STRICTLY PRIVATE & CONFIDENTIAL Value over Volume · 2017. 5. 25. · STRICTLY PRIVATE &...

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


2

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


2010

3


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

?


4


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


5

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


6

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


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


8 Source: RISI, Fisher


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

$





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.


W P

ric

e/T

on

USD

$



10 Source: Fisher, Hawkins Wright


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.


W P

ric

e/T

on

USD

$




…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


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


13

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


16

…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


17

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


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


20

…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


21

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

STRICTLY PRIVATE & CONFIDENTIAL Value over Volume · 2017. 5. 25. · STRICTLY PRIVATE &...

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