3

10 mill. m3 4 mill. m3

< 1 mill. m3 9 mill. m3

2 mill. m3

Source: FAO/Skogsindustrierna

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Sawn softwood exports to MENA The MENA region’s importance for European sawmilling industry is vital. Rumors about the devaluation of the Egyptian Pound and decrease of oil revenue in Algeria have kept the  Pine outlook challenging. Long term outlook for the region remains positive – young demographics, etc. but the political unrest and  low oil price are and will cause challenges.

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Sawn softwood exports to Japan Japanese housing starts has strong growth during the first half of 2016 beating expectations. The planed VAT increase for 2017 has been postponed until 2019. The strengthening of the Yen is expected to impact negatively the economic growth in 2016‐2017. Population aging ‐ long terms prospects are challenging.  Housing Starts, New Construction Starts of Dwellings 1 400 000 1 300 000 1 200 000 1 100 000 1 000 000 900 000 800 000 700 000 600 000 500 000 400 000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est.

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Sawn softwood exports to China

The Chinese economy has continued to grow, albeit at  slower speed than before, at an annual rate of 6‐7%. The Chinese housing market showed signs of slowing in  2014 and 2015 but activity picked up end of 2015. A McKenzie analysis predicted that about 300 million  people are going to move to urban areas during 2015‐ 2025. This is will be significant driver for the construction  industry. 

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Sawn softwood exports to China The growth of sawn timber consumption and demand from China has been extremely important particularly  for Finland, Sweden and for Russia. Russia and Finland are exporting in 2016 respectively about 40% and 90%  more than in 2015. Especially children's’ wooden furniture industry growth has been the driver for the Scandinavia spruce exports. Russian timber export growth has put pressure on Pine prices in China.

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US Total Housing Starts

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Sawn softwood exports to the US The US market has become a steady but small market for the European sawmills, primarily the German and  Swedish producers. With the housing start growing and nearing 1.5 million starts per annum, the US market is expected to become  more important for the European producers. The USD/EUR and USD/SEK rate plays an important role on the  viability of the exports from Europe to the US market.

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By‐Product Sales

Chips, bark and forest chips price development EUR/MWh, DLD to client

Chips

Price of wood chips have been under pressure in  Europe. There is an oversupply in pulp logs, bark and  sawdust.

Bark

Forest chips

In Finland forest chips are being subsidized, putting  pressure in sawmills’ by‐products. Situation has worsened by cheap energy prices and  past warm winters.

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Exchange rates Currency fluctuations have dramatic effects on the industry in Europe

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Financial health of industry 2015 & 2016 H1 EBITDA Results for Selected European Sawmilling Companies Vida (EBIT) Vapo Timber EBITA Stora Enso Building & Living Sodra Timber 2016 H1 (Jan‐Apr) Setra (EBIT)

21.3%

Rusforest 25.5%

Norvik Timber Industries Moelven Metsa Wood Koskisen (EBIT) Holmen Timber Bergs Timber 2016 H1 (Dec '15‐May '16) ‐6,00%

‐3,00%

0,00%

3,00%

2015

2016 H1

6,00%

9,00% Source: Publicized annual reports

Sodra result exclude "återbäring" for member's log supply; 2015: estimated milllion SEK 481 Vapo sawmills sold end 2015 Koskisen only reports annual figures Rusforest 2016 does not include disposal on non‐current assets

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What’s next?

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Summary When we thought the European political situation had stabilized, the BREXIT vote result brought uncertainty back. European demand is expected to continue to increase, albeit slowly. Demand from the overseas markets continue to play an increasingly important role for the European sawmill industry. Exchange rate fluctuations will continue to affect the industry. Financial performance of the European sawmilling industry has improved in 2016 but remains unsatisfactory in many parts of Europe. The moderate increase in production has enabled the industry to perform better. By‐product sale challenges could slow production increases.

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Merci beaucoup!

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