Market pulp Outlook, and impact of India Utipulp meeting Barcelona, 18th September 2014

Pulp prices versus other commodities

Current problem is demand, rather than supply includes India, Thailand, Indonesia, Vietnam. Also Korea, Taiwan. And Turkey Demand averages 1.2 million tpa over past ten years, but has slowed over past 2 years

Chinese monthly import +5% v 2013= 0.4Mt in 7 months Russia +38% Indonesia +7% Brazil +33% Indian imports

Net capacity additions average 1. 4 million tpa for next five years Net capacity additions average 1.4 million tpa for next five years. Mostly BHKP Recent closures of Huelva and Old Town reduce the surplus for 2014 and 2015, but further closures will be necessary to restore balance Capacity surplus based on current plans: Where? When? Who?

Impact of exchange rates - softwood

Impact of exchange rates - hardwood

Impact of exchange rates Since January, NBSK PIX has risen by $24 but €55 European dollar denominated costs are falling with weaker euro…

Defining the Indian market for Pulp & Paper Hawkins Wright published mullti-client report on India in 2008 and 2013 Similar approach to China research… Market remains relatively small in absolute terms, but has been developing steadily Furthermore, analysis is useful in understanding the drivers of China and other emerging markets

Comparisons with China…population India v China population, 1990-2019(f) Indian population is only 31% urbanised compared to 45% in China, 44% Indonesia, 78% in Mexico, 87% in Brazil. Urbanisation should further boost economic growth, but lack of investment in infrastructure such as transport, housing, and basic sanitation is a major problem. Of the 1 billion people in the world who have no toilet, India accounts for nearly 600m. Problem is partly economic, partly cultural. Indian per capita income is $1500pa in 2013 ($5350 by PPP) and unevenly distributed. Some states are $1000pc Households are larger, so household income is higher China per capita disposable income was US$3000 in 2013

Comparisons with China…GDP India v China GDP growth, 1990-2014(f) India v China GDP, 1990-2012 Indian per capita income is $1500pa in 2013 ($5350 by PPP) and unevenly distributed. Some states are $1000pc Households are larger, so household income is higher China per capita disposable income was US$3000 in 2013

India is world’s 3rd largest economy by PPP (10th in absolute dollar terms) GDP compared, 2012 (PPP basis): In 2013, IMF estimates China $13.4 trillion and India $5.1 trillion Not GDP

So, why is paper production lagging?? Indian tissue demand <150,000tpa compared to 6 million t in China

Importance of China’s export sector India runs a current account deficit of -1.99 per cent of GDP in 2013, whilst China has a surplus of +2.06 per cent. China exported $2.2 TRILLION (=$2,200,000 MILLION) in last twelve months…textiles, footwear, furniture, toys, electronics. i.e. Mostly packaged goods. (Spanish GDP is $1.3 trillion. German GDP $3.6trn). China exports ~17 million tonnes of P&B in converted form India exported $320 MILLION. Mostly engineering goods, gems and jewellery, chemicals, agricultural products and textiles (9%)….this sector is not a driver of P&B demand

Services account for 56 per cent of the Indian economy (43 per cent in China), whilst industry accounts for just 26 per cent (47 per cent in China). Composition of GDP, India Composition of GDP, China These differences explain the different scale and structure of the paper industries…. e.g. Packaging grades account for two thirds of Chinese consumption, compared to only 40% in India.

Paper consumption is related to spending (rather than population or GDP) GDP compared, 2012 (PPP basis): Not GDP

Paper consumption is related to spending (rather than population or GDP) Spend ~$115,000 to generate 1 tonne of paper demand, and the “yield” is falling

Paper consumption is related to spending (rather than population or GDP)

Geography & Industry fragmentation (China development was concentrated in coastal provinces) 17 Indian companies have annual capacity >100,000t/y. Combined output is 4.6 million t/y. Remaining 6 million tonnes of production is very small scale and impossible to measure output accurately Largest paper machines are 200,000t/y or less Average order size = 1/3 container Lack of merchants and intermediaries. Difficult to build brand Geographically dispersed across 35 locations (opposite) Average distance for BILT CWF: 1200km

Fibre demand, 2013 Forestry – Industrial plantations are prohibited. Farm forestry schemes with local farmers. Even so, BILT, JK Paper, ITC, Century, West coast have installed 1 million t/y pulp capacity since 2009. Most pursue a strategy of integration Fibre deficit…wood chip imports are expected to reach 1 million BDMT in 2014. Low wastepaper recovery rate (<30%)

Pulp imports BSKP imported from North America, Nordic, and Chile APRIL controls BHKP market. BILT brings in tied volume from Malaysia BEKP import ~50,000t/y Limited opportunity to displace local non-wood and wood pulp (less than in China)

Opportunities and challenges India’s population is young and growing, and less urbanised Income per capita remains very low even compared to China, Indonesia Positive economic outlook Investment in infrastructure is crucial. Roads, ports, warehouses. Also power generation and network, drainage & sanitation. Access to capital? Restrictive labour laws and bureaucracy discourage industry and labour intensive manufacturing…bold reforms required Land reform (plantation ownership) Fragmentation, opportunities for consolidation are limited Whilst China aims to reduce investment and promote consumption, India must do the opposite Big things are expected of Mr Modi…GDP has started to rise, rupee has stabilised, and BSE is at record highs. Can he deliver?

Outlook P&B grew by 7% 2007-2012 = 3.2Mt in 5 years Pulp imports grew by 0.4Mt Assuming Indian paper demand grows by 0.8 million tpa, how is this achieved? What percentage of P&B growth taken by imports? (over-supply globally) Of local P&B production, what percentage of fibre is virgin v recycled? Of virgin fibre, what proportion is imported pulp v local pulp; local plantations v imported chips and logs? Outside of China, India remains an important emerging market for pulp. However, fundamentals of population, geography, culture, and economy suggest a very different path to China. Slow and steady rather than explosive?