Water Scarcity: Rebirth of Dissolving Pulp MarketSeptember 2011

Prepared by: AMEC Americas Ltd.

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Agenda

Introduction

Global context and trends

What does all this mean?

What do some of the major players think?

Industry challenges and opportunities

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Should we be worried?

“Water Scarcity Could Affect Billions: Is This the Biggest Crisis of All”Independent, UK

“Southeastern U.S., With Exception of Florida, Likely to Have Serious Water Scarcity Issues”

ScienceDaily

“Coming Era of Water Scarcity Will Prompt Global Industrial Transformation, According to Survey of International Experts”

By Keith Schneider, Circle of Blue

“Yet Another 'Footprint' to Worry About: Water .”Taking a Cue From Carbon Tracking, Companies and Conservationists Tally Hidden Sources of Consumption, Wall Street Journal

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Water Scarcity – a definition

Water stress and water scarcity occur when: the demand for water exceeds the available amount during a certain period; or when poor quality restricts its use.

According to UNFAO by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under stress conditions.[2]

A country or region is said to experience "water stress" when annual water supplies drop below 1,700 cubic meters per person per year, according to the Falkenmark Water Stress Indicator.[3]

Much of the fresh water supply has become polluted, salted, unsuitable or otherwise unavailable for drinking, industry and agriculture.

Freshwater supply may decrease because of climate change.

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1. "Learn More: Water Scarcity". Columbia Water Center. 2. FAO Hot issues: Water scarcity3. Falkenmark and Lindh 1976, quoted in UNEP/WMO. "Climate Change 2001: Working Group II: Impacts, Adaptation and Vulnerability". UNEP.

http://www.grida.no/climate/ipcc_tar/wg2/180.htm. Retrieved 2009-02-03

Global Context and Trends“A World of Salt”

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Fresh water availability is flat to declining …

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Source: UNEP

Fresh Water Resources per Capita

  < 1,000 m3 5,000 m3   16,000-50,000 m3  1,000-1,700 m3 15,000 m3   >51,000 m3

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Fresh water availability is flat to declining …

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Source: UNEP

Fresh Water Resources per Capita

  < 1,000 m3 5,000 m3   16,000-50,000 m3  1,000-1,700 m3 15,000 m3   >51,000 m3

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… yet withdrawals are increasing

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Source: UNEP

Water Withdrawal as a % of Total Available

  more than 40%   from 20% to 10%  from 40% to 20%   less than 10%

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Intensive agriculture is decimating some areas environmentally and economically

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Contributing to fresh water stress/scarcity

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Source: International Water Management Institute

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Population growth and global warming may exacerbate the situation

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Population Growth

Climate Changing Precipitation

What does this mean?

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Proportion of water consumption will shift away from agriculture to industrial and domestic

GlobalProportion of Withdrawals2010 2025

Domestic 5-10% 10-20% Industrial 15-25% 20-25% Agriculture 70-80% 55-65%

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Which sectors of agriculture will lose the “water competition”?

Live stock and cotton cultivation are the most intense water users

Product Unit –Quantity (typical serving)

Water Required per Unit

Cattle 200 g 2,500 liters

Milk 200 ml 200 liters

Tomato 70 g 13 liters

Cotton T-shirt

500 g 4,100 liters

Sheet of paper

80g/m2 10 liters

Microchip 2g 32 liters

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Source: Various

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Climate change may result in …

Some areas will: receive less rain, others more; see an increase in arable land,

others a decline. Agriculture:

ceasing in some areas; migrating to others; and changing crops.

Technological advances in irrigation and water reclamation may mitigate some of the stress.

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Water scarcity/stress in the largest cotton cultivation countries - USA

Does it make sense to continue growing cotton in Texas and California?

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Annual Precipitation

Cotton Cultivation

Can the US government continue to subsidize cotton to the tune of over $200 per acre

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Water scarcity/stress in the largest cotton cultivation countries - Australia

40% cut in Murray River water volume taken for irrigation

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Inducements to: reduce water use; adopt more efficient forms of

irrigation; and Change crops.

Australian Rainfall Deficiency

Shift from Rice to Grapes

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Water scarcity/stress in the largest cotton cultivation countries - India

In light of: Increasing population Increasing industrialization Increasing urbanization Increasing disposable income

Biggest challenge for India is water and waste water management

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Cotton Cultivation

Indian Water Scarcity

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Water scarcity/stress in the largest cotton cultivation countries - China

In light of: Increasing population Increasing industrialization Increasing urbanization Increasing disposable income

Biggest challenge for China is water and waste water management

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Ground Water Depletion

Cotton Cultivation

What do some of the major players think?

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Industry leaders are making sustainability a priority

According to David Bennell, Executive Director of Textile Exchange there are several reasons companies are changing their attitudes about textiles: 20% of industrial fresh water pollution comes

from the textile industry. It takes 4,100 liters of fresh water to produce

one cotton t-shirt (500 g). In 2009, approximately eleven trillion liters of

fresh water were used to produce 60 million tonnes of fabric.

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Source: 2010 Sustainable Textiles Conference

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Since 2001 Nike set out to influence the water-use behaviors of its suppliers

Defining good water stewardship as borrowing water responsibly and returning it clean.

Targets include: improve the quality of the wastewater

discharge volume, increase overall water efficiency, and reduce the social and environmental impacts of

water use throughout the supply chain. Through the data collected from the Water

Program Nike is able to critically evaluate water use and improve water management.

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“Water scarcity is one of the central environmental and human health issues facing the world. It is

also a key concern for our company.”Source: Nike Corporate Responsibility Report

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Companies are developing ways to measure their water footprint as part of sustainability

Water Footprint measurements will help companies to minimize their use of water.

In October of 2008, the Water Footprint Network (WFN) was formally established in The Netherlands, and aims to accelerate the research, applications and discussions on water footprints.1

Levi Stauss & Co.: “Since 2008, we have been tracking water usage throughout our owned and operated facilities. With that data, we are able to …develop targets for water reduction at each facility.”

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1 Source: Water footprint overview in the governmental, public policy, and corporate contexts

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Several large multinational companies have made addressing water usage a priority

Levi Strauss & Co. is supporting more sustainable ways to grow cotton to monitoring how suppliers use water in the manufacturing process.

Wal-mart and H&M are working with their Chinese textile suppliers to reduce water use in the supply chain.1

Wal-mart has also partnered their textile network with the Organic Trade Association and Organic Exchange – advocating the USDA’s standards for cotton growth.

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1 Source: Natural Resources Defense Council 2010-09-24

Industry Challenges and Opportunities

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Issues and indicators to track that will impact the forest products industry

Cost of water – is the cost of desalination or reclamation a reasonable indicator?

Population growth and urbanisation Increasing disposable income of Brazil, China, and India – who’s

next Production and price of cotton Production and price of oil Government subsidization of cotton production Textile recycling?

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Where is the income and more importantly where is the income growth?

Per capita income is highest in the developed world

But the growth is inthe emerging nations

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Historically VSF has been the marginal raw material for textiles, however ….

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Raw Material Share of Textiles

Source: AMEC

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… availability constraints of cotton and oil are a positive driver for VSF

Cotton availability has been flat recently and prices have climbed.

Oil availability (reserves) are growing slowly and prices have been trending higher.

Hence the demand for VSF has improved considerably in the past decade. CAGR of 5% per year since 2003

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Oil and Cotton Price History

Source: US EIA, National Cotton Council of America

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Total DP demand contracted through the 90’s but this trend has reversed

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Worldwide Dissolving Pulp Demand(tonnes)

Source: UNFAO

CAGR-4.9%

CAGR4.2%

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Economic growth in China has fueled significant demand ….

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World Dissolving Pulp Demand by Region(million tonnes)

Source: RISI

CAGR

1.0%

9.1%

-1.3%-1.7%

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… and imports have grown by an order of magnitude

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China Dissolving Pulp Imports(tonnes)

Source: UNFAO

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Key consumers/converters of VSF are focused in Asia

Capacity has closed in Europe and North America. Replaced by factories in India, Indonesia, Thailand, and more recently

China. Rayon lines can be added in increments of 30,000 tpy.

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Key VSF Consumers/Converters and Capacity

Source: Various

Company Tonnes Region of OperationsBirla 690,000 India, China, Thailand, IndonesiaLenzing 580,000 Indonesia, China, Europe, North AmericaSateri 200,000 China, EuropeFormosa (FCFC) 140,000 TaiwanOther Asia 1,000,000Other 600,000Total 3,210,000

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Rayon versus Cotton – the battle continues …

“Why rayon is suddenly back in style” The Wall Street Journal Clothing manufacturers are scrambling for alternatives to pricey cotton,

resulting in a spike in demand for rayon's major ingredient. Investors, it's fashion worth following.

“High cotton prices may be in store for U.S. buyers” Reuters U.S. consumers wracked by a shaky economy and steep unemployment

will likely think twice about buying clothes from retailers trying to pass on cotton prices that recently scaled a 150-year peak, analysts said.

“Cotton holds breath” The Land The cotton industry faces an anxious couple of months as the full

ramifications of volatile markets and the as-yet-unknown extent of fallout from Queensland’s natural flood disasters becomes clear.

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Dissolving pulp to fabric …

"Regular rayon" has the largest market share.

High Wet Modulus (HWM) rayon.

High Tenacity Rayon is a modification of "regular rayon" to provide exceptional strength.

Cupramonium Rayon is another type with properties similar to those of viscose or regular rayon.

Microfibers from either regular or HWM rayon.

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Forest coverage is greatest in regions with less fresh water stress – an opportunity?

If cotton declines, crude oil remains relatively expensive, man made fibre/textile using DP as feedstock has a favorable medium and long term outlook.

In fact, Birla has established plantations in Laos with plans to build a pulp mill there in the 2015 to 2018 time period.

Declining paper grade pulp demand as a result of the demise of the publication paper business may mean: that northern hemisphere fibre will become less expensive (reduced

demand for fibre); more distressed assets become available; and therefore, some opportunities for conversion.

Forest coverage is greatest in regions with less fresh water stress.

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Will a shift away from Cotton to “synthetic” fiber accelerate?

If so

When?Where?

How much?

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