Sector: Paper & Forest Products Sector Weighting...
Transcript of Sector: Paper & Forest Products Sector Weighting...
Markets And Trade in Transition: Implications for Public Forest
Agencies
Don Roberts, Managing Director 613-564-0827 [email protected]
Forest Governance in Transition: Challenges and Opportunities Megafloristais Working Group
Grey Towers, USA October 2006
Sector: Paper & Forest Products
Sector Weighting: Underweight
NOT FOR GENERAL DISTRIBUTION.
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Context
Generally dealing with the private use of a public resource in developing the forest industry Two questions: 1. How will the private players be affected by the major shifts taking place in the markets and trade?
2.What are the implications for you as a manager of public forest lands?
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Outline Set the Global Stage
Key Issues & Implications:
1. Trends in prices of logs and forest products
2. Emergence of China
3. Changes in demand
4. Increasingly scarce energy
5. Exchange rates
6. Financial performance of the industry
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The Global Stage Location of Global Softwood Fiber
Source: JP Management Consulting, CIBC World Markets.
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The Global Stage Location of Global Hardwood Fiber
Source: JP Management Consulting, CIBC World Markets.
Alaska
Cameroon
Brazil
Canada
United States of America
Chile
Argentina
Uruguay
Russian Federation
Australia
S.E. Asia
South Africa
China
India
Western Europe
Hardw ood Surplus Hardw ood Neutral Hardw ood Deficit
Mexico
Iberia
Scandinavia
UK
Eastern Europe
Congo
Mozambique
Vietnam
Tanzania
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The Global Stage Estimated Pulpwood Consumption by Region (2004)
Conifer Non-Conifer
Source: Wood Resources International. Source: Wood Resources International.
•The U.S. South is the most dominant consumer of both conifer and non-conifer pulp wood – by far.
•China is now the second biggest paper & paperboard producer in the world, but it directly consumes a relatively small volume of pulp wood.
•Despite its large forest resource, Russia also consumes little.
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The Global Stage Paper and Paperboard Furnish by Region
Source: JP Management Consulting
0% 20% 40% 60% 80% 100%
Asia
Latin America
W. Europe
Oceania
Africa
E. Europe
N. America
Wood Pulp Non-Wood Pulp Recovered Paper
•Recovered paper is an increasingly important source of fiber for the paper & paperboard industry.
•Non-wood pulp still plays an important role in Asia and Africa. In China & India, it accounts for roughly ¼ of the furnish.
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Price Signals
In a market economy, prices summarize a lot of information. ….so let’s start by looking at the “price signals” being sent by the market.
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Average Delivered Pulp Log Prices Q2/06 (US$/ODMT)
Source: Wood Resources International.
Price Signals
• There is a large variation in pulp log prices around the world, with the differences generally greater for softwood than hardwood.
• Highest prices in Europe and Eastern Canada, and lowest in the emerging regions. In Indonesia, prices in a range of $37-$50 since 2000
• Both hardwood and softwood prices in Brazil are still reasonably low. This is despite the fact that since they bottomed in early 2003, they have risen by more than 3x in US$ – higher log prices now reflected in higher timberland prices.
Conifer Non-Conifer
Source: Wood Resources International, CIBC World Markets
02040
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Price Signals
Implications of regional pulp log prices? •If conditions persist, pressure for mill closures and contracting fiber demand in Europe and Eastern Canada.
• For those regions with relatively low prices (eg., Indonesia, Spain), there is an incentive for mills to increase their fiber consumption.
•Especially if oil prices drop, expect further expansion in fiber exports from Australia, New Zealand, Chile, B.C., Russia and U.S. PNW. Softwood fiber in particular, and mostly to China.
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Price Signals Global Average Prices For Pulpwood
Source: Wood Resources, CIBC World Markets.
• Real pulp wood prices are on a secular decline – true for both soft and hardwoods.
• Is it just a cyclical rebound since late 2002, or something more sustained? Falling US$ played the biggest role for most, especially Europe and Canada.
• Conifer - small increases in local currency for conifer in Germany, Eastern Canada and U.S. South. Non-conifer - larger increases in local currency for Germany (+60%) and Brazil (+110%)
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Nominal RealLinear (Nominal) Linear (Real)
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88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
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mt)
Nominal RealLinear (Nominal) Linear (Real)
Non-Conifer
Source: Wood Resources, CIBC World Markets.
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Price Signals Global Average Prices for Conifer Sawlogs
• Real softwood sawlog prices are generally on a secular decline, with the biggest decreases in Western N. America, Oceania, and Japan.
• Much of the rise since 2002 has been due to the weakening US$, and the N. American solidwood prices have recently collapsed.
Source: 2005 Wood Resources International.
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Price Signals Change in Regional Sawlog Prices, 1995-2005
(Conifer Sawlog Prices 1995 to 2005, $US)
• Over the past 10 years, saw log prices have increased in Eastern and Latin America, but have fallen in Asia and Western North America.
• Price changes have been mixed in Europe.
• Since 2002, there have been meaningful rises in some region’s prices even when measured in their own currencies. In Latin America and E. Europe due to increasing sawmilling capacity, and in E. Canada due to log shortages.
Source: 2005 Wood Resources International.
North America* Europe L. America & Asia
*North America change is upto Q206
US South 6% Finland 5% Brazil 69%US West -8% Sweden -14% Chile 8%BC Coast -58% Austria -9% New Zealand -14%BC Interior 3% Germany -15% Japan - Sugi -53%Quebec 55% Japan - Douglas Fir -25%
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Price Signals Implications of declining price trend for wood fibre?
• Suggests wood has become less economically scarce over time.
• Signals wood processors to increase their use of fiber, and for timberland owners to decrease their supply and investments.
• If this continues, stumpage price earned by governments on their sale of public timber will be reduced over time.
• The value of timberland will tend to decline – time to sell?
• More difficult for industrial forest producers to compete with alternative land uses (e.g., recreation/wild life in Canada; palm oil in Indonesia, soya bean and cattle production in Brazil).
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Price Signals Implications of declining price trend for wood fiber?
• If prices are declining mostly because of increased supply from illegal logging which is unsustainable, then fiber prices may rise sharply in the future. Is the market sending a confused signal?
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Price Signals
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Estimated Percent Of Log Production Illegally Harvested
Source: Seneca Creek Associated, Wood Resources International.
• WRI estimates that roughly 10% of global logging is illegal. Expect to be greater for the higher quality timber that goes into making products like plywood.
• The World Bank estimates illegal logging causes about $5 billion in lost government revenue, and over $10 billion loss in global market value of forest products.
• By its very nature, it is difficult to measure the degree of illegal logging. But is the magnitude sufficiently large than it can be a meaningful contributor to lower historical prices?
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Price Signals Lumber Prices (Western SPF, 2x4 Std & Btr)
Source: Random Lengths, CIBC World Markets.
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Linerboard Prices (42-lb. Eastern U.S.)
Source: Pulp & Paper Week, CIBC World Markets.
The good news – the real price trend is up slightly for lumber, and only down slightly for linerboard.
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Newsprint Prices (30-lb. Eastern U.S.)
Source: Pulp & Paper Week, CIBC World Markets.
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88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
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Price Signals
Source: Pulp & Paper Week, CIBC World Markets.
Eucalyptus Pulp Prices (Brazil/Iberia)
The bad news – the real price trend is declining for essentially every grade of pulp and paper.
Prices are currently near cyclical peak.
Real price trend is even more negative for non-U.S. producers with strengthening currencies (eg., Canada, Brazil, Europe).
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Price Signals Implications of declining price trend for forest products?
• Prices are still cyclical, but most pulp and paper products have become less economically scarce over time. Good for consumers, but not producers.
• With lower product prices, mills are unable to pay as much for their wood – lower revenue for the landowner.
• Be critical when mill projects are being proposed that assume rising, or even stable prices.
• Pulp & paper prices are currently near cyclical peaks (in US$), but profits are well below previous highs due to higher than usual costs. Over the next several years, many companies won’t have the financial strength to expand as planned/hoped.
Note: Although there is feedback between them, global pulpwood prices have fallen even faster than pulp & paper prices.
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Changes in Aggregate Paper & Paperboard Capacity
Source: NLK, CIBC World Markets Corp.
Emergence Of China
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•China contributed roughly 90% the global net increase in paper & paperboard capacity since 2000 – now the 2nd largest.
•China will continue to dominate going forward, with 55% of the announced net change in global capacity over the 2006-08 period.
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Chinese And Global Confirmed Capacity Changes, By Grade (2000-2005)
Source: NLK, CIBC World Markets Corp.
Without China: • Essentially no net change in the world’s capacity to produce containerboard,
boxboard and uncoated printing & writing paper • Global newsprint capacity would have actually shrunk by roughly 6%.
Emergence Of China
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Chinese And Global Announced Capacity Changes, By Grade (2006-2008)
Source: NLK, CIBC World Markets Corp.
Through 2008: • China will continue to be the single biggest source of new capacity for
containerboard, boxboard, newsprint and printing & writing papers. • Even with its lack of fiber, China is still proposing to build almost 20% of the
world’s new market pulp capacity over the next 3 years.
Emergence Of China
2,18
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Emergence of China
• The furnish used by China’s paper & paperboard industry is varied: roughly 50% recovered paper, 25% wood pulp, 25% non-wood pulp.
•China’s imports of recovered paper (RP) have more than doubled just since 2000 – it now accounts for over 1/3 of the world’s total RP imports.
•Imported wood pulp accounts for over 75% of the total wood pulp consumed in China, and China continues to account for the bulk of the global growth in pulp imports.
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Emergence of China By far the bulk of China’s roundwood consumption is in its solidwood industry, and segments of this industry are expanding rapidly.
Plywood: •Roughly 10x increase in capacity since 1994 •Now the world’s largest producer (mostly hardwood) •Currently exporting about 20% of its production.
Medium Density Fiberboard (MDF): •Roughly 8x increase in capacity since 1994. •Now the world’s largest producer. •Significant indirect exporter, mostly in the form of furniture.
The panel sector is competing for the same small poplar and eucalytpus logs which might be expected to supply China’s new pulp & paper mills.
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Emergence of China
China is the world’s 3rd or 4th largest producer of lumber, but its output has declined since the mid-1990s because of the National Forest Protection Program’s logging ban.
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Emergence of China
•When considering all roundwood supply, China appears to be importing roughly 25% of its wood requirements.
•China’s log imports have grown from about 5 million m3 in 1998 to roughly 28 million m3 this year – over a 5x increase.
• Coniferous logs now make up over 65% of the total log imports – its share has been rising.
•Roughly 85% of the softwood log imports are from Russia – official data suggests it will exceed 20 million m3 in 2006 (roughly ½ of Russia’s total roundwood exports).
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Emergence of China
• Given the lack of consistent forest inventory data and industrial statistics, there is not a clear picture of China’s domestic “wood balance”. • Even if the aggressive plantation targets are eventually met, not clear how much of the fiber would ultimately be available for industrial purposes.
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Emergence of China Implications of an emerging China?
•China’s “wood deficit” is expected to increase (not decrease), requiring growing imports of roundwood, wood chips and market pulp.
• This will raise demand for wood fiber in the rest of the world, and put upward pressure on prices
•Good news for land owners, but not wood processors or other users of the forest in the rest of the world.
•Given China’s growing dependence on Russia as a source of roundwood, it is important that everyone have a better understanding of the potential sustainable harvest in Russia.
.
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Emergence of China Implications of an emerging China?
•Given continuing shortages of tropical hardwood peeler logs, the growth in Chinese plywood production is expected to slow and probably decrease.
• In response, expect increased plywood production (and demand for peeler logs) in countries like Russia, Oceania, Chile and Brazil.
.
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Emergence of China Implications of an emerging China?
•Since China must import massive volumes of recovered paper (RP) to supply its expanding containerboard, boxboard and newsprint capacity, this is will continue to place upward pressure on global RP prices:
•Cause substitution toward pulp wood in the rest of the world - especially in regions like the U.S. where the relative price of wood/RP is lowest.
.
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Emergence of China Implications of an emerging China?
•China has been expanding its production of numerous forest products faster than its consumption (eg., plywood, MDF, newsprint, boxboard). This has occurred while the growth in demand in the rest of the world has moderated.
• Downward pressure on global prices.
•Closure of higher cost mills. This will reduce the demand for wood fiber from local mills – mostly in N. America, Europe and Rest of Asia.
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Emergence of China Implications of an emerging China?
•The global pulp and paper industry’s relative dependence on non-wood fiber has been declining, but the rising wood deficit in China may reverse this trend throughout the world. Significant unused volume of non-wood fiber, but its removal from agricultural sites may jeopardize soil productivity over time.
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Emergence of China Implications of an emerging China?
• Water is arguably scarcer than wood in China. Among the least efficient users of water are the old non-wood pulp mills.
• Many use roughly 10x the volume of water to produce a ton of pulp as do the modern pulp mills.
• The government wants to close down the worst performers.
• Holding paper consumption fixed, a 20% reduction in non-wood pulp capacity would increase China’s market pulp imports by roughly 30%. Such a hypothetical change would put significant upward pressure on pulp prices, and increase the demand for pulp wood around the world.
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Changing Demand
Source: Jaakko Poyry.
Demand For World Market Wood Pulp: 2000-2015
• We are seeing a shift in the pulp industry from the northern to the southern industry; and over time, the same shift is expected in much of the paper industry.
• BSKP Northern is still the dominant grade of pulp, but it is also one of the slowest growing — 1/5th the growth rate of demand for Eucalyptus. Beware of “pulp chauvinism” in the North.
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Changing Demand Projected Paper & Paperboard Consumption (to 2050)
Source:CINTRAFOR
•Since the late 1990s, the growth in forest products consumption has slowed by almost two-thirds.
•If we stay at the lower growth rate, we require significantly less wood for industrial purposes than would otherwise be the case.
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• The “intensity of consumption” has been declining for newsprint in both the North American and global market.
• Same has occurred for UFS paper — the dominant grade of printing & writing paper — since the mid 1990s.
• In 2005, North American demand fell 5% for newsprint, 2% for P&W paper. • The paper industry’s problem is a basic supply/demand imbalance.
Global Consumption Per Unit Of Real GDP N. American Consumption Per Unit Of Real GDP
Source: RISI, CIBC World Markets Source: RISI.
40.0050.0060.0070.0080.0090.00
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Changing Demand Total U.S. Newsprint Consumption (million tonnes)
Source: PPPC. \
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• In some cases we are not just talking reduced growth rates, but absolute reductions in demand.
• The consumption of newsprint in North America is on a secular decline –down 25% since 2000. To help balance the market, newsprint capacity in N. America has been reduced by roughly 20 % over the same period.
• Will the other paper grades follow? We think so, eventually.
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Changing Demand
• Lumber and plywood production dominate the demand for solidwood fibre.
• However, producers must stay competitive and relevant - building products continue to evolve. Consumers will respond to relative costs and qualities.
• Oriented Strand Board will “go global” and continue to displace plywood – N.American capacity already down 35% since 1990.
• Engineered Wood Products like LVL, OSL, I-joists, and Laminated Strand Lumber will start to displace sawnwood
Wood products and their competitors’ life cycles, 2006
Source: USDA Forest Service, 2006
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Changing Demand Implications of changing demand?
•Due to reduced demand growth for paper, the demand for pulp wood from traditional users may be lower than expected.
•The growth in Engineered Wood Products (EWP) will reduce the growth in demand for large logs from big trees – they can be made from small pulpwood-sized bolts.
•Provided a good business case can be made, the above two implications suggest land managers should be open to re-allocating cutting licenses from paper to wood products companies.
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Changing Demand Implications of changing demand?
•On-going depletion of the tropical hardwood resource also sets the stage for significant growth in EWP in emerging markets.
•Oriented and Engineered Strand Lumber can be manufactured from eucalyptus – arguably better strength and water/termite resistance.
•Rate of growth of biomass will increase in importance relative to the inherent characteristics of the species – technological “fix” after the tree is harvested.
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Changing Demand Implications of changing demand?
•Over time, we may see a decrease in the price premium for large logs. Implications?
• Shorten the optimum tree-growing rotation
• Decrease the incentive for illegal logging of natural forests (?)
.
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Energy Scarcity
• Growing interest in energy from renewable energy
sources not just because of high fossil fuel prices, but
also as a way to reduce carbon emissions and
greenhouse gases.
• The incentive to explore wood-based fuels depends
partly on the regional price of electricity. Regions
dependent on coal and gas have much more volatile
prices than those dependent on hydro and nuclear –
latter have high fixed costs, but low variable costs.
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Norway
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S. Korea
U.S.
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Japan
(U.S. cents/kWh)
Energy Scarcity International Electricity Prices For Industrial Users (2004)
.
• Biggest incentive to produce bio-fuels is where electricity prices are already high (eg., Japan, China, Europe), but these regions tend to have wood deficits.
• Electricity prices in Brazil up from 2.5 cents in 2002 to 6.0 cents in Q1/06; similar move in Ontario…..newly created incentive to develop bio-fuels (and avoid energy intensive forest products).
Source: International Energy Agency, U.S. Dept. of Energy, Hydro Quebec.
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Energy Scarcity Implications of energy scarcity?
• A range of “high-tech” and “low-tech” alternatives are
available to make cellulose-based bio-fuels.
• The “high-tech” options include fuels from bio-refiners
and black liquor gasification in kraft pulp mills (eg.,
dimethyle ether/DME, Fisher-Tropsc fuels).
Energy and cellulose are true joint products, which can
make the economics more attractive for wood than
other bio-products (eg., corn, sugar-cane).
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Energy Scarcity Implications of energy scarcity? The “low tech” options include wood pellets that can be burned.
• Pellet prices have been on a modest upward trend due to
rising demand. Canada has rapidly become the major
wood pellet exporter, followed by Austria and France.
• From 2006-2010, pellet production is expected to climb:
• From 1.2 to 5.0 million tonnes in Canada
• From 1.3 to 3.3 million tonnes in U.S.
• Expect additional investments in Russia, L. America,
Africa
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Energy Scarcity Implications of energy scarcity?
• Non-wood sources of bio-fuels may also be expanded
(eg., palm oil), which may create land-use conflicts
with forestry.
• Transportation costs rise, which discourages trade. It
has the most negative impact on commodities with a
low value per unit volume (eg., pulp logs, chips).
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Energy Scarcity Implications of energy scarcity?
• Processing costs rise for all forest products, and it
decreases what they can afford to pay for fiber:
• Greatest negative impact on high energy intensive
commodities (eg. recycled paperboard, mechanical
pulps and newsprint)
• Least negative impact on low energy intensive
commodities (eg., solidwood products, kraft pulp)
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Exchange Rates
Exchange rates are volatile, and can have a dramatic
impact on the profitability & competitiveness of
national industries
Canadian Case Study:
• C$/US$ appreciated by 22% from Jan 2001-Dec 2005
• Given most products are sold in US$, it reduced the
revenue in local currency:
• Eg., Newsprint prices up 3% in US$, but down
roughly 20% in C$
• Increased the relative cost of Canadian mills
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Global Softwood Kraft Market Pulp, Delivered Cash Cost To Rotterdam, (Q2/05), US$/C$=0.75
Exchange Rates
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Cdn Mills Other NA Mills
11.9%15.6%
19.5% 53.0%
Source: Paperloop Benchmarking Service.
With the US$/C$=0.75, Canadian pulp mills are distributed throughout the global cost curve.
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21.1% 62.4%
Exchange Rates Global Softwood Kraft Market Pulp, Delivered Cash Cost To Rotterdam,
(Q2/05), With US$/C$=0.95
Source: Paperloop Benchmarking Service.
If the US$/C$ exchange rate rises to 0.95: the number of Cdn mills in the lowest cost quartile shrinks from 9 to 1; and the number in the highest cost quartile rises from 9 to 14.
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Exchange Rates Exchange Rates To The U.S. Dollar
• Due to its “twin” current account and budgetary deficits, the US$ is expected to depreciate over time. This will help the U.S. industry’s competitiveness.
• Since 2003, the forest industry in Brazil and Canada have been hurt the worst by an appreciating currency.
• A weak currency has benefited Russia since 2003.
Source: Bloomberg, CIBC World Markets.
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06
Jul-0
6
Janu
ary
2000
= 1
00
Cdn Dollar Chinese Yuan Russian Ruble
Brazilian Real Indonesian Rupiah
+19.0%
-3.0%
-4.2%
-16.2%
-27.6%
52
Exchange Rates Percent Change From The Current To The PPP Implied Exchange Rate
(2006)
• The Purchasing Power Parity concept is one approach to estimating the long-run exchange rate.
• Over the medium term, the Chinese, Indian and Indonesian currencies are likely to appreciate the most. The Russian and Brazilian currencies also have upward pressure
• The Canadian, Japanese and European currencies may be slightly overvalued.
Source: International Monetary Fund, CIBC World Markets
Indi
a
Chi
na
Indo
nesi
a
Japa
n
Can
ada
W. E
urop
e
Rus
sia
Bra
zil
-90%
-70%
-50%
-30%
-10%
10%
30%
Overvalued
Undervalued
53
Exchange Rates Implications of a stronger local currency? • For China and India, it makes it cheaper to:
• Import fiber (eg., wood, recovered paper, pulp) and processed products.
• Invest in plantations and processing plants off-shore.
• For Brazil, Russia, Indonesia, it makes it more
difficult to export (eg., pulp, paper, solidwood products).
In isolation, it takes demand pressure off of the domestic forest resource (and local wood prices), and puts more pressure on the foreign forest resource.
Key question: We have a sense for the direction of the
currency changes relative to the $US, but what about the changes among the emerging players?
54
Financial Performance
We track more than 100 public companies world wide - these are the 20 largest in terms of sales
Source: PWC, CIBC World Markets.
55
Financial Performance Return On Capital Employed By Region: Eight-year
Average (1998-2005)
Source: PricewaterhouseCoopers, CIBC World Markets.
• The cost of capital is roughly 10%, but even the most profitable region has only generated an average ROCE of 7%.
• Given these results, many companies are having problems getting new capital.
7.0
5.7
5.4
4.6
4.2
3.7
2.2
0.001.002.003.004.005.006.007.008.009.00
10.0011.00
Latin
Amer
ica
&So
uth
Afric
a
Euro
pe
USA
Aust
ralia
&N
ewZe
alan
d
Can
ada
Oth
er A
sia
Japa
n
RO
C E
(%)
Cost of Capital 10%
56
Financial Performance Basic problem? • Too much capital invested per $ of sales
• Demand not growing as much as expected.
• Profit margin too low due to too much supply. (Most
governments try to attract new mills…..and then set up barriers to exit.)
Chronically low returns because of the “private use” of a “public resource”???
57
Financial Performance Top 10 World Wide, ROCE: Eight-year Average (1998-2005)
• Four of the top 5 performers operate in “emerging” countries.
• The eight-year average ROCE of the top 10 is 10.3%; roughly equal to the cost of capital
• Pattern in terms of product focus? If involved with processing, go “high end” – otherwise, stick to the trees.
Source: PricewaterhouseCoopers, Company Reports, CIBC World Markets.
15.5
12.1
10.5
9.9
9.6
9.4
9.3
9.1
9.0
8.7
-5
0
5
10
15
20S
ino
Fore
st (H
ong
Kon
g)
Sia
m P
ulp
& P
aper
(Tha
iland
)
Bill
erud
(S
wed
en)
Suz
ano
(Bra
zil)
Vot
oran
tim (B
razi
l)
Plu
m C
reek
Tim
ber
Com
pany
(US
A)
Sch
wei
tzer
Mau
duit
Int'l
(U
SA
)
Kla
bin
(Bra
zil)
May
r-M
elnh
of K
arto
n(A
ustri
a)
Son
oco
(US
A)
RO
C E
(%)
58
Financial Performance Of the top ten financial performers in the world:
• Two are essentially “pure plays” in timberland (Sino Forest and Plum Creek)
• Three more have significant timberland holdings (Suzano, Votorantim, Klabin)
The best returns are generally captured in the timberlands, not in the processing. (Why?...... In economists’ jargon, “timberland is the input in most in-elastic supply”.)
Despite the overall industry’s poor performance, private equity investors have abundant capital to invest in timberland (attracted as much by the risk diversification as the absolute return).
59
Financial Performance
Most of the major public forest companies in North America have already sold their timberland to financial investors.
Financial investors: • Own roughly $37 billion worth of timberland in N.A. – up 7x since mid
1990s. • Looking aggressively off-shore, and already own roughly 1.2 million ha
outside the U.S., with almost 60% in Oceania.
UK7%
S. Africa6%
Canada2%
Argentina1%
Chile3%
Venezuela4%
Uruguay10%
Brazil8%
Australia20%
New Zealand39%
Non-U.S. Timberland Holdings of Financial Investors
Source: Hancock Timber.
60
Financial Performance
Implications of industry’s financial performance?
• The greatest financial returns in the global industry
tend to be generated in S. America and Asia, so that’s
where we can expect new capital entering the industry
to continue to gravitate.
• However, even most of the very best performers in the
global industry have problems earning their cost of
capital. The forest industry’s current model is broken,
and fine-tuning is not enough. As a result, it is difficult
to expect sustainable increases in log prices going
forward.
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Financial Performance Implications of industry’s financial performance? In a competitive market, the results are consistent with
the view that the timberland owner absorbs the volatility in forest industry profits.
• If your agency is selling standing timber, your
stumpage system should be responsive to increases (and decreases) in forest product prices and costs. Is it?
• If your agency is “collecting rent” by requiring the industry to do other things than making forest products (eg., provide infrastructure, inefficient employment), the stumpage system is likely not effectively capturing the rent. Its likely either too low or too high.
62
Financial Performance
Implications of industry’s financial performance?
• If all you want is to attract capital to develop your
forest sector - its easy. You just have to be willing to
sell the timberland…..there is lots of money available.
63
Financial Performance If you want to attract capital, but don’t want to sell the
timberland: • Have a bias toward the solid wood industry – generally
less capital and energy intensive, and likely better long-term demand.
• Don’t just look to the established multi-nationals – they have a poor track record. New players may bring a new approach, with “best practices” from other industries.
• Beware the “infant industry” argument (i.e, they just need help initially to get them going)….most never “grow-up”.
64
Final Thoughts
Russia is the biggest “wild-card” with respect to
the global supply.
China is the biggest “wild-card” with respect to
the global demand.
65
Final Thoughts The “good news” is that if your regional
industry is competitive, the landowner should capture most of the rent.
The “bad news” is that if your industry is not competitive
• There will be no rent to capture
• Given the social demands, you will be pressured to assist the industry to maintain employment and infrastructure.
Implication? It is in the land managers’ interest to have a profitable industry.
66
Final Thoughts
Since the current industry model is likely broken, do not be afraid to try new forms of tenure, or challenge most established relationships.
One long-term solution may lie in new products and markets….easier said than done. R&D is central, and it goes beyond growing trees. Transformative technologies are needed, (and the landowner arguably has the most at stake). E.g.,
• Bio-energy
• Wood chemistry
• Composite materials
67
Final Thoughts
The empirical fact is that globally, wood prices
have been on a secular decline. Why?
• Magnitude of illegal logging?
• Flawed statistics on available forest resource?
• Subsidized plantations?
Or simply that wood is becoming less
economically scarce over time?
68
Case Study: Sino Forest in Hunan, China
Sept 28, 2006, Sino Forest signed agreement with a SOE to buy standing timber on roughly 100,000 ha of mature conifer plantations anytime over the next 14 years. Price=$33/m3
• Trees worth $76/m3 (logs + residues) in the current market
• Costs $58/m3 (stumpage $33 + harvest $25)
• Gross margin of $18/m3, or 24%
• After overhead expenses, Sino is making a pre-tax profit of
$105/ha/year
• Expects to acquire an additional 300,000 in Hunan before the end of 2006, with same economics.
• Not obligated to replant, but promises to work with local gov’t. to improve future yields and help develop local industry.
A good deal for the local government?
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Important Disclosures
Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.
Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.
In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.
Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
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Companies Mentioned Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets: Stock Prices as of 02/24/2006: Abitibi-Consolidated Inc. (2a, 2d, 2e, 2f, 2g, 6a) (A-TSX, C$4.11, Sector Outperformer) Bowater Inc. (9) (BOW-NYSE, US$27.20, Sector Outperformer) Canfor Corporation (CFP-TSX, C$13.48, Sector Performer) Cascades Inc. (2a, 2e, 2g, 4a, 4b, 7, C16) (CAS-TSX, C$10.35, Sector Outperformer) Catalyst Paper Corporation (2a, 2e) (CTL-TSX, C$3.26, Sector Underperformer) Domtar Inc. (2a, 2c, 2d, 2g, 7) (DTC-TSX, C$6.14, Sector Outperformer) Fraser Papers (2g) (FPS-TSX, C$7.18, Sector Performer) International Forest Products Limited (2g, 12) (IFP.SV.A-TSX, C$6.86, Sector Performer) Norbord Inc (2g) (NBD-TSX, C$12.72, Sector Underperformer) Tembec Inc. (2g) (TBC-TSX, C$1.17, Sector Underperformer) West Fraser Timber Co. Ltd. (2g) (WFT-TSX, C$41.11, Sector Outperformer) Weyerhaeuser Co. (2a, 2e) (WY-NYSE, US$69.03, Sector Underperformer)
Companies Mentioned in this Report that Are Not Covered by CIBC World Markets: Stock Prices as of 02/24/2006: Ainsworth (ANS-TSX, C$23.30, Not Rated) Neenah Paper (NP-NYSE, US$29.49, Not Rated) Smurfit Stone Container Corp. (SSCC-NASDAQ, US$13.19, Not Rated) UPM-Kymmene Corp. (UPM-NYSE, US$21.47, Not Rated) Western Forest Products Inc. (WEF-TSX, C$1.75, Not Rated) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.
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Key To Important Disclosure Footnotes Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12
months. 3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12
months. 4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12
months. 4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities
of this company. 6a The CIBC World Markets Inc. analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. research analyst who covers this company has a long position in the common equity securities of
this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued
by this company. 8 A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this
company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World
Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit
relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares.
72
CIBC World Markets Price Chart
For price and performance information charts required under NYSE and NASD rules, please visit CIBC on the web at http://www.cibcwm.com/research/sec2711 or write to CIBC World Markets Corp., 300 Madison Avenue, 7th Floor, New York, NY 10017-6204, Attn: Research Disclosure Chart Request.
CIBC World Markets' Stock Rating System
Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months. SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months. SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months. NR Not Rated CIBC does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. "CC" indicates Commencement of Coverage. The analyst named started covering the security on the date specified.
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Ratings Distribution
Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 24 Feb 2006) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) 295 36.1% Sector Outperformer (Buy) 163 55.3% Sector Performer (Hold/Neutral) 395 48.3% Sector Performer (Hold/Neutral) 175 44.3% Sector Underperformer (Sell) 107 13.1% Sector Underperformer (Sell) 53 49.5% Restricted 9 1.1% Restricted 9 100.0%
Ratings Distribution: Paper & Forest Products Coverage Universe (as of 24 Feb 2006) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) 5 33.3% Sector Outperformer (Buy) 4 80.0% Sector Performer (Hold/Neutral) 5 33.3% Sector Performer (Hold/Neutral) 2 40.0% Sector Underperformer (Sell) 5 33.3% Sector Underperformer (Sell) 4 80.0% Restricted 0 0.0% Restricted 0 0.0% Paper & Forest Products Sector includes the following tickers: A, BOW, CAS, CFP, CTL, DTC, FPS, GP, IFP.SV.A, IP, LPX, NBD, TBC, WFT, WY. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IDA Policy 11, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC on the web at http://research.cibcwm.com/res/Policies/Policies.html or by writing to CIBC World Markets Inc., BCE Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request.
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This presentation has not been reviewed or approved by CIBC World Markets Corp., a member of the New York Stock Exchange (“NYSE”), NASD and SIPC. This presentation is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC Rule 15a-6 and Section 15 of the Securities Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major institutional investors receiving this presentation should effect transactions in securities discussed through CIBC World Markets Corp. This document and any of the products and information contained herein are not intended for the use of private investors in the UK. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of clients of CIBC World Markets Australia Limited. 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