Trends and Developments in the Chinese Pulp and Paper Industry
International Forum on Investment and Finance in China’s Forestry Sector September 22-23, 2004, Beijing, China Ilkka Kuusisto Associate Principal Jaakko Pöyry Consulting, Shanghai
Agenda Paper and paperboard consumption
Will the growth continue?
Production and capacity additions
Where will the production be located and who will operate it?
Future fibre supply
Is there enough fibre? Where will it come from?
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Global Consulting and Engineering Group
Client- and technology-oriented globally operating consulting and engineering firm Core operations based on three know-how clusters: 1. forest industry 2. energy, and 3. infrastructure & environment Global market leader in forest industry Strong international position
3
Paper and paperboard consumption
Will the growth continue?
Production and capacity additions
Future fibre supply
4
Global Paper and Board Consumption Over the past 23 years, global paper and paperboard consumption has grown 3.0% a year or a total of 165 million tons. 350
Million tons
+ 3.1 %/a
Rest of World
300
+ 3.4 %/a
Non-Japan Asia
250
Japan 200
Europe
150
100
50
0 1980
North America
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
5
Co-existence of Media Historically, electronic media has not threatened the growth of paper based communication – in many cases the paper industry has benefited from it. - Paper consumption, million t/a 40
40
Newsprint and pr/wr paper consumption in Western Europe
Expansion of Internet/WWW CD-ROMs Laser Printers
30
Satellite TV
20 Colour TV 10
Mini Computers
Cable TV VCR
30
PCs 20
Printing and writing papers 10
Mainframe Computers
Radio Cinema TV
Newsprint 0 1950
0 1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
6 103TTS01
Innovations and Paper-based Packaging Paper remains a very competitive packaging material. New innovations and applications help maintain its position against other materials and systems. - Consumption, million t/a 200
Smart packaging Digital printing Non-impact printing
150
Microflutes Lightweighting 100
Barrier technology Aseptic liquid packaging
50
World consumption of packaging paper and board 0 1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
7 103TTS01
GDP and Paper Consumption per Capita Low- to medium-income regions with vast population base represent the biggest growth potential for the paper industry in the long term...
400
Consumption 2000, kg per capita Finland
USA
Austria
300
Belgium
New Zealand
200
Italy Rep. of Korea
Malaysia
100
0 0
Portugal
South Mexico China Africa Argentina Brazil Turkey Venezuela Russia India
5000
10000
Spain
Germany
Canada Netherlands
Australia
UK
Denmark
Japan 1980-2000
France Singapore
Ireland
Greece
15000
Sweden
20000
25000
30000
35000
40000
GDP per capita, USD 2000 prices 8
GDP Growth by Region …and the rapid economic growth in Asia will underpin the growth in paper consumption. Asia (excl. Japan and China)
Japan
1998
2001
0.4
2001
2002
0.2
2002 2.5
2003
5.9
4.2
2004
7.1
1999
5.3
2000
2.8
2000
7.8
1998
1999
0.8
8.8
1997
0.4
1998
0
1999
4.4
1997
1.6
1997
China
8.0
2000
3.8
7.3
2001
4.4
8.0
2002
2003
5.9
2003
2004
5.8
2004
9.1 8.3
2005
1.8
2005
5.6
2005
7.7
2006
1.9
2006
5.5
2006
7.6
2007
1.8
2007
5.5
2007
7.0
2008
5.7
2008
7.3
2008
2.1
L-t trend 0
2
5.4
L-t trend
1.3 4
6
8
0
2
4
6
7.7
L-t trend 8
0 2 4
6 8 10
% change in GDP
Source: Consensus Forecasts and OECD
9
World Demand for Paper and Paperboard World demand for paper and paperboard continues to grow. With an average growth rate of 2.2 percents a year, it will reach 450 million tons by the year 2015.
500
Million tons Forecast
Rest of the World Latin America
400
Rest of Asia
300
China Japan Eastern Europe
200
Western Europe
100
0 1980
North America
1985
1990
1995
2000
2005
2010
2015
10
Growth of Paper and Paperboard Demand Most of the growth will take place in more volatile emerging markets.
Demand growth %/a
5
Emerging Growth Markets
Eastern Europe China Asia excl. Japan & China
4
Latin America Africa
3
Average 2.2 %/a Oceania Western Europe
2
Traditional Strongholds Japan
1
North America
0 0
20
40
60
80
100
Share of consumption in 2000 (325 million tons), % 11
Growth of Paper and Paperboard Demand Woodfree papers and tissue show highest growth rates, packaging boards account for substantial volume growth. Demand growth %/a
4
Uncoated woodfree
3
Coated woodfree Tissue
Average 2.2%/a
Corrugating materials Coated mechanical
Cartonboards
Uncoated mechanical
2
Newsprint
1 Sack paper
Other grades
0 0
20
40
60
80
100
Share of consumption in 2000, % 12
Paper and paperboard consumption
Production and capacity additions
Where will the production be located and who will operate it?
Future fibre supply
13
Consolidation and Globalization Search for markets, assets and competitive advantage drive consolidation and globalization Trade policy & legislation
Market growth
Resource availability
Search for improved efficiency
Search for new markets & growth
Globalization of customers
Search for strategic assets & capabilities
Regional cost advantages
Competitive pressure
14
Leading Global Paper and Paperboard Producers Truly global companies are yet to emerge but many companies have by now established Asian presence. Regional Capacity Distribution, 2004/IIQ Stora Enso International Paper UPM Oji Georgia-Pacific Weyerhaeuser Nippon Unipac Holding Smurfit-Stone Container Abitibi-Consolidated SCA
North America Western Europe Eastern Europe Latin America Asia Other
M-real Asia Pulp & Paper Norske Skog MeadWestvaco Mondi 0
2000
4000
6000
8000 10000 12000 - Capacity, 1000 t/a -
14000
16000
15
18000
Paper Industry Concentration 1997 vs. 2002 The pulp and paper industry is still relatively fragmented with top five firms controlling only 20-40% of regional capacity.
60
Combined capacity share of top five firms (%) 1997 2002
40
20
0 North America
Western Europe
Asia
Latin America
World
16
Industry-level Benefits of Consolidation Consolidation helps to bring price stability. Price volatility vs. industry concentration 16
- Standard deviation, % Global price, regional concentration for pulp
14 BHKP 12
Testliner
10
BSKP
Uncoated woodfree
8
Kraftliner
Newsprint
6
LWC
4
SC
2 0 20
40
60 80 - Concentration of Top 5, % -
100
17
Changes in Investment Conduct The past 10 years has been a decade of acquisitions.
25 %
- Investment spend, % of sales -
20 %
15 %
12.3%
20.7%
2.4%
10 %
1.8% 5%
1.5%
11.2% 6.9%
7.0% 0% Total Acq. New Other inv. lines capex
1991 - 1995
Total Acq. New Other inv. lines capex .
1996 - 2000 18
Acquisition and Investment Activity Consolidation has mainly taken place in developed, slow growing, mature markets. Asian companies are still growing through new investments. North America, Europe and Japan
China and Rest of Asia Acquisitions
Acquisitions
55 %
Fixed Investments
45 %
10 %
90 %
Fixed Investments
Source: JP Research
19
Global Capacity Growth Non-Japan Asia’s share of global capacity investments has grown significantly
100
%
Asia
Rest of World 80
China
Japan 60
Europe 40
20
North America
0 1970s
1980s
1990s
2001-2006
Source: JP Research 20
Capacity Expansion Projects in China Over the next five years, China will lead the world in capacity growth. Company APP Ningxing Zhonghua APP Hainan Jinhai Pulp APP Gold East Paper APRIL APRIL Daewoo Paper Dongguang Jia Hui (Sun) Dongguang Jia Hui (Sun) Foshan Huafeng Hebei Pan Asia Long-Teng Jiangxi Chenming Paper Lee & Man Paper Mfg. Lee & Man Paper Mfg. Lee & Man Paper Mfg. Nine Dragons Nine Dragons Nine Dragons Ningxia Meili Paper Industry Oji Paper Shandong Cheming Shandong Cheming Qihe Shandong Huatai Shandong Jin Feng Yuan Shanghai Zhonglong Paper StoraEnso Suzhou Paper UPM-Kymmene Wuhan Chenming Wuxi Long Chen Paper Yuen Foong Yu Paper Yuen Foong Yu Paper Yueyang Paper Zhanjiang Wood Pulp Mill TOTAL ABOVE
Capacity 1000 t/a 700 1000 700 400 1000 300 300 300 300 330 400 250 350 400 250 250 300 300 400 400 300 450 450 300 450 450 300 400 500 500 300 700 13730
Grade Duplex board Bl hardwood pulp Coated woodfree Uncoated woodfree Bl hardwood pulp Coated woodfree Duplex board Duplex board Duplex board Newsprint LWC Unbl testliner Recycled medium Testliner/medium Recycled medium Recycled medium Unbl testliner Folding boxboard/duplex Coated woodfree Folding boxboard Recycled medium Newsprint/LWC Duplex board Testliner/medium Coated woodfree Uncoated woodfree Cartonboard Testliner/medium Testliner/medium Testliner/medium Folding boxboard Bl hardwood pulp
Location Zhejiang Hainan Jiangsu Guangdong Shandong Heilongjiang Guangdong Guangdong Guangdong Hebei Jiangxi Jiangsu Jiangsu Guangdong Guangdong Guangdong Guangdong Ningxia Jiangsu Shandong Shandong Shandong Shanghai/Fengxian Shanghai/Pudong Jiangsu Jiangsu Hubei Jiangsu Jiangsu n.a. Hunan Guangdong
Time 2004 2005 2005/2006 2006/2007 n.a. 2006 June 2004 August 2005 2005 2005 2004 2004 September 2004 2005 August 2004 August 2004 2005 2005 2006 2005 n.a. 2005 n.a. 2004 n.a. 2005 n.a. 2007 2006 n.a. n.a. n.a.
21
Paper and paperboard consumption
Production and capacity additions
Future fibre supply
Is there enough fibre? Where will it come from?
22
Global Consumption of Papermaking Fibre World consumption of papermaking fibre is forecast to grow from 350 million tons in 2003 to 460 million tons by the year 2015, or 2.3%/a on average. 500
Million tons
Forecast
400
Recovered paper
300
Non-wood pulps Sulphite pulps UKP
200
BHKP 100
BSKP Mechanical/semichemical 0 1970
1975
1980
1985
1990
1995
2000
2005
2010
2015 23
Average Papermaking Fibre Furnish in the World Wood pulp is still the most important papermaking raw material, but recovered paper continuously increases its share of the total – today about 48% of the total
100% 90%
Percent
Forecast Recovered paper
80%
Non-wood pulps 70%
Sulphite pulps 60% 50%
UKP
40%
BHKP
30%
BSKP
20% 10% 0% 1970
Mechanical/semichemical
1975
1980
1985
1990
1995
2000
2005
2010
2015 24
Recovered Paper Collection and Consumption – 2003 North America is the great provider of recovered paper for Asia. Million tons 50
58%
50%
6.9
9.3
4.1
45
2.0
2.7
40
0.7
1.5
35
0.4
40%
30 25
65%
20
Recovery rate 15 Consumption Collection
10 5 0 Western Europe
North America
Non-Japan Asia
Japan
New Capacity in China 11 million tons of new papermaking capacity came on stream in China during the past three years. To keep these machines running requires nearly 8 million tons of recycled fibre as well as virgin wood pulp. 12 Million tons
Pulp
10
& fillers
8
Containerboard 6
Mixed
Cartonboard 4
Printing and writing Newsprint
OCC
2
ONP 0 2002
2003
2004
RCF required
26
Recovered Paper Imports into Mainland China Large part of the increase in consumption has come from imports. 14
Million tons
White
12
Mix 10
8
ONP 6
4
OCC 2
0 '95
'96
'97
'98
'99
'00
'01
'02
'03
'04
Note: 2004 estimated based on Jan-Jul statistics 27
Recovered Paper Imports into Mainland China USA, Europe and Japan are the largest import sources, but they have just about reached their limits. Other countries cannot export more, either. 14
Million tons
12
Japan
10
8
Others Korea Canada Australia Hong Kong
Europe
6
4
USA 2
0 '95
'96
'97
'98
'99
'00
'01
'02
'03
'04
Note: 2004 estimated based on Jan-Jul statistics 28
Paper Recycling Water Wheel Continuous additions of fibre are needed to offset losses. Virgin Wood Pulp Minerals and Additives Process Losses (deinking)
Production of Paper
Used for Paper Production
Paper Trade Trade in Paper Products
Consumption of Paper
Collection of Paper Recovered Paper Trade
Other Uses Not Collected of Old Paper (tissue, library books, burned, etc.) 29
Paper and Paperboard Collection Cycle Fibre quality decreases over time until it disappears in the recycling process. - Volume of raw material 120
Without virgin fibre injection, paper & paperboard industry would run out of raw material within 6 months.
100
80
Collection 45%/Round 20 Days Collection 50%/Round 20 Days
60 Collection 60%/Round 20 Days Collection 60%/Round 30 Days 40
20
0 0
20
40
60
80
100
120
140
160
180
200
220
240
Days CALCMOD2/ILE
30
So What are the Solutions? Domestic collection of recovered paper must be improved
Non Wood Pulp China has traditionally relied on non-wood pulp for large portion of its paper industry’s fibre needs. With modern technology, non-wood pulp can be processed efficiently and in environmentally sound way to produce high quality fibre.
16
Production in China – Million tons
Forecast
14 12 10 8 6 4 2 0 1980
1985
1990
1995
2000
2005
2010
2015 32
Growing Stock of Forests There is plenty of wood in the World. It is just not all in the right places. China must secure a reliable and sustainable source of wood for its industry. 63.7
-billion m316.9
22.6 13.0
6.8
7.5
12.7 9.5
1.8 1.1 4.9 4.9 107.4 37.1 55.1 3.8
7.9 0.5 2.0
Total 380 billion
0.9
m3
Softwood 126 billion m3 Hardwood 254 billion m3 33
Conclusions The global demand for paper and paperboard continues to grow The industry growth is shifting outside traditional supply areas, especially to Asia and increasingly to China The industry remains fragmented, especially in Asia Acquisitions have become an important driver of corporate growth, but capacity growth continues in China Recycled fibre will soon constitute over 50% of global paper industry’s fibre raw materials Traditional supply sources cannot continuously increase their exports of recovered paper Domestic collection must be developed and improved to meet a growing part of the fibre mix Non wood pulp must be developed into a viable alternative World has enough wood to meet the growing demand but it is not all located in the right places. China will have to develop sustainable source of wood to help meet its growing demand for fibre. 34
