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Conversions vs New Builds —Which Offers the Most Bang for the Buck?

Jon RagerSVP, RISI Analytics

International Containerboard Conference ChicagoNovember 2018

Conditions Driving Conversions (and Other Capacity Additions) Are Different Now

• Previous conversion storyline Declining graphic paper markets Readily available assets/fiber base Access to large, stable commodity packaging markets

• Rationale today Solid and growing traditional containerboard market Additional boost from e‐commerce tailwinds Dynamic fiber and developing export trade situation with China

2© Copyright 2018 RISI, Inc. | Proprietary Information

Current Long List of Conversions/New Capacity


Company Mill PM Grade Type Thousand Short Tons

Year

Midwest Paper Combined Locks, WI Recycled Conversion 220 est. 2018

Verso Jay, ME 3 Kraft Conversion 200 2018

PCA Wallula, WA 3 Kraft Conversion 400 2018

Global Win Wickliffe, KY 1 Recycled? Conversion 300 2019

IP Selma, AL 15 Kraft (WT) Conversion 450 2019

McKinley/Bio‐Pappel Port Angeles, WA Recycled Conversion 250 2019

Pratt Wapakoneta, OH 17 Recycled New 400 2019

WestRock Florence, AL 4 Kraft New/replacement 27 net 2020

Green Bay Green Bay, WI 4 Recycled New/replacement 445 net 2020

ND Paper Wisc. Rapids, WI 25 Recycled Conversion 250 2020

New Indy Catawba, SC Kraft? Conversion ? 2020?

Cascades Ashland, VA 1 Recycled Conversion 400 2021

What Defines a Good Conversion Candidate, and Are the Criteria Also Changing?


Factor Then Now1. Trim width Min. 2 rolls at common width Some flexibility2. Technical age Low technical age very important Less relevant w/incr. capex3. Production cost Start plus trajectory = final See above4. Furnish/fiber Edge to kraft integration Wider window for RCP5. Energy assets Biofuels and co‐gen capacity Same6. Market strategy Strong edge to box integration Offshore investors, export

How Well Can Conversions Be Anticipated?Looking Back at RISI N. American and European Conversion Studies

• 169 NA graphic paper machines were analyzed Five of the top 25 candidates have either converted, are in the process of converting, or have definitive plans for converting


• 283 European graphic paper machines were analyzed Five of the top 10 candidates have either converted, are in the process of converting, or have definitive plans for converting

Company Mill PM

Stora Enso Varkaus, Finland 3

Schumacher Myszkow, Poland 6

Parenco / SKG Renkum, Netherlands 2

International Paper Madrid, Spain 62

Leipa Schwedt, Germany 11/5

Company Mill PM

International Paper Selma, AL 15

Kruger Trois Rivieres, QC 10

Resolute Catawba, SC 3

PCA Wallula, WA 3

Sappi Skowhegan, ME 1

Conversion Technology and Machine Components


Capex depends on scope, recent levels approach new buildMill Area Issue/ Typical Modification Relative Cost

Fiber/ stock prep. • Addition of RCP processing system• Virgin fiber line modifications• Refining capacity

$$

Forming • Headbox hydraulic capacity• Drainage/water handling

$‐$$$

Pressing • Shoe press for water removal into drying• Sheet densification

$$

Drying • Additional drying capacity• Sizing/surface treatment

$‐$$$$

Winding/ Roll Handling • Larger reels, bigger rolls• Roll wrap, logistics

$‐$$

Capital Requirements Can Vary Greatly

• Recycled conversions range from limited to major rebuilds

• Conversions with kraft content can exceed new build capex, but have also been reported at extremely low levels

• New or replacement machines can benefit from higher capacity

7

Conversion spend has even greater variation than new build

© Copyright 2018 RISI, Inc. | Proprietary Information

0

200

400

600

800

1000

Conversion ‐Recycled

Conversion ‐ Kraft New/Replacement

$/ ann

ual ton

cap

acity

What Benefits Do New Builds Provide That Conversions Don’t?


Conversion New Build

Furnish (Site dependent) (Site/ concept dependent)

Speed/ Drying Capacity

Energy Assets

Site Layout/ Automation

Product Attributes

PM Width

Site Location

Capital alone cannot transform site evaluation into site selection

Significant Number of Assets Still Available


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

52‐69 70‐79 80‐89 90‐99 100‐119 120+

4.5% 3.5%

33.3%42.5%

15.5%

0.7%

Percen

tage

Width (Inches)

*Based on machines with known widths only Source: RISI Corrugator Database 2018

North American Corrugators98” corrugators are largest group, 110” and 130” fastest growing

N. American Containerboard Mills and CorrugatorsConversions also have a wider geographic distribution than new


Source: RISI Corrugated database

Drop in RCP Prices Has Improved Position of Recycled Containerboard Mills


Q2 2018 Unit prices, Unbleached Liner Curve

Rec. mills position 11% below integrated, 8% below overall avg.

Integrated Recycled

Magnitude of Investment Can Strongly Influence Cost Curve Positioning


Q2 2018 Unit prices, Unbleached Liner Curve

New NewConv, Hi

Conv, MidConv, Mid Conv, Lo

Conv, HiConvs, Lo

Convs, Lo

(Recycled) (Integrated)

North American Conversion Summary

• Conditions driving conversion decisions have changed, accelerating pace of announcements RCP policy shifts have boosted China investment in N. America Asset evaluation criteria have also been impacted

• Conversions now have higher average capex and wider range Expanded scope of conversions closes gap with new build capex

• Recovered paper price drop improves recycled positioning Project scope/capex influences cash cost competitiveness


conversions vs new - fastmarkets risi · • recycled conversions range from limited to major...

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