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RISI Global Tissue OutlookTissue Is in a Very Dynamic Phase Worldwide

Esko UutelaPrincipal, Tissue

RISI Asian Conference

Shenzhen, China

May 2017

© Copyright 2017 RISI, Inc. | Proprietary Information

• Educational background in forestry, economics and business studies

• In consulting business and information services for the forest industry since 1976

• Cooperating with RISI since 2007

• Developed global tissue databases and forecasting models

• Previous experience in graphic papers, packaging papers and recovered paper

• Assisted by RISI Asian, European and American colleagues and consultants

• Produced more than 200 single- and multi-client tissue studies

Principal, Tissue

Esko Uutela

[email protected]

© Copyright 2017 RISI, Inc. | Proprietary Information 2

Agenda

• Recent Global Trends

• American Outlook

• European Outlook

• Asian Outlook

• Market Dynamics

• Summary of Global Outlook

• Concluding Remarks


RECENT GLOBAL TRENDS


World Tissue Consumption by RegionMarket is dynamic: China has passed Western Europe in market size, while Asia Far East is—and Eastern Europe soon will be—larger than Japan. China has been the largest producer country since 2015.

N. America 25.0%

China21.3%

W. Europe18.3%

L. America11.1%

Asia Far East5.9%

E. Europe5.4%

Japan5.5%

N&M East4.1%

Africa2.1%

Oceania1.2%

Global Consumption: 36.3 Million Tonnes (2016p)


Growth in the Global Tissue Market

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• Relatively stable growth until the Great Recession in 2009

• Volume growth was slightly above 1.0 million tonnes per year

• Recovery took a few years, but 2015 was a good year due to China, North America and Western Europe

• Preliminary data suggest that 2016 was also strong

Regional Volume Growth of Tissue Consumption, 2000-2016

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global growth in China!

Total Global Growth: 15.3 Million Tonnes (959,000 Tonnes per Year)

Latin America shows the second-largest volume

growth


Per Capita Consumption of Tissue in Different World Regions, 2015

8© Copyright 2017 RISI, Inc. | Proprietary Information

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AMERICAN OUTLOOK


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North American Tissue Business Exceptionally Strong in 2015-2016Sound economy helped growth, particularly in the AfH sector

Average growth accelerating from 1.5% to 1.75% per year


Retailer Label Share Up in the USA, Down in CanadaMajor fight going on between private labels and brands in the USA, with brand owners increasingly using special price promotions, while in Canada brands continue to rebound through "half-price" actions

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© Copyright 2016 RISI, Inc. | Proprietary Information11© Copyright 2017 RISI, Inc. | Proprietary Information

Expected Growth in US Tissue Consumption by Business SectorAt-Home retailer labels will show strong growth of about 640,000 tonnes in 2010-2018, while At-Home branded volume growth will remain moderate

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Growth of 6.0% per year

Minor growth of 0.2% per year

Growth of 2.2% per year


Major Tissue Capacity Changes in North America, 2016-2017*2016

• First Quality Tissue, Anderson, SC (new TAD PM) 64,000 t/a

• Von Drehle Corp., Natchez, MS, USA (NTT PM) 32,000 t/a

• St. Croix Tissue (APP), Baileyville, ME, USA 126,000 t/a

• Clearwater Paper, Neenah, WI, USA -29,000 t/a

193,000 t/a

2017

• Orchids Paper Products, Barnwell, SC, USA (NTT PM) 32,000 t/a

• Resolute Forest Products, Calhoun, TN, USA (NTT PM) 60,000 t/a

• Kruger Products, Crabtree, QC, Canada 20,000 t/a

• Little Rapids Corporation, Shawano, WI, USA (replacement) 10,000 t/a

122,000 t/a


* In metric tons

Major Tissue Capacity Changes in North America, 2018-2019*2018

• Sofidel America, Circleville, OH, USA (2 x NTT) 140,000 t/a

• ST Tissue, Franklin, VA, USA 45,000 t/a

• Irving Consumer Products, Fort Edward, NY, USA 64,000 t/a

• First Quality Tissue, Anderson, SC, USA (TAD PM) 64,000 t/a

313,000 t/a

2019

• Clearwater Paper, Shelby, NC, USA (NTT PM) 64,000 t/a

• First Quality Tissue, Lock Haven, PA, USA 64,000 t/a

• First Quality Tissue, Anderson, SC, USA (ATMOS PM) ??? 68,000 t/a

196,000 t/a

Potential Projects

• Kruger Tissue, Memphis, TN or Canada (TAD PM) 65,000 t/a

• Resolute Forest Products, Calhoun, TN, USA (second NTT PM) 60,000 t/a

• Sofidel America, OK (?), USA 70,000 t/a

195,000 t/a

© Copyright 2017RISI, Inc. | Proprietary Information 14

* In metric tons

Net Capacity Change* and Tissue Capacity Utilization in North AmericaThis year is looking good as some projects have been delayed, but any new expansion adding to the committed capacity would change the current outlook from rather stable to negative; potential closures could help

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Capacity Change Capacity Utilization

*Based on committed projects only

A lot of new capacity coming on stream that will affect 2019-2020; utilization rate will head south if no further closures occur


Expected Volume Growth of Latin American Tissue Demand by Main Country, 2015-2019Brazil is projected to recover in 2017-2019

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Net Capacity Change* and Tissue Capacity Utilization in Latin America Project delays and stronger demand could help a lot, but the current outlook is not encouraging for new investments

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EUROPEAN OUTLOOK


Western European Tissue Market Showing Variation from Year to YearSouthern Europe finally returning to its pre-recession level

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Very long-lasting recession, but positive

recovery in 2015


Eastern European Tissue Market Growth Negatively Affected by the Political TensionThe Russia-Ukraine conflict has taken a toll on the tissue sector

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Recent growth disappointing, but 2016 showed improvement


Volume Growth of W. European Tissue Markets by Main Country, 2015-2019In the next few years, volume growth will be largest in the UK, followed by France, Germany and Italy

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Volume Growth of E. European Tissue Markets by Main Country, 2015-2019Poland is expected to show the largest growth, followed by Russia, despite its current economic problems, Romania and Ukraine

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Net Capacity Change* and Tissue Capacity Utilization in Western Europe until 2019Capacity closures helped the industry in 2011-2013, but new projects thereafter cut the trend. Current outlook is rather stable, but capacity utilization will remain below 90% in 2017-2019.

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Capacity Change




Net Capacity Change* and Tissue Capacity Utilization in Eastern Europe until 2019New investments from late 2014 onward and slowed demand growth caused capacity utilization to decline; no immediate change is expected.

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ASIAN OUTLOOK


Main Asian Tissue Markets, 2016China dominant, Asia Far East now larger than Japan

China58%

Asia Far East16%

Japan15%

N&M East11%

Total Market Size: 13.4 Million Tonnes


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Recent Growth Rates of Chinese Tissue Consumption The Chinese tissue market has been in a very strong growth phase, but now showing stronger growth than the economy

Average growth: 8.0% per year

Recently, growth has been slowing, but 2015 was an exception


Chinese Tissue Export Growth, 2009-2016Chinese tissue exports exploded in 2011-2014 and went to nearly every corner of the world—with Asia Far East, North America and Japan being the largest buyers, followed by Oceania. Growth waned in 2015, but resumed in 2016, although not to 2014 level.

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Average growth rate, 2011-2016 +11.5%/a


Expected Growth Rates of Asian Tissue Consumption, 2015-2019 Strong growth in major markets, with Japan, South Korea and Taiwan the exceptions; India to gradually take off, China slowing

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Average Growth: 5.3% per year


Chinese Investments Exploding, but Closures and Project Delays Expected There is a real investment peak with too much capacity being built, but currently also a wave of capacity closures in the industry

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New Projects Closures Net Capacity Change

* PM start-up/learning curves considered


Net Capacity Change* and Capacity Utilization in the Asian Tissue IndustryOvercapacity is obvious, although project delays may help

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*Based on committed projects only, learning curves considered


MARKET DYNAMICS


World Top 10 Tissue Producers and Comparison of Their Production Volumes in 2006 and 2016 After recent major investments, Indonesia and Turkey have joined the top producers list

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Main Volume Increases in Global Tissue Production in 2006-2016 China is its own category in expansion and emerging countries are well represented in this ranking; the USA and Germany are the only developed world countries to reach the top 10

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The Top 10 World Tissue Suppliers Based on Installed Capacity, End 2016 Several companies have expanded strongly through acquisitions and/or organic companies: APP and SCA in particular, but also Hengan, Sofidel, CMPC and WEPA

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Main Volume Increases in Installed Tissue Capacity by Company, 2006-2016 China APP and SCA have been the absolutely most aggressive players in the past 10 years while North Americans have used a more defensive and margin-focused strategies

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New Players Entering the Tissue Sector

• North America▪ Atlas Holdings – Soundview Paper and Putney acquisitions

▪ Dunn Paper – Mill acquisitions from Clearwater Paper

▪ Resolute Forest Products – Atlas Paper Holdings acquisition and Calhoun, Tennessee tissue PM investment

• Europe▪ Abris Capital Partners – Pehart Tec acquisition in Romania

▪ The Navigator Co. – acquisition of AMS Star Paper and forthcoming Cacia mill tissue investment in Portugal

• Latin America▪ Suzano Pulp and Paper – integration of Mucuri and Imperaritz pulp

mills with tissue PMs in Brazil

• Near and Middle East▪ Itihad Investments – acquisition of Crown Paper Mill and expansion

planned in the UAE


New Players Entering the Tissue Sector

• China▪ Shandong Chenming – diversification into tissue

▪ Sun Paper – diversification into tissue

▪ Lee & Man – diversification into tissue

▪ Shanghai Taison Group – acquisition of Well Mind Paper in Chongqing and Guizhou Chitianhua Paper with tissue PM investments, plus greenfield tissue mill construction in Jiangxi

▪ Max Fortune – consumer products company diversifying to tissue with Garven Sanitary Products mill, but project hit with major delays

• Asia Far East▪ Meghna Group – diversification into tissue in Bangladesh

• Africa▪ Faderco – diversification into tissue in Algeria

▪ Ethos Capital – acquisition of Nampak Tissue and renaming as Twinsaver, plus forthcoming expansion investment


Why Is Tissue Attracting Investors?• Tissue business is characterized by continuous growth and much less

cyclical variation than many other businesses—not only in the paper branch but overall—as tissue is a daily necessity whose use is of "habitual nature".

• In most regions, tissue companies reach acceptable EBITDA margins, at least until now, and investors see this as a relatively safe way to earn money when bank interest rates are close to zero, if not negative.

• Graphic paper producers are worried about the future of their mill sites, and in many cases subsidies are available for maintaining existing or creating new business—continuation of the business is important.

• Pulp producers also see the downward trend in the graphic paper business, and as tissue is the second main end use for market pulp, integration is interesting also for cost reasons (integrated pulp, steam and other energy from the pulp mill).

• Tissue has relatively low investment cost compared to other options.


Long-Term Growth Trends in the Global Tissue MarketInternational trade in tissue shows higher growth rate than tissue consumption, a clear sign of business globalization. Parent roll trade has accelerated in recent years.

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Top 10 Tissue Parent Roll Exporters, 2016


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Top 10 Tissue Parent Roll Exporters, 2006


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SUMMARY OF GLOBAL OUTLOOK


Anticipated Growth in the Global Tissue MarketTissue consumption benefitting from improving global economic growth, but there are also uncertainties ahead

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Relative Growth


Net Capacity Change* and Capacity Utilization in the Global Tissue IndustryMajor capacity closures could improve outlook, but only marginally. Global overcapacity is the name of the game!

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Concluding Remarks

• China's growth is slowing and also cutting average global growth to 3.5% per year, which is still good, although down from 4.0% earlier. China will continue to be the main driving force of global tissue industry expansion, although overcapacity is a threat in nearly every region. Project delays will be common.

• North American developments are characterized by steady and encouraging growth, with many new developments and technological and raw material considerations, but also continuing fights between brands and private labels.

• Latin America is suffering from economic instability. Brazil is in a deep recession, but recovering, and Venezuela is a catastrophe as long as everything is controlled by the current government. However, Mexico is back on a growth track again.


Concluding Remarks

• The Western European tissue business had a rather quiet phase, but is now seeing some more positive developments, and many new plans are currently moving forward. Investments are concentrated in certain sub-regions, the Iberian Peninsula in particular, and this is likely to cause export pressures outside Europe; regional overcapacity is obvious.

• The global trading pattern of tissue is in a continuous move, with international trade growing more than tissue consumption. The tissue business is becoming increasingly dynamic and global. Cost-competitiveness based on low-cost hardwood pulp and energy through integration seems to be a major benefit.

• But there are clouds on the skyline with the new political trends toward protectionism and populism. Free trade agreements could be reconsidered, and this could change the current trends of continuing internationalization in the global tissue business.


Thank you for your attention!For more information:

Outlook for World Tissue Businesswww.risi.com/OWTB

World Tissue Business Monitorwww.risi.com/WTBM

US Tissue Monthly Datawww.risi.com/USTM


risi global tissue outlook - fastmarkets risi · • st tissue, franklin, va, usa 45,000 t/a •...

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