HAWKINS WRIGHT

The outlook for dissolving wood pulp supply and demandMAY 2017

Oliver LansdellHAWKINS WRIGHT LTD

Tel: +44 20 8747 5840Web: www.hawkinswright.comEmail: oliver.lansdell@hawkinswright.com------------------------------------------------------

Example slides

HAWKINS WRIGHT

Agenda

1. Year-to-date DWP demand and review of the dominant features of the market• Overview of the textile market• Overview of cotton linter pulp supply• Spotlight on China

2. Long term overview• Demand forecast through 2020• Supply forecast through 2020• Cash costs of production

3. Outlook for dissolving pulp prices• Impact of exchange rates• Net equilibrium price model

All data sourced from Hawkins Wright multi-client reports:

• Outlook service for market pulp• Defining the China market for pulp, paper and board• Outlook service for dissolving pulp• Pulpwatch

Example slides

HAWKINS WRIGHT

Chinese viscose fibre production(3 month moving average)

Source: Hawkins Wright

100

150

200

250

300

350

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

000s

t

Viscose fibre (VSF + VFY)

Example slides

HAWKINS WRIGHT

Chinese DWP imports: 3 month moving average

Source: Hawkins Wright

60

80

100

120

140

160

180

200

220

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

000s

t (3

mon

ths

mov

ing

aver

age)

Chinese DWP imports (LHS)

Example slides

HAWKINS WRIGHT

Chinese DWP imports: from SA(3 month moving average)

Source: Hawkins Wright

5

10

15

20

25

30

35

40

45

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

000s

t

Example slides

HAWKINS WRIGHT

Chinese DWP imports: from Indonesia(3 month moving average)

Source: Hawkins Wright, Emerging Textiles

5

10

15

20

25

30

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

000s

t

PT Toba swinging production

Kerinci starts trial runs of DWP

Example slides

HAWKINS WRIGHT

Chinese staple fibre prices2007-2017

Source: Hawkins Wright, Emerging Textiles

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Yuan

/MT

PSF Cotton VSF

Example slides

HAWKINS WRIGHT

VSF inventories

Source: Hawkins Wright, CCFEI

0

5

10

15

20

25

30

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Inve

ntor

ies,

day

s of

sup

ply

Monthly average inventory

Example slides

HAWKINS WRIGHT

VSF producer margins

Source: Hawkins Wright

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

RM

B/t

Note: The viscose producers' converting margin is the absolute difference between the selling price of viscose and the inputcost of fibre. Assumes 1.03 t of DP/tonne of viscose

Example slides

HAWKINS WRIGHT

Changing patterns of Chinese supplyChemical cellulose demand, 2017

A fall in Chinese DWP imports and Chinese CLP production has been more than offset by increased domestic supply of DWP coupled with increased use of paper grade pulp as an extender

2015 2016 % y-o-y

(12 months) (12 months) 2015/2016 2015/2016

Brazil 366 478 +31% +112Canada 229 170 -26% -60USA 289 299 +3% +10Indonesia 179 231 +29% +52South Africa 359 287 -20% -72Europe 657 599 -9% -57 - Austria 158 160 +1% +2 - Czech republic 106 68 -36% -38 - Finland 144 147 +2% +3 - Norway 43 35 -18% -8 - Portugal 84 93 +11% +10 - Sweden 123 96 -21% -26Japan 72 93 +29% +21Thailand 93 81 -14% -13Other 3 10 +190% +6

Total Imports 2247 2246 -0% -1

+ Domestic DWP supply 550 910 +65% +360

+ Domestic CLP supply 520 415 -20.2% -105

+ Paper grade pulp as an 'extender' 250 460 +84.0% +210

= Total Demand 3567 4031 +13.0% +464

Imported DWP share of total Chinese chemical

cellulose demand63% 56%

000s tVolume change

Impo

rt de

man

d by

cou

ntry

of o

rigin

Example slides

HAWKINS WRIGHT

Chinese CLP converting margins, 2012-2017

Source: Hawkins Wright Estimates

0

100

200

300

400

500

600

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

US$

/t

CLP Converting Margin

The cotton linter pulp producers' converting margin is the absolute difference between the selling price of cotton linter pulp and the input cost of fibre (cotton linter)(Data based on a 3 month moving average)

High value encourages production

Low value discourages production

Example slides

HAWKINS WRIGHT

Chinese cotton linter pulp production2000-2016

Source: Hawkins Wright

0

200

400

600

800

1,000

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chi

nese

CLP

Pro

duct

ion

000s

tonn

esExample slides

HAWKINS WRIGHT

Paper grade pulp used as an extender (China)2010-2016

0

50

100

150

200

250

300

350

400

450

500

2010 2011 2012 2013 2014 2015 2016

Pap

er g

rade

pul

p us

ed a

s an

ext

ende

r00

0s to

nnes

Source: Hawkins Wright

Example slides

HAWKINS WRIGHT

Paper grade pulp used as an extender (China)2010-2016

Source: Hawkins Wright

TOTAL

All grades Chile Russia Canada USA Brazil Russia Canada

Yibin Hiest Fiber Ltd 410 249 245 2 2 161 161

Tangshan Sanyou Group Yuanda Chemical Fibre Co.,Ltd 77 42 42 35 35

Tangshan Sanyou Group Xingda Chemical Fibre Co.,Ltd 27 24 24 3 3

Xinjiang Fulida Fiber Ltd 85 26 26 59 15 43 1

TOTAL 599 341 245 28 2 66 258 214 43 1

Less volumes being traded -270 -175 -95

Plus volumes being procurred through traders +130 +70 +60

= Total paper pulp procurred for use as an extender 459 236 223

Source: HW

estimates

BSKPBy country of origin

BHKPPaper grade pulp imports by companyBy country of origin

Source: Chinese customs

data

(000s tonnes)

Example slides

HAWKINS WRIGHT

6 year seasonality of Chinese DWP import andVSF production

Source: Hawkins Wright

-15.%

-10.%

-5.%

0.%

5.%

10.%

15.%

20.%

25.%

Jan Feb Mar Apr May June Jul Aug Sept Oct Nov Dec

VSF Production

DWP imports

Example slides

HAWKINS WRIGHT

World viscose capacity forecast

Source: Hawkins Wright Estimates

5,715

7,670

+245+735

+570+255 +150

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2016 2017 2018 2019 2020 2021 end 2021

thou

sand

tonn

es

Baseline capacity Confirmed additions

---------------------- Forecast ----------------------

Example slides

HAWKINS WRIGHT

DWP demand growth (viscose grade)Demand forecast, 2000-2021

Source: Hawkins Wright Estimates

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

thou

sand

tonn

es Viscose grade DWP demand

FORECAST

Example slides

HAWKINS WRIGHT

CLP demand growth Demand forecast, 2000-2021

Source: Hawkins Wright Estimates

0

200

400

600

800

1,000

1,200

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

thou

sand

tonn

es

FORECAST

Total CLP demand

Example slides

HAWKINS WRIGHT

DWP demand growth (specialty grade)Demand forecast, 2000-2021

Source: Hawkins Wright Estimates

950

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

thou

sand

tonn

es

FORECAST

Specialty grade DWP demand

Example slides

HAWKINS WRIGHT

Specialty grade chemical cellulose: growth rate assumptions, mkt size by grade

Source: Hawkins Wright Estimates

0

2

4

6

8

10

12

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

VSF

Acetate

Ethers

MCC

Filaments

Nitrates

Annual growth rate (%)

Man

ufac

turin

g co

mpl

exity

Sponges

Cellophanes

Tire cords

Casings

Example slides

HAWKINS WRIGHT

DWP capacity forecast (all grades)2016-2021

Source: Hawkins Wright Estimates

MAJOR PROJECTS, 2016-20202017: APRIL Kerinci, APRIL Rizhao, SAPPI Cloquet, Rayonier AM, SNIACE, Sun Paper, IP, JARI2018: Sun Paper Laos2019: Arauco Valdivia

Watch list: Shandong Chenming, IP (and Ilim), Sodra, Stora, SAPPI, Fibria

7,010

9,045

+625+570

+370 +300 +170

-

+1,000

+2,000

+3,000

+4,000

+5,000

+6,000

+7,000

+8,000

+9,000

+10,000

2016 2017 2018 2019 2020 2021 Year-end2021

000s

tExample slides

HAWKINS WRIGHT

Commodity DWP capacity forecast, by furnish2016-2021

Source: Hawkins Wright Estimates

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2013 2014 2015 2016 2017 2018 2019 2020 2021

000s

t

Non-wood

Hardwood

Softwood

FORECAST

Example slides

HAWKINS WRIGHT

Net price differentialsBSKP and BHKP vs. DWP

Source: Hawkins Wright Estimates

0

50

100

150

200

250

300

350

400

450

500

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

US$

/t (C

IF. C

hina

)

DWP premium vs. NBSK DWP premium vs. BEKP

Example slides

HAWKINS WRIGHT

Costs, commodity grade viscose, April-2017Weighted average production cost CIF China

Source: Hawkins Wright Estimates

0

250

500

750

1000

US$

per

tonn

e

Marketing & Sales

Freight

Other mill costs

Maintenance

Labour

Energy

Chemicals

Wood

Example slides

HAWKINS WRIGHT

Net equilibrium price, CIF China, April 2017

Source: Hawkins Wright Estimates

0

100

200

300

400

500

600

700

800

900

1000

1100

0 1000 2000 3000 4000 5000 6000 7000 8000

US d

olla

rs p

er to

nne

cif C

hina

Annual capacity/shipments (000s t)

Net equilibrium price of $830/t

Example slides

HAWKINS WRIGHT

A strong dollar reduces the dollar-denominated production costs of non-US pulp producers

Source: Hawkins Wright

US dollar index vs. weighted average cash costs CIF China, commodity grade DP

40

60

80

100

1200

100

200

300

400

500

600

700

800

900U

S$ Index (inverted scale)

US$

per

tonn

e, c

if C

hina

DWP production cost (left hand scale)

$ Index (right hand scale)

Weak $

Strong $

Example slides