2020 | Fastmarkets RISI | Mill Intelligence Outlook

Ville Henttonen

Senior Product Manager, Mill Intelligence

Mill Intelligence OutlookIntroduction to panel discussion

2

Agenda

2020 | Fastmarkets RISI | Mill Intelligence Outlook

• Key cost drivers

• Machine conversions

• Risk of closure

• Converting integration strategies

• Paper vs. plastics case study: Shopping bags

• Water efficiency and effluent treatment

Key cost drivers have varying volatility

TYPICAL RISK SCENARIOS FOCUS ON

THOSE THAT FLUCTUATE THE MOST

AND MAKE THE BIGGEST DIFFERENCE

• Recovered paper prices have typically been

more volatile than wood prices, especially since

the changes in China’s market, which have also

affected the global pulp market

• Wood prices are relatively regional, which is

why even large local changes, like storm or

beetle damage, often have a more moderate

effect on average European prices

• Recently, Central Europe has seen a situation

where all fiber prices (wood, recovered paper

and market pulp) have dropped to low levels

• Average electricity and natural gas prices have

followed a similar trend, but recently electricity

prices have remained higher and more stable

32020 | Fastmarkets RISI | Mill Intelligence Outlook

European conversions from graphic to packaging papers

42020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

RECENTLY ALL SORTS OF

GRAPHIC PAPER MACHINES

HAVE BEEN CONVERTED TO

VARIOUS PACKAGING PAPERS

• Asset quality of an individual machine

often has high importance in conversion

decisions, especially in containerboard

• It seems that most of the best deals

have already been done, which may

lead to less competitive conversions

• Many graphic paper grades suffer from

such strong demand declines that any

other grade is seen as a better option

• Containerboard is not necessarily the

best conversion grade anymore, as the

market and prices have weakened

Machine conversion competitiveness may vary

MACHINES CONVERTED FROM

GRAPHIC PAPERS CAN HAVE

SIGNIFICANTLY DIFFERENT

CASH COST COMPETITIVENESS

• Successful conversions depend on

several factors: rebuild concept, asset

quality, fiber sourcing, cost position,

product quality, sales and marketing, etc.

• The most successful European machine

conversions have been able to reach the

second or even the first quartile on the

regional containerboard cash cost curve

• Typically, converted machines are not

the widest, biggest or most modern, but

are still slightly ahead of the average

producer

52020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

Machine conversion also requires investment

MACHINES CONVERSION CASES

HAVE DIFFERENT INVESTMENT

REQUIREMENTS

• First key factor is the asset ownership

• Is the machine already owned or does it

have to be acquired?

• Some machines are easier to convert

than others as equipment changes and

upgrade needs may vary

• Most of the European conversions lose

cost competitiveness when capital

costs are included

• Globally many conversions have been

done with minimal “zero” investments

62020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

Risk matrix: Company risk is combined with machine risk

COMPARISON OF COMPANY AND

MACHINE RISK TO THE REGIONAL

INDUSTRY AVERAGE MAY REVEAL

POTENTIAL INDUSTRY ACTIONS

• Company risk identifies those companies

that are most likely to do forced or planned

closures or to divest their competitive assets

• Machine risk identifies those machines

inside the high-risk companies that are most

likely to be closed or divested

• Machines with high company and machine

risk are most likely to face forced closure in

difficult market conditions

• Case study: Western and Central European

containerboard market (2017)

72020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

Comparison of corrugated board cost and price index

CORRUGATING COSTS HAVE

DECREASED DUE TO LOWER

CONTAINERBOARD PRICES

• Containerboard is the most important

key cost driver of corrugated board

• In 2017-2018, high containerboard

prices increased the corrugating costs

• Many corrugated board producers faced

difficulties in transferring the full effect of

cost increases to their prices

• Recently, corrugating cost indices have

come down to the same level as the

price index

• Currently, corrugated board has better

business potential than containerboard

• Integrating both containerboard and

corrugating operations to the same

company helps to control volatility risks

82020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

Integrated vs. independent corrugating plant

MANUFACTURING CORRUGATED

BOARD WITH TWO INTEGRATION

STRATEGIES

• Integrated = Containerboard net price at

corporate level equals manufacturing

cost + delivery to “natural market,” thus

own corrugator

• Integrated corrugators are exposed to

immediate price changes in necessary

containerboard raw materials

• Independent corrugators usually

experience a slight delay in raw material

cost changes (containerboard prices)

• In 19H2, both integrated and independent

corrugators operated at relatively low cost

92020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

Cost variation between corrugators

THE CASH COST DIFFERENCE

BETWEEN LOW-COST AND

HIGH-COST CORRUGATORS

CAN BE WIDE

• The cost difference is mainly due to

operational efficiency; labor productivity

in particular is a significant factor

• Despite the wide gap, the vast majority

of capacity operates near the average

cost level

• The cost difference has been quite

consistent

• All raw materials are assumed to be

purchased at estimated market prices

of each country

102020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI

Competitiveness of packaging paper vs. plastics: Shopping bags

PAPER AND PLASTIC SHOPPING BAG

COST COMPETITIVENESS COMPARISON

• Moldable thermoplastics compete with packaging

papers in various packaging applications

• Resin commodities are sold as both virgin pellets

and somewhat cheaper recycled regrind flakes

• Low-density polyethylene (PELD) is used, for

example, in shopping bags

• Unbleached machine-finished (MF) bag paper is

used in comparable paper bags

• Case study: Shopping bag raw material costs in

Germany, excluding other converting costs

• MF bag paper average costs are a delivered total

cost estimate of all identified European producers

• Plastics prices per tonne have been more volatile

but have recently stabilized at a relatively low

level

112020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI, Plasticker.de

Competitiveness of packaging paper vs. plastics: Shopping bags

PAPER BAG COSTS HAVE BEEN HIGHER

AND RECENTLY MORE VOLATILE

• Heavier 55 g paper bag requires more raw

material than lighter 21 g plastic bag

• Relative price volatility of plastics is much lower if

analyzed per bag instead of per tonne

122020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI, Plasticker.de

Water efficiency and effluent treatment

WATER SUPPLY IS LIKELY TO BE AN ISSUE

AND EFFLUENTS WILL BE LESS TOLERATED

• All environmental aspects are getting higher focus, and

most related laws and regulations are likely to become

stricter

• Many regional environmental authorities have put a

higher emphasis on effluent treatment and emissions

• Several European mills have recently faced effluent-

related inspections, sanctions and even constraints

• Climate change is likely to complicate fresh water

supply as precipitation decreases in southern Europe

• Precipitation may actually increase in central and

northern Europe, hampering harvesting in the Nordic

region

• The importance of water efficiency and effluent

treatment at pulp and paper mills is likely to increase,

as will demand for related technology and solutions

132020 | Fastmarkets RISI | Mill Intelligence Outlook Source: Fastmarkets RISI, EEA / EURO-CORDEX

Take away

Machine conversions can give varying results

▪ Conversion does not necessarily improve competitiveness

▪ The packaging markets also have their own complexities and issues

Two-dimensional risk analysis

▪ Both company risk and machine risk are worth analyzing

▪ Fiber and energy price scenarios can predict profit volatility

Integration strategy is an important factor in the

containerboard business

▪ Integrated corrugating may safeguard otherwise high-risk units

▪ Price fluctuations have a bigger effect on independent corrugators

▪ Transportation, operational and labor efficiency are also important

2020 | Fastmarkets RISI | Mill Intelligence Outlook 14

Fiber and energy are the key cost drivers

▪ Especially volatile recovered paper costs for recycled mills

▪ Gas and electricity are the most important energy cost drivers

Further reading

European Containerboard Risk of Closure Study

https://www.risiinfo.com/product/european-containerboard-risk-

closure-study/

Analytical Cornerstone Cost Benchmarking Tool

https://www.risiinfo.com/product/analytical-cornerstone-4-0-cost-

benchmarking-tool/

2020 | Fastmarkets RISI | Mill Intelligence Outlook 15

European Corrugators: A Comprehensive View

https://www.risiinfo.com/product/european-corrugator-study/

European Containerboard Machine Conversion Study

https://www.risiinfo.com/product/european-containerboard-machine-

conversion-study/

Asset Database

https://www.risiinfo.com/service/mill-data-costs/asset-database/

Index Builder

https://www.risiinfo.com/product/index-builder/

Thank you for your attention

Ville Henttonen, Senior Product Manager, Mill Intelligence

ville.henttonen@fastmarkets.com

Fastmarkets RISI

162020 | Fastmarkets RISI | Mill Intelligence Outlook