Recovered Paper for Tissue Manufacturing

Bill Moore, PresidentMoore & Associates

October 1, 2019

Global Recovered Paper (RCP) Markets

2018249 million tonnes

~55% of the world’s paper and board production is based on recycled fiber3

Global RCP Usage by Grade

2008208 million tonnes

Case Materials,

49%

Newsprint, 13%

Tissue, 8%

Printing/ Writing,

7%

Other Grades,

23%

Case Materials,

62%

Tissue, 6%

Newsprint, 6%

Printing/ Writing,

7%

Other Grades,

22%

World RCP Demand by Grade

4

0

20

40

60

80

100

120

140

160

180

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

Mixed Paper

High Grades

ONP/OMG

OCC

Million Tonnes

China: Major Factor in RCP Markets

• Even though China was not a large user/importer of RCP high grades, their import restrictions on all grades of RCP have effected the grades used by the tissue industry

• Almost all of China’s tissue making capacity installed in the last ten years has been based on virgin fiber

• But there is some recycled fiber tissue production in the country and they imported SOP for use in white top paperboards

• In 2019, China’s imports of SOP were greatly curtailed

China and High Grades/SOP

• In 2016, China imported 29 million tons of recovered paper (RCP) to supply their domestic paper and board industry

• Chinese regulations restricting RCP imports into the country reduced the annual import volume into China to 17 million tons in 2018.

• In 2019, we forecast that imports will fall to 12 million tons • Looming on the near horizon is a total ban on imported RCP scheduled for the

end of 2020• This leaves a tremendous shortfall of recovered paper in China resulting in

reduced operating rates, revenue reductions and creating a non-sustainable supply chain disruption in the second largest paper and board production market in the world

China's Imports of RCP

7

Effective March 1, 2018 (material arrival in China)

• Weight of recovered paper (RCP) Prohibitives (non-paper contaminants) must be < 0.5% - all grades. This is the most important limitation

• No unsorted RCP/Mixed Paper

• China import permits regulated and issued quarterly

• Mills with <50,000 MT/year production prohibited from importing RCP directly

• China buyers must be associated with a mill group

Key Aspects of China 2018 Import Policy

8

• Scheduled to take effect in 2020

• Will such pre-consumer grades as DLK, #9 Over Issue News, and Pulp Substitutes, etc. be exempted?

• Recycled Fiber (RCF) pulp not affected?

• Will create a shortage of fiber for the Chinese paper and board industry of 13 million tonnes/year

• A boon for RCF pulp?

• While there is some impact on high grades, OCC and Mixed Paper markets much more effected

Full Ban of RCP Imports into China

9

US RCP Market

Recovered Paper Price Ticker

11

$140 $142

$146 $149

$156 $156 $156 $157 $160

$163

$170

$180

$169

$162 $165

$171 $170

$165

$146

$151 $153

$155 $154 $154 $154 $156

$161

$166 $167 $169 $170 $169

$167 $166

$156

$150

$140

$129

$118

$113

$108

$105

$110

$115

$120

$125

$130

$135

$140

$145

$150

$155

$160

$165

$170

$175

$180

Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19

$/Ton FOB seller’s dock

Source: Fastmarkets/RISI RCP Price Ticker

Sharp decline in all grades

High grade prices increasing / bulk grades decreaseRealization that China's import

restrictions are real and China's RCP buying drops

RCP Price Ticker:Average combined domestic mill price for Mixed Paper, #8,

ONP/SRPN, OCC, Hard White Envelope Cuttings, SOP, SWL.

China buys heavily

Typical upward market movement after period

of low prices

China's import restrictions kick in

Market thinks China restrictions may be eased

Use of US RCP, 2008 vs. 2018

12

201853 million tons

200852 million tons

Exports, 38%Tissue, 8%

Other, 11%

Containerboard,14%

Paperboard,14%

Exports, 39%

Tissue, 8%

Other, 6%

Containerboard,35%

Paperboard,11%

US RCP Exports by Country, 2018

13

China, 40%

India, 18%

Mexico, 9%

Indonesia, 6%

Korea, 6%

Canada, 4%

All Others, 17%

SOP Demand

Recovered fiber declining as a raw material for tissue

15

46% 50% 51% 49% 48% 47%42% 39%

47% 42% 41% 44% 45% 46% 53% 56%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1994 2000 2004 2008 2012 2016 2018

OtherMechanical PulpChemical PulpRecovered Fiber

Global fiber Furnish in Tissue Manufacture

Historically, 'High Grades' have been used in tissue

High grades are made up of:• Deinking High Grades (DHG)• Pulp Substitutes (PS)

The approximate composition of Deinking High Grades (DHG) is:– 55% SOP– 20% Coated Book Stock/Printers Mix (book and printing scrap)– 15% Sorted and Manifold (pre-consumer from printers) Ledgers– 10% Other Bleached Chemical Grades – mostly SBS scrap (white/bleached box scrap)

Note that DHG is not an actual grade but an aggregate statistical category.Pulp Substitutes (PS) used for tissue include:

– Bleached Kraft: bleached white sulfate and cuttings; some tissue paper converting scrap; some coated book stock

16

Usage of SOP and CBS declining globally

The trend in all regions of the world are similar:• Sorted Office Paper (SOP) supply is declining – fewer printed documents• Less use of Coated Book Stock:

– More coated material in SOP– Process changes to reduce the need for this low yield grade

• Ledger grades have been merged and supply is declining • All SBS scrap is recovered; slow growth in developed economies as more

SBS packaging makes more supply available• Some increase in the mechanical fiber grades – magazines and coated

groundwood sections

17

Why is SOP demand declining?

• Yields on SOP have declined because quality of the grade is dropping

• Processing costs have increased

• SOP cycle costs have increased (until this last low cycle)

18

Recovered fiber trends are similar in all regions

• Recycled fiber-based tissue is more prevalent in certain markets – North America (US, Canada, & Mexico), Europe, Middle East, and developed Asian countries (Japan, Korea, etc.)

• Regional trends in recycled fiber use in tissue:– North America - slow decline– Europe - declining– Middle East - declining– Developed Asia - slow decline

• China’s tissue business is growing largely with virgin fiber (vs. newsprint and paperboard sectors, which rely heavily on recycled fiber).

19

The search is on for alternative types of fiber

• Developing regions and emerging Asia – the clear trend is for the use of virgin fiber in tissue production.

• Searching for alternative grades and fibers: bamboo, agricultural residues• Other sources of fiber are replacing SOP for tissue:

– Greater use of Pulp Subs (PS) – primarily the SBS grades for which supply is increasing

– Greater use of virgin pulp such as Bleached Eucalyptus Kraft (BEK)• Other grades of post consumer RCP: cups/other poly coated SBS• Other post industrial grades: undeliverable mail (UMM), silicone release

papers

20

• No recycle tissue mills are planned in the US or Canada.

• Mexico has one new machine coming on line in 2021 that is recycled fiber-based: Papel San Francisco in Mexicali.

– This mill will use an additional 30,000 tons per year of SOP, fairly small use.

– Future expansions in Mexico are expected and will probably use more SOP.

Little new RCF-based tissue capacity planned in NA

21

• Shutdown of three recycled fiber tissue mills – note that most of the production was shifted to other mills

• Significant SOP use by the Fairmount, WV mill mostly stopped: conversion to ‘brown’ pulp for shipment to China by ND Paper

• Fires causing shutdowns at the Soundview/Marcal and GP – Muskogee –again note that most of the production loss was shifted to other mills.

– Both of these are transient: Marcal down almost a year, GP down one+ month

• In 2019 at the margin some low quality SOP is being sold as Mixed Paper. The largest imbalance (over-supply) in the SOP market ever

Significant drop in SOP demand in NA, 2019

22

North American SOP exports on the decline

• Declines to all regions except Mexico.

• China, although never a large importer of North American SOP, is now importing no SOP.

• Exports are declining for the same reasons as domestic demand.

• Definitely a shift in the use of recycled fiber in tissue in all the world’s regions.

23

69%17%

9%

3% 1%

1% 1%

IndiaChinaIndonesiaSouth KoreaTaiwanThailandVietnam

66%

15%

12%

4% 2%

1% 1%

IndiaIndonesiaSouth KoreaTaiwanThailandChinaVietnam

India the largest buyer of US High Grade exports

Deinking High Grades(45,149 Tonnes Exported)

Pulp Subs(111,365 Tonnes Exported)

Source: US Dept of Commerce, Bureau of Census, PPI Pulp & Paper Week 24

US Exports to Asia, Q1 2019

Source: US Dept of Commerce, Bureau of Census, PPI Pulp & Paper Week NOTE: 1% values are shown graphically but with no data label

17%

71%

46%

66%

69%

4%

43%

18%

15%

9%

5%

29%

11% 7%

12%

3%

15%

8%

7%

4

3

13%

7%

2

3

4%

7%

0% 20% 40% 60% 80% 100%

Deinking

Pulp Subs

News

Mixed Paper

Corrugated

ChinaIndiaIndonesiaVietnamS. KoreaTaiwanThailand

High Grades are a small share of US RCP exports

TOTAL TONNES EXPORTED ('000s)

25

67%

15%

14%

3% 1%

Corrugated - 2,210.5Mixed Paper - 477.7News - 455.6Pulp Subs - 111.4Deinking - 45.1

SOP Supply

Global tissue consumption is growing – while P/W papers decline

10

30

50

70

90

110

130

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GlobalTissue

GlobalPrinting &Writing

Million Tonnes

27NOTE: Not all tissue is produced from recycled fiber.

• From the late 1990s through 2010, the global supply of SOP steadily increased:

• Printing and writing paper use was still increasing

• Fast growth of confidential document destruction/shredding

• Since 2010, overall decline in use of P/W papers

• World printing industry is declining - structural trend of printing fewer hard copy documents

• Drop in postal mail delivery

The rise and fall of printing and P/W papers…

28

• After fifteen years of rapid increase, the growth of document destruction in the developed countries began to slow.

• Prior to 1998, shredded office papers made up less than 10% of all office papers generated.

• From 1998 through 2005, the growth in SOP supply from shredded office papers kept SOP market pricing down.

• Moore & Associates estimates that shredded material now accounts for about 70+% of the US SOP market.

Document destruction has also peaked

29

• Conventional office paper source-separated recycling programs are virtually gone.

• Single stream commercial recycling collection is the growth area for collection of the 'last' of office papers

– Frequently cannot be separated into SOP and will go into Mixed Paper, a much lower quality grade.

• Could we get a deinkable tissue grade pack from residential recycling? Mail, office papers, SBS packaging, poly coated foodboards, magazines, etc.

Recycling practices affect SOP quality

30

8,363 8,3447,985

7,524 7,488 7,310 7,0936,687 6,530 6,466 6,403 6,354 6,234

5,914 5,779

2,400 2,324 2,533 2,377 2,4452,186 2,122 2,108 2,053 2,009 1,997 1,978 1,949 1,920 1,909

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

UFS Consumption

SOP Consumption

Uncoated Freesheet is declining faster than SOP in NA

'000Tonnes

31

Forecast 2019-2028

Source: Moore & Associates SOP Supply & Demand Forecast, June 2019

US & Canada:

Long Term US Average SOP Price($/ton) – Source RISI/Fastmarkets & Moore & Associates

$70$90

$110$130$150$170$190$210$230$250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

OCC Demand and Supply Trends

33

• New OCC based containerboard mill projects in Asia (including China), Europe, Middle East, and North America – demand it is creating will strengthen the market

• New demand for OCC especially strong in the US

• OCC recovery in the developed regions of the world is very high, really at the maximum level in many parts of Europe and headed that way in the US, but box supply growth continues

• China and India (as well as the rest of the developing regions of the world) will continue to increase their domestic OCC recovery

• All of the “easy to get” OCC is already recovered – grocery store and large generators. Residential e-commerce box recovery lagging

• But we are not ‘running out’ of OCC that can be recovered. In the U.S.– almost 25 million tons per year of paper is still disposed, OCC is a part of it

Average Annual North America OCC PriceSource - Moore & Associates

34

$39 $37

$91

$160

$78

$94

$74

$83

$97

$55

$83

$79

$99 $96

$88

$137

$127

$74 $75

$177

$129

$132

$117

$99$111

$169

$109

$55

$30

$50

$70

$90

$110

$130

$150

$170

$190

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019H 1

$/Ton, Baled, FOB Generator’s Dock

Thank you for your attentionMoore & Associateswww.MARecycle.com