Post on 17-Aug-2020
STRICTLY PRIVATE & CONFIDENTIAL
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The Case for Value Driven Growth in the Pulp Industry
Sunil Sood, ShenzhenMay, 2017
Photo courtesy of OKI Engineering team
Value over Volume
The following presentation represents APP’s views of the market according to our research and perceptions
STRICTLY PRIVATE & CONFIDENTIAL
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We can all look to history to determine our future course…
Will it repeat itself, or will we buck the trend this time?
Source: Brian McClay, Hawkins Wright, PPPC, APP Internal Research
Historical changes in Capacity vs. HW Price
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
CH
AN
GES I
N C
APA
CIT
Y
?
BH
KP B
RA
ZIL P
RIC
E TO
ASIA
STRICTLY PRIVATE & CONFIDENTIAL
2010
3
Historical changes in Capacity vs. HW Price
But what exactly has history taught us? 2 things…
Source: Brian McClay, Hawkins Wright, PPPC, APP Internal Research
Little to no relationship
between capacity
additions and price
drops
Sustained price
increases are often followed
by sudden price drops
1
2
*
BH
KP B
RA
ZIL P
RIC
E TO
ASIAC
HA
NG
ES I
N C
APA
CIT
Y
2016 201720152011 2012 2013 20142006
?
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Historical changes in Capacity vs. HW Price
Like OKI, let’s look at the Second Thing First: Capacity Change vs Price Change…
Source: FisherSolve, Hawkins Wright
Qu
art
erly
Ca
pa
city
Ch
an
ge
%
Quarterly Price Change %
PC
- Strangely there is actually a mild positivecorrelation between increases in capacity and increases in prices if looked at in the same quarter.
- When capacity has increased, prices have often also increased.
- In fact, there were more incidences where when capacity increased price also increased (22) than prices decreasing when prices increased (13).
- The size of the circles in the graph will show us that prices increases were actually larger when capacity increased than the price increases when capacity decreased!
…Is that because prices take time to belatedly come into effect??
R2 = 0.4%
PC
n= 22n= 13
n= 3PC
PC
n= 2
Q1’07 – Q1’17
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Qu
art
erly
Ca
pa
city
Ch
an
ge
%
Quarterly Price Change %
Q1’07 – Q1’17
PC
R2 = 0.4%
PC
n= 22n= 13
n= 3PC
PC
n= 2
PC
PC
n= 21n= 13
n= 2PC
PC
n= 4
NO. If we correlate quarterly capacity changes to next quarter price changes
we find an even weaker correlation…
Next Quarter Price Change %
R2 = 0.02%
Next Quarter
Price Change %
Historical changes in Capacity vs. HW Price (Q+1)
So price volatility is
not linked to
capacity increase.
Other factors are at
play
Source: FisherSolve, Hawkins Wright
STRICTLY PRIVATE & CONFIDENTIAL
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Mo
nth
ly S
hip
me
nts
Ch
an
ge
%
Monthly Price Change %
Jan ’07 – Mar ’17
PC
R2 = 0.08%
PC
PC
PC
PC
PC
PC
PC
Nor is price change directly correlated to actual demand data on a monthly
basis… So irrational behavior and sentiment is evidently at play here…
M+1 Price Change %
R2 = 1.3%
Next Month
Price Change %
Historical changes in Shipments vs. HW Price (M+1)
Source: PPPC Numera Global Shipments, Hawkins Wright
n= 46n= 29
n= 17 n= 42
n= 46n= 28
n= 18 n= 41
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7 Source: RISI
…So what exactly has explained past booms and busts?
3 acute cases can be examined…
HW
Pric
e/T
on
USD
$
Hardwood Prices 1995-2016
STRICTLY PRIVATE & CONFIDENTIAL
8 Source: RISI, Fisher
3 acute cases can be examined…
1995
- 1994 was the largest ever rise in Chinese consumption of market pulp at the time
- A boom in the paper industry
was accompanied by a spurt in production costs
- Inventory buildup was due to poor planning by traders and paper mills alike
- Speculation was rife with ramp up of paper machines purchased across China
with no real increment in demand of paper and board products
…So what exactly has explained past booms and busts?H
W P
ric
e/T
on
USD
$
Hardwood Prices 1995-2016
STRICTLY PRIVATE & CONFIDENTIAL
9 Source: RISI, Fisher
3 acute cases can be examined…
2008
- The commodities boom prior to the global financial crisis led to speculative inflation of prices amid access to
cheap credit.
- From Q3 2007-Q2 2008, Paper mills’ capacities rose 24%, while pulp mill capacity rose 14% only for demand to drop in Q3 2008 once the credit crisis hit.
- Pulp sell-in prices hit a historical low amid dried up global demand for paper products.
…So what exactly has explained past booms and busts?H
W P
ric
e/T
on
USD
$
Hardwood Prices 1995-2016
STRICTLY PRIVATE & CONFIDENTIAL
10 Source: Fisher, Hawkins Wright
3 acute cases can be examined…
2010
- Sudden Supply-Demand change caused disruption.
- Global pulp prices soared once again in 2010 when the Chilean earthquake in Feb. 27, 2010 pulled up
price of BSK, and subsequently benefited the price of BHK.
- The panic steadily abated once supply was restored to markets.
…So what exactly has explained past booms and busts?H
W P
ric
e/T
on
USD
$
Hardwood Prices 1995-2016
STRICTLY PRIVATE & CONFIDENTIAL
11 Source: RISI, Fisher
…So what exactly has explained past booms and busts?
Speculation
Cheap credit
1995 2008 2010
HW
Pric
e/T
on
USD
$
Speculation
Poor planning Panic
Sentiment
STRICTLY PRIVATE & CONFIDENTIAL
12 Source: PPPC, Numera Analytics
…Why is it different this time?W
20
S/C
HW
OP
. RA
TESW
20
HW
IN
VEN
TOR
YTO
TAL
HW
SH
IPM
EN
TS
HW demand at record highs. HW Op. rates at threshold levels amid dwindling inventory
Latam
Rest of World
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Coated
WF 157
gsm
Ivory
board
250 gsm
Uncoated
WF 70-80
gsm
Jumbo
Roll
Tissue
2016 2017 2016 2017 2016 2017
RMB Paper Prices % Change MoM Prices Price Gap BHKP Pulp vs. Paper
Rising pricesFor all paperGrades in 2017
Price changeshave been positivedespite incoming new paper capacity
The price gap between pulp and paper is above $300
…How is Downstream Demand Behaving in China?
China Prices
Source: Internal Intelligence
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…And is There Really a Dreaded Oversupply?
Source: Hawkins Wright, Brian McClay, Internal Intel
…The reality is that there could very well be a supply deficit in the medium term. Something that downstream manufacturers are ill prepared for...
2017 2018Supply vs. Market Factors
SupplyFactors
MarketFactors
While it is true that
OKI and Fibria have or will
launch a significant amount of
supply into the market…
…Several market factors in fact
point to a net supply shortage:
1. Asian demand for tissue, as well as
other grades, is booming.
2. China is strictly enforcing its
pollutant discharge policy leading to
shutdowns in obsolete capacity.
3. Conversions to alternative grades
like Dissolving Pulp have given the
market breathing room.
4. Unplanned downtimes are having
an effect on market sentiment e.g.
CMPC and IP.
Balance Result: Net Deficit in Supply
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…So we could be entering an era of possible scarcity
…And it seems like no one has actually
prepared for that scenario...
Rising Raw material/
input costs
Obligations towards
Sustainable Practices
Consistently strong
downstream demand in key markets
Higher barriers in entering the industry
Lower barriers in exiting the industry
Industry levels of preparedness for the two scenarios:
1
2p= 95%
p= 5%
Price vs. Capacity Chart
Price
Capacity Changes
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…We need to help the Paper Industry by looking to Add Value
…and OKI looks to provide that value...
…So OKI has been conceived of as Value
project, not a Volume project
USD $3Billion in state of the art investments aimed at leveraging the superior qualities of Acacia Pulp
All best practices employed from APP’s years of cumulative experience in Acacia pulp
Disciplined focus in providing Value over Volume by showcasing our Excellence in Acacia:
VA
LUE
AC
AC
IA
Superior Brightness
Greater Strength
Higher Softness
Folding Endurance
Better Smoothness
Higher Fiber population
Photos courtesy of OKI Engineering team
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OKI was conceived of as a Value project, not a Volume project…P
ara
me
ter
Co
mp
ariso
n
…The test results for OKI Acacia reveal that we compete with the best. Our value proposition is aimed at ensuring paper producers can extract maximum value from our pulp.
Brightness
Tensile Index
Tear Index
Burst Index
AttributeLBKP Euca
BrazilEucaChile
AcaciaAsia 1
OKIAcacia
Folding End.
CompressionStrength
AcaciaAsia 2
The APP Value Map
OKI 90 72.5 7.7mN·m2/g
5.39Kpa·m2/g
136 3rd
Brightness TensileIndex
TearIndex
BurstIndex
FoldingEndurance
CompressionStrength
Initial results reveal several points of
differentiation where APP’s Acacia offers
more value over its competitors and
competes directly with Eucalyptus Pulp
OKI LBKP Benchmark
Pulp was refined to 425 CSF
OKI vs. the Rest
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Months After Start-up
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The OKI Line 2 start-up has been highly successful…A
ctu
al C
um
ula
tive
Pro
du
ctio
n a
s %
of
Cu
mu
lative
De
sig
n P
rod
uc
tio
n
…OKI has had a very successful start-up relative to other competing mills all over the world…
OKI
Start-up Curves of Recent Pulp Lines
…And yet despite the news of OKI’s entrance, prices have continued to rise, defying all odds…
Implemented Price Hikes Nov’16-Mar’17
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…Value Driven vs. Volume Driven Growth
Competitive
Landscape
Growth
Mindset
Zero/Negative
Sum
Key Metric
for Success% Market
Share
Competitive advantage
and uniqueness
Pricing
Tactics
Cost plusor minus
Market
InsightsIndustry
Level
Commodity mindset
Positive Sum
% Contribution Margin (profit)
Value based pricing
Customer level/End-use
granularity
VALUE VOLUMEDIMENSION
I seek growthby creating my own unique value niche
I study how I can sell more of a generic product
New value is evergreen. It can be created in the market and it is important to understand where it is
Value in this market is finite and it is important to capture it before any competitor does
My fixed costs are sunk. The profit I make over and above my FC is what I care about
I win by getting the most volume out into the market
I price my products by understanding what attributes my customer is willing to pay a premium for
I look at my costs and manipulate my markup up or down depending on market sentiment
I understand everything about my customer and their end-uses for my products
I study the industry and how supply and demand trends move
STRICTLY PRIVATE & CONFIDENTIAL
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…So what is OKIs Value Proposition
Production Sales Logistics Support
…OKI plans to excel along every step of the Value Chain with its Acacia Pulp
Create a product
with excellent
formation and sheet
stability by
leveraging the
inherent virtues of
Acacia pulp for
Paper and Tissue
producers.
As Paper
Manufacturers we
offer our technical
expertise to all of our
customers in how to
embed value and
quality in their
product so that they
can command a
higher premium.
Improve lead times
to our customers by
decreasing their
inbound supply
chain costs, offering
them a high quality
pulp option close to
their operations.
Help in improving
products and
processes for paper
manufacturers by
advising them on
how to optimize
their use of Acacia
pulp relative to their
end-uses.
ASSURE PAPER MANUFACTURERS CAN CONTINUE CREATING VALUE IN THE MARKET
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Thank you
1. (n.) The regard that something is held to deserve; the importance, worth, or usefulness of something…
1valuenoun ǀ val·ue ǀ [val-(ˌ)yü\]
Source: Oxford Dictionary