trade and industry in transition: a global perspective through 2020 don roberts, managing director...

Trade and Industry in Transition:

A Global Perspective Through 2020

Don Roberts, Managing [email protected]

Global Natural Resources ForumU.S. Forest Service & Natural Resources Conservation

ServiceOaxaca, MexicoDecember 2007

2

Outline

The recurring theme is globalization, and the forces that will shape the forest industry between now and 2020:

1. Shift In The Global Footprint of Growth

2. Globalization of Capital Markets

3. Globalization of Environmental Standards

4. Globalization of Fiber Markets

5. Globalization of Energy Markets

Conclusions

3

1. Shift in Global GrowthReal GDP/Capita & Avg. Real GDP Growth

Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007

• The fastest economic growth is generally occurring in the countries with

the lowest GDP/capita. This will likely continue through 2020.

• Through 2020, we expect growth of 2%-3% in the developed world and

7%-9% in the developing world.

0

5,000

10,000

15,000

20,000

25,000

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2005 Real GDP/Capita (1990 US$) 2000-2005 Avg Real GDP Growth

4

Per Capita Consumption of Paper & Board (2004)

Source: Pulp & Paper Intl.

• Given population growth and even only modest increases in per capita consumption, the potential increase in paper & board consumption in the developing world is significant.

1. Shift in Global Growth

312

285

253

247

236

223

195

183

170

42

22

7

0

50

100

150

200

250

300

350

U.S

.

Fin

land

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man

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Can

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ea

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na

Indo

nesi

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(kg)

5

Total U.S. Newsprint Consumption (million tonnes)

Source: PPPC.

• In N. America, we are seeing an absolute reduction in the production and consumption of some paper products – electronic communication is having an impact.

• The consumption of newsprint in North America is on a secular decline – down 35% since 2000. In 2006, U.S. real GDP grew by 3.3%, and yet the demand for newsprint and printing & writing paper actually fell by 6% and 1.4%, respectively.


7.07.58.08.5

9.09.5

10.010.511.011.5

12.012.513.0

Jan-

84

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6

• We think the trends in N. America will eventually spread to the rest of the world.

• At the global level, the “intensity of consumption” in the economy has been declining for newsprint since 1970, and started to decline for printing & writing papers in 2000.

• Packaging is more associated with overall economic activity, and is “holding its own.”

Global Consumption Per Unit Of Real GDP

Source: RISI, CIBC World Markets

40.00

50.00

60.00

70.00

80.0090.00

100.00

110.00

120.00

130.00

140.00

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Containerboard New sprint P&W

.


7


With respect to growth rates in global consumption over the period 2007-2020, we expect:

• The highest to be experienced in the markets for:• paperboard,• tissue paper,• hardwood market pulp• engineered wood products, and,• non-structural panels.

• The lowest to be experienced in the markets for:• newsprint,• uncoated free sheet paper, and,• plywood.

8

Regional Changes in Paper & Paperboard Capacity

Source: NLK, CIBC World Markets Corp.

11,8

88

1,57

0

9,70

4

14,1

35

0

4,000

8,000

12,000

16,000

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firm

ed(2

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• China contributed roughly 90% of the global net increase in paper & paperboard capacity since 2000 – now the second largest paper industry.

• China is expected to continue to dominate, with 55% of the announced net change in global capacity over the 2006-08 period.

• The historical numbers reflect closures, but the future numbers do not.


9

In the solidwood sector, China has also been the major sourceof global growth in both production and consumption.

For example:

Plywood:• Roughly 10x increase in Chinese capacity since mid-1990s.• Now the world’s largest producer (mostly hardwood).• Currently exporting about 20% of its production.

Medium Density Fiberboard (MDF):• Roughly 8x increase in Chinese capacity since mid-1990s.• Now the world’s largest producer.• Significant indirect exporter, mostly in the form of furniture.


10


More than a 40% increase in the value of global forest product exports since 2000.

We expect continued growth in the global trade of forest products through 2020 in response to:

• Overall economic growth

• Growing fiber deficits in the fastest growing regions

• Reductions in tariff and non-tariff barriers to trade.

11

Improvements in transportation infrastructure will further

stimulate growth in trade flows.• Globally, investing roughly $700 billion/year.• In the U.S., investing roughly $180 billion/year.

China has made significant headway, but more to come:• 9 of the world’s top 50 ports• Will invest $50 billion in additional port infrastructure

over the next 5 years (includes 22 new inter-modal

terminals)


12

India’s infrastructure improvements are largely still to

come.

• Ports have typical vessel turnaround time of 3-5 days.

Better than the 9 days in 1990, but still far worse than

the 4-6 hours in Singapore and Hong Kong.

• Currently, poor road infrastructure and unreliable rail

freight in India make transport of high volume-low value

products such as wood fibre very inefficient.


13

• However, India is investing over $11 billion on highway

improvement (Golden Quadrilateral Highway,

North/South Corridor, East/West Corridor).

……… The stimulative impact could be similar to that on

the American economy when the Interstate Highway

System was built in the mid-1950s.


14

• Lack of infrastructure, particularly east of the Ural

Mountains, continues to be a major obstacle to the

development of the Russian forest sector.

• The relative extent to which the public and private

sectors bear the burden of financing this infrastructure

remains unclear.

• However, as proven by China, significant improvements

could occur in Russia by 2020 if the state provides these

public goods.


15

Return On Capital Employed (ROCE) By Region: Eight-year Average (1998-2005)

Source: PricewaterhouseCoopers, CIBC World Markets.

• Capital can be expected to flow into those countries that offer the highest financial returns, and out of those which offer the lowest returns.

• Since the ROCE has been highest in the developing countries, we would naturally expect them to capture the bulk of the new investment. We would expect (and actually see) the least investment in countries like Japan and Canada.

• However, even the regions with the highest ROCE in the forest products industry have not typically earned more than their cost of capital – they are the “best of a bad bunch”.


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16


• Due to its “twin” current account and budgetary deficits, the US$ is expected to depreciate over time. This will help the U.S. industry’s competitiveness.

• Since 2003, the forest industries in Brazil and Canada have been hurt the worst by an appreciating currency. This impact is in terms of realized product prices and relative costs.

Source: Bloomberg, CIBC World Markets. Monthly averages, as of 11/29/2007

Exchange Rates To The U.S. Dollar

50

60

70

80

90

100

110

Jan

-03

Ap

r-0

3

Jul-

03

Oct

-03

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

Jan

-05

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r-0

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Jul-

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-06

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06

Oct

-06

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Janu

ary

2000

= 1

00

Japanese Yen Brazilian Real Euro Cdn Dollar Russian Ruble

-23.4%

-7.7%

-35.5%

-28.1%

-47.9%

17

2. Globalization of Capital MarketsIndex of NBSK Pulp Prices When Denominated in

Different Currencies

80

100

120

140

160

180

200

220Ja

n-0

3

Ap

r-0

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Jul-

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07

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ua

ry 2

00

3 =

10

0

NBSK (NE) - $US NBSK (NE) - $CAD NBSK (NE) - EURO

+41.6%

+25.3%

+95.3%

•Pulp prices have generally been on a cyclical upswing since 2003.

•But due to shifts in exchange rates, the realized price increase varies dramatically across countries. European mills have enjoyed less than ½ the increase experienced by the U.S. mills, and Canadian mills about only ¼.

18

2. Globalization of Capital MarketsGlobal Softwood Kraft Market Pulp, Delivered Cash Cost To Rotterdam

(Assuming $C/$US= 0.77 vs 1.00)

$1 CAD = $0.77 USD $1 CAD = $1 USD

250

300

350

400

450

500

550

600

650

700

750

Del

iver

ed C

ash

Cos

t US$

/AD

MT

Canadian Mills Non-Canadian Mills250

350

450

550

650

750

850

Del

iver

ed C

ash

Cos

t US$

/AD

MT

Canadian Mills Non-Canadian Mills

•Canada is the largest producer of softwood kraft pulp in the world.

• Based on a C/$US=0.74 (the average in 2004), 7 Canadian kraft pulp mills were in the lowest cost quartile, and 4 were in the highest cost.

•With the current $C/$US~1.00, only 1 Canadian mill is in the lowest cost quartile and 10 are in the highest cost.

19

Percent Change From The Current To The PPP Implied Exchange Rate (2007)

• The Purchasing Power Parity concept is one approach to estimating the long-run exchange rate.

• Between now and 2020, the Chinese, Indian and Indonesian currencies are likely to appreciate the most. The Russian and Brazilian currencies also have upward pressure.

• The Canadian and European currencies may be slightly overvalued.

Source: International Monetary Fund, CIBC World Markets


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-90%

-70%

-50%

-30%

-10%

10%

30% Overvalued

Undervalued

20

Implications of a weaker currency for the U.S.?• The international competitiveness of the U.S. forest

products industry will improve over the next 10 years.

Implications of a stronger foreign currency?

• For China and India, it makes it cheaper to:• Import fiber (e.g., logs, recovered paper, pulp) and

processed products.• Invest in plantations and processing plants off-shore.

• For Brazil, Russia, Indonesia, it makes it more difficult to export (e.g., pulp, paper, solidwood products).

• In isolation, it takes demand pressure off of the foreign forest resource (and its wood prices), and puts more pressure on the U.S. forest resource.


21


Better communication is a force for the convergence of

environmental standards. Poor performance is difficult to

hide, and opportunities for improvement are more easily

identified - reputations more fragile.

Higher standards are moving overseas

• International Paper was not FSC certified in the U.S., but most of the long-term cutting leases owned through its joint-venture in Russia are FSC certified.

• Indian pulp producers must switch to Elementary Chlorine Free Technology by 2008.

22


Environmental regulations in one jurisdiction can have meaningful impacts in other jurisdictions.

• EU’s binding target to reach a 20% share of renewable energy sources in its total energy output by 2020.

• ....estimated to create a 200-260 million m3 gap in European wood market, resulting in rise in prices, imports, and harvesting in other regions.

23


• A clean environment is often perceived as a “luxury good,” and countries like Brazil, China, India and Russia will be able to increasingly afford it.

• “Ecology is part of the economy. Money spent on the environment depends on development of the industry,” -- Gennady Pocherevin, Minister of Natural Resources, Government of Khabarovsk Territory, Russian Federation, September 27, 2007.

• In our view, the greatest potential return from environmental activism is in the developing world.

24

4. Globalization of Fiber MarketsLocation of Global Hardwood Fiber

Source: JP Management Consulting, CIBC World Markets.

Alaska

Brazil

Canada

United States of America

Chile

Argentina

Uruguay

Russian Federation

Australia

S.E. Asia

South Africa

China

India

Western Europe

Hardwood Surplus Hardwood Neutral Hardwood Deficit

Mexico

Iberia

Scandinavia

UK

Eastern Europe

Vietnam

• In general, the wood fiber is not where the economic growth and demand is located.

25

Location of Global Softwood Fiber

Source: JP Management Consulting, CIBC World Markets.

Eastern Europe

Scandinavia

Western Europe

Eastern Canada

South Africa

Australia

Western Canada

New Zealand

India

China

S.E. Asia

Russian Federation

Uruguay

Argentina

Chile

United States of America

Alaska

Softwood Surplus Softwood Neutral Softwood Deficit

Mexico

Iberia

UK

Baltic States


• Global industrial softwood log production: USA roughly 30%, Canada 15%, Russia 10%.• Russia accounts for roughly 40% of global softwood log exports (or just over 40 million m3), U.S. and NZ just above 10%.

26

Paper and Paperboard Furnish by Region

Source: JP Management Consulting

• Wood fiber isn’t the only game in town.

• Recovered paper is an increasingly important source of fiber for the paper &

paperboard industry.

• Non-wood pulp still plays a meaningful role in Asia and Africa, but most

extensively in India (~1/3) and China (~1/4)…bigger role in

2020.

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

India

China

Asia

Latin America

W. Europe

Oceania

Africa

E. Europe

N. America

Wood Pulp Non-Wood Pulp Recovered Paper


27

Estimated Pulpwood Consumption by Region (2004)

Conifer Non-Conifer

Source: Wood Resources International. Source: Wood Resources International.

• The U.S. South is by far the most dominant consumer of pulpwood, and we expect this to remain the case in 2020.

• China is now the second-biggest paper & paperboard producer in the world, but it depends more heavily on recovered paper and non-wood pulp. China’s dependence on imported wood pulp will continue to rise through 2020.

• By 2020, we expect Russia’s consumption of pulpwood will rise significantly.

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28

Average Delivered Conifer Pulpwood Prices for Q3/07 (US$/ODMT)

Source: Wood Resources International, CIBC World Markets.


• The global cost curves are quite steep for pulpwood. Prices in the lowest cost region are less than one-third of those in the highest cost region for softwood, and half for hardwoods.

• Prices in Brazil and W. Russia are now higher than those in the U.S. South – a milestone.

Source: Wood Resources International, CIBC World Markets.

Average Delivered Non-Conifer Pulpwood Prices for Q3/07 (US$/ODMT)

0

20

40

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29

Global Average Prices For Non-Conifer Pulpwood

• Real pulpwood prices have been on a secular downward trend over at least the past 20 years – true for both hardwoods and softwoods.

• At the global level, the perception of wood fiber scarcity changes over time:• Relatively scarce from 1985-1995• Relatively abundant from 1995-2006• Relatively scarce from 2007 - 2020? We think so.

Source: Wood Resources, CIBC World Markets.


60708090

100110120130140150

1988 1989 1991 1992 1994 1995 1997 1998 2000 2001 2003 2004 2006 2007

US$

/Met

ric T

onne

Nominal Real Linear (Nominal) Linear (Real)

30

We are likely at an inflection point regarding the perceptionof scarcity.

The combination of 5 shocks will likely shift the perception atthe global level from “relative abundance” to “relativescarcity” of wood fiber:

1. Continuing Growth in Asia’s Wood Deficit

2. Increase in Russian Log Export Tax

3. Reduction in Supply of Illegal Logs

4. Insect Infestation in Western Canada

5. Growth of the Bio-energy Sector


31

Almost impossible to exaggerate China’s importance to the global forest product markets.

Its dramatic expansion has been made possible due to very large and increasing imports of fiber.

China is now the world’s largest importer of logs, wood pulp and recovered paper.


32

From 1995 to 2006, China’s:

• Wood chip trade has gone from export of ~ 1.8 BDMT to a small net importer.

• Log imports up from ~2 million cm to ~33 million cm.

• Wood pulp imports up from ~ 1 million tonnes to ~8 million tonnes.

• Recovered paper imports up from ~1 million tonnes to ~19 million tonnes.


33

Since 1995, China’s overall timber supply deficit (including imports of wood products and pulp) has risen from ~ 10 million cm (RWE) to ~80 million:

• An eightfold increase already.

• Deficit expected to double to ~160 million cm (RWE) by 2020.


34

China’s paper & packaging sector is largely built on imported recovered paper from the United States.

China is now buying over 60% of the U.S.’ exports – up from 34% five years ago.


35

The U.S. was the “Saudi Arabia of Waste Paper.”

• Historically, lots of high-quality, low-cost recovered paper.

• In 2006, it produced a record 53.5 million tonnes.

• The recovery rate has increased to 53.4% (up almost 85%

since 1990), and is targeted to reach 55% by 2012.

• The “cheap” paper is already being recovered, and the

potential supply of key grades like ONP is actually falling

(35% drop in N. American consumption of newsprint since

2000).

• Prices are currently near an all-time high.


36

• Russia’s output of processed forest products is very low, and it wants to capture more value-added.

• On February 5, 2007, Russia announced that it plans to dramatically raise its current 6.5% tax of log exports:

• July 1, 2007: 20%, but not less than 10 euros/m3

• April 1, 2008: 25%, but not less than 15 euros/m3

• Jan. 1, 2009: 80%, but not less than 50 euros/m3.

• Implementation may be slowed as Russia negotiates its entry into the WTO.

• But the trend is clearly upward. Policy should be seen in the context of Russia becoming more aggressive in asserting control over its natural resources in general.


37

What are the empirical facts?• Russia contains over 20% of the world’s timber resource –

more forest cover than Canada + Brazil – but much is uneconomic.

• Actual harvest of 132 million m3 is far smaller than the AAC of 564 million m3, but govt. still estimates the economically available harvest is 250 million m3. Implies potential incremental increase of 120 million m3 – 90% more than current harvest, or about 60% of Canada.

• World’s largest exporter of logs - ~40% of total.

• Provides ~80% of the logs imported into Finland, ~65% for and China, and a high % for Japan and S. Korea.


38

Disproportion of harvesting volumes and timber processing capacities.

Source: Federal Russian Forestry Agency.

Economically available cutting area

Logging

Available processing capacities (%)

0,50,3

South

Center

19

10

Volga

36

20

Ural

37

10

North-West

59

44

Far East

33

14

Siberia

64

32

38%

13%

2%14%

5%

25%

2%

Potential harvesting growth in economically accessiblezone (120 Mil. m3)

Economically available cutting area

Logging

Available processing capacities (%)

0,50,3

South

Center

19

10

Volga

36

20

Ural

37

10

North-West

59

44

Far East

33

14

Siberia

64

32

38%

13%

2%14%

5%

25%

2%

Potential harvesting growth in economically accessiblezone (120 Mil. m3)


39

Biggest direct losers are Russian loggers, and the major log importers:

• China

• Japan

• Finland

In terms of commodities, the greatest upward pressure on prices is expected (in decreasing order) for:• Logs

• Plywood

• Softwood Lumber

• Softwood Pulp


40

5%

15% 20

%

30%

60%

0%

10%

20%

30%

40%

50%

60%

70%

Mal

aysi

a

Bra

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Rus

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nesi

a

Estimated Percent Of Log Production Illegally Harvested

Source: Seneca Creek Associated, Wood Resources International.

• WRI estimates that roughly 10% of global logging is illegal. Expect to be greater for the higher-quality timber that goes into making products like plywood.

• The World Bank estimates illegal logging causes about $5 billion in lost government revenue and over $10 billion loss in global market value of forest products.

• We expect the supply of illegal logs to decline:

• Since Jan 2007, Indonesia has implemented a vigorous clamp down.

• Russia’s higher export tax and policies to encourage consolidation expected to decrease illegal harvesting.


41

Mountain Pine Beetle Infestation in British Columbia• Due to global warming, British Columbia Interior is afflicted with the worst insect

infestation in North American history. • Area affected has risen from 4.2 million ha in 2004 to ~13 million in 2007. The region

supplies over 20% of the North American lumber market.• Conventional wisdom is that the region’s AAC will be reduced by 25%-35% in 8-10 years.• However, the decrease in economic harvest will likely be sooner and greater than

conventional wisdom. Worst case 50% in 5 years?

Cumulative Percentage of Pine Killed

2001 2006

Low and Trace

LakeParks and Protected AreasFormal District BoundaryOver runVery SevereSevereHighModerate

Source: Government of B.C.


42

• We expect the bio-energy sector to experience significant growth through at least 2020.

• This should lead to a convergence of the markets for fuel, food and fiber (e.g., wood).

• The primary feedstocks for these three markets will tend to trade on the basis of their “energy equivalency.”

• Rising energy prices will provide a price floor for lower quality wood.


43

The underlying forces driving the convergence in the fuel, food and fiber markets are concerns related to:

• Environmental Security (i.e., amelioration of climate change)

• Economic Security (i.e., protection against the rising real price of oil).

• National Security (i.e., decreasing N. American and European dependence on the Middle East/Russia for fossil fuels)

• Political Security (i.e., greater rural development, and increased support from the rural population)


44

Summary

Increasing wood demand due to:

• Growing fiber deficit in Asia.

• Developing bio-energy sector.

Decreasing wood supply due to:

• Increase in Russian log export tax.

• Reduction in supply of illegal logs.

• Insect infestation in Western Canada.

Expect rising real wood prices through 2020 (subject to cyclical swings).


45


• Growth in global energy demand is now being driven mainly by economic growth in Asia, and this is expected to support a secular rise in real energy prices through 2020.

• Higher energy prices have an uneven impact on the cost of producing forest products:• Most energy intensive are newsprint/groundwood papers

and recycled paperboard.• Least energy intensive are solid wood products and kraft

pulp.

• Higher energy prices have a particularly negative impact on

the cost of transporting bulky products (eg., tissue paper) and

products with a low value/unit volume (eg., logs, chips) This

may dampen trade in these commodities over time.

46


In response to higher energy prices, a range of “high-tech” and “low-tech” alternatives are available to make cellulose-based bio-fuels.

• The “high-tech” options include cellulosic ethanol and fuels from bio-refiners (e.g., dimethyle ether/DME, Fischer-Tropsch fuels).

• The “low-tech” options include fire wood and wood pellets.

47


• Convergence of the fuel, food and fiber markets is expected to occur over time.

• The underlying forces driving this convergence are related to:1. Environmental Security (i.e., climate change)2. Economic Security (i.e., rising price of oil)3. National Security (i.e, dependence on Middle East and

Russia for fossil fuels)4. Political Security (i.e., support for rural development and

rural votes.)

• The feedstocks for these three markets will tend to trade on the basis of their “energy equivalency”.

48

Food, Fuel and Fibre Prices:

(Q1/00 to Q3/07)

• Key food, fuel and fibre prices have been on an upward trend. Is there any

causation, or just correlation?

• With biofuel production spreading, will the world price for oil become a support

price for farm and forest products?

Source: Bloomberg, Wood Resources, CIBC World Markets


50

100

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200

250

300

350

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

(Ind

ex M

arch

200

0=10

0)

(USA) Ethanol (USA) Gasoline (Brazil) Non-Conifer Roundw ood

(USA) Corn Palm Crude oil (MYR/ton)

.

49

Fascinating strategic alliances are being formed across industries:

• Stora Enso/Neste Oil, UPM-Kymmene/Andritz, Royal Dutch Shell/Choren with a focus on Fisher-Tropsche fuels

• Weyerhaeuser/Chevron, Royal Dutch Shell/Petro-Canada/Iogen with a focus on cellulosic ethanol

• BP/Dupont/Associated British Foods with a focus on bio-butonol

• BP/D1 Oils, Conoco Phillips/Tyson Foods with a focus on biodiesel.


50

• Totaled ~US$2.5 billion in 2005 and US$4.7 billion in 2006.

• At US$2.44 billion in Q1/07, at an annual run rate of almost US$10 billion in 2007.

• But overall financings have fallen in H2/07.


Global Biofuels Financings: Q1/05-Q1/07

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

Q1/

05

Q2/

05

Q3/

05

Q4/

05

Q1/

06

Q2/

06

Q3/

06

Q4/

06

Q1/

07

($U

S b

lns)

Quarter $US blns

Q1/05 0.69Q2/05 0.26Q3/05 0.34Q4/05 0.86Q1/06 1.29Q2/06 1.63Q3/06 1.37Q4/06 0.43Q1/07 2.44

*Source: New Energy Finance

51

• U.S. fuel ethanol production is undergoing dramatic growth, and is based almost entirely on grains. 109 plants in the U.S., and adding 78 in 19 states.

• Output will exceed 6 bln. gallons in 2007 – up from 2 billion in 2000. Capacity is expected to roughly double over next 18-24 months - 11.6 bln. by Q1/09.

• Subsidies provide some incentive with $0.51/gal blender’s credit, and equivalent tariff on imports (Cellulosic ethanol also gets an extra $0.50/gal)


0

1000

2000

3000

4000

5000

6000

7000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Gal

lons

(m

lns)

Fuel Ethanol Production in the U.S.

*Source: U.S. Energy Information Administration/Renewable Fuels Association

52

• U.S. Senate has raised the Renewable Fuels Standard targets to 8.5 bn gallons in 2008 and 36 bn gal in 2022.

• Even at the 2006/7 level of ~6 billion gallons, roughly 20% of the corn crop is already going to biofuel. Furthermore, the USDA’s latest forecast suggests this will rise to 27% in 2007/8.

• At some point, interactions with food and animal feed markets will make corn economically impractical as a feedstock. • Each $1.00/bu increase in the price of corn raises the cost of

producing ethanol by $0.35/gallon.

• Beyond that point, it is generally agreed that biofuels growth will depend on new feedstocks of cellulose and hemicellulose, of which most of the plant world is constituted.


53

Governments are mandating minimum renewable fuel content, with the primary focus on the transport sector.

Europe:• 5.75% (non-binding) of the transport fuel consumption by

2010, and 10% (binding) by 2020 – 27 billion litres of ethanol and 24 billion of biodiesel.

• 185 biodiesel plants already built, and 58 more under construction.

North America:• Canada requiring 5% average renewable energy standard

for gasoline by 2010.• U.S. targeting 7% by 2012 at the national level.• More stringent mandates coming at the state level.

• e.g., California (10% ethanol blend by 2010), Minnesota (20% by 2013).


54

China:

• In December 2006, China announced that it will no longer approve the construction of starch-based ethanol plants.

• However, cellulosic-ethanol production is being encouraged with a gov’t. 10-year, $5 billion capital commitment.

• In early 2007 the State Forestry Commission announced it will develop 13.3 m ha of forests by 2020 to produce fuel for biodiesel production and power generation. • Work in co-operation with the China National Petroleum Corp, the grain

trader Cofco and the State Grid Corporation. • Already developing land in Yunnan and Sichuan provinces.• China currently has 4 m ha of land with oil-bearing plants, able to

produce 5 m tonnes of oil.


55

Economics Of Biofuels

Four key variables:

1. The price of oil (the main substitute);

2. The cost of the feedstock (50%-80& of AVC);

3. The conversion technology; and,

4. Regulations, which stimulate demand.

Currently, all four of these variables are in a state of flux.


56

• When crude oil prices fall below $60/barrel, interest in building biofuel plants falters in most countries (except for Brazil); and it is sparked when oil hits $70/barrel and above.

• Biofuels from a wide variety off cellulosic feedstocks would be cost competitive with crude oil prices of $80-$100/barrel.


57

• At large scale, estimated cost per installed gallon of $1.70 for cellulosic ethanol vs. $1.45 for starch-based ethanol.

• Lower variable costs vs. corn-based ethanol• $1.22-$1.31/gallon for cellulosic ethanol (assuming no carbon credits)• $1.55-$1.75/gallon for starch-based ethanol

• Higher capital cost driven by energy-efficient cogen• Cogen is elective based on separate ROI analysis• Abandoned infrastructure reduces cost vs. new

5. Globalization of Energy MarketsEstimated Scale Economies For Hardwood-based Cellulosic Ethanol

*Source: SunOpta Bio Process Inc.

58

Estimated Scale Economies For Cellulosic Ethanol

• A world-scale 100 million gallon plant would consume roughly 1.2 million dry tons/2.4 million green tons per year of wood (i.e., a 380 million litre plant needs 2.4 million m3 of wood/year).

• From our perspective, the key challenges to be overcome are:

• Demonstrating that the existing technologies within the plant can truly be “scaled-up” to the size required to achieve competitive costs.

• Meet the materials handling challenge required to satisfy the voracious appetite for fibre.


59

Cellulosic ethanol is currently more expensive than starch-based ethanol.

But cellulosic-based ethanol also has some advantages:

• The feedstock itself tends to be cheaper.

• The fuel yield per hectare is generally higher.

• The fossil energy balance is estimated to be better.


60

Some advantages of wood relative to most other cellulosic

biomass:

• Higher sugar content

• Higher bulk density (lower transport costs)

• Longer storage life and lower storage costs

• Less intensive use of water and fertilizers

• Established collection systems


61

Wood Pellets are the “low-tech” bio-fuel.

• Feedstock is primarily sawmill residues at present.

• Can consume softwood, hardwood, and even the bark.

• Some competition for roundwood in other jurisdictions.

• Globally, both the supply and demand are blossoming.


62


*Source: Wood Pellet Association of Canada.

• We anticipate increasing wood pellet production in Russia and Africa, with the destination expected to be the European market.

63


• Europe is driving the global market for wood pellets, and this demand is driven by a series of “carrots” and “sticks.” Consumption already up roughly 10x since 2000 to ~5 million tpy, and expected to rise to almost 13 million tpy by 2010.

• Consumers? ~ 60% to co-fire coal power plants, 25% district heating, 15% residential.


WOOD PELLETS CONSUMPTION EUROPE

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,0005,000,0005,500,0006,000,0006,500,0007,000,0007,500,0008,000,0008,500,0009,000,0009,500,000

10,000,00010,500,00011,000,00011,500,00012,000,00012,500,00013,000,00013,500,00014,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

European Production

Import to Europe

Estimated European Consumption

Poly. (Estimated EuropeanConsumption)

Poly. (European Production)

Expon. (Import to Europe)

PREDICTION IN YELLOW

WOOD PELLETS CONSUMPTION EUROPE

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,0005,000,0005,500,0006,000,0006,500,0007,000,0007,500,0008,000,0008,500,0009,000,0009,500,000

10,000,00010,500,00011,000,00011,500,00012,000,00012,500,00013,000,00013,500,00014,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

European Production

Import to Europe

Estimated European Consumption

Poly. (Estimated EuropeanConsumption)

Poly. (European Production)

Expon. (Import to Europe)


64



• B.C.’s production is expected to increase from almost 0.9 million tpy in 2006 to over 3.0 million tpy by 2010. Canada should reach 5.0 million tpy by 2010.

• North American capacity expected to rise almost 3x from 2006 to 2010 – feeding Europe for now, but exports to Japan and local use will increase.

WOOD PELLETS PRODUCTION IN NORTH AMERICA

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

9,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

Canada Claimed Cap.

Canada Production

USA Claimed Cap.

USA Production

TOTAL NA Claimed Cap.

TOTAL NA Production

Poly. (TOTAL NA Claimed Cap.)

2 per. Mov. Avg. (TOTAL NAProduction)


1,400,000 ton 2006

5,500,000 ton 2010

Estimated Canadian Exports 20105,000,000 tons P/A


0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

9,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

Canada Claimed Cap.

Canada Production

USA Claimed Cap.

USA Production


TOTAL NA Production



PREDICTION IN BOX

1,400,000 ton 2006

5,500,000 ton 2010



0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

9,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

Canada Claimed Cap.

Canada Production

USA Claimed Cap.

USA Production


TOTAL NA Production





0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

9,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

Canada Claimed Cap.

Canada Production

USA Claimed Cap.

USA Production


TOTAL NA Production




1,400,000 ton 2006

5,500,000 ton 2010



0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

9,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

Canada Claimed Cap.

Canada Production

USA Claimed Cap.

USA Production


TOTAL NA Production



PREDICTION IN BOX


0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

8,500,000

9,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

METRIC TONNE

Canada Claimed Cap.

Canada Production

USA Claimed Cap.

USA Production


TOTAL NA Production



PREDICTION IN BOX

1,400,000 ton 2006

5,500,000 ton 2010


65

• To expand production in most parts of N. America, the pellet industry needs to utilize fibre sources other than sawdust/shavings.

• Raw material costs for traditional pellet plants typically account for 45%-60% of the total cash production cost. If fibre costs increase, other costs need to be reduced – pursue economies of scale?

• Canada: 25 plants; average capacity of ~60,000 tpy

• U.S.: almost 100 plants; average capacity of <20,000 tpy

• Two 500,000 tpy plants have been announced for the U.S. South (300,000 tpy more likely) – Both have good access to ports for export to Europe.• Green Circle Bioenergy in Florida

• Dixie Pellets in Alabama


66

Wood Pellets vs. Fossil Fuels

• In Europe, due to CO2 emission reduction commitments, expect continuing use of wood pellets even if it were not supported by the economics.

• Wood pellets have a calorific value of 5.6 Mwh or 20.5 GJ per ton

• There is 3.36 barrels of oil to 1 ton of wood pellets, so oil at $70/barrel is consistent with wood pellets at $235/ton millgate – far above current prices.

• Wood pellets at $180/ton=$8.78/GJ, and most consumers pay $11-14/GJ for natural gas.


67

We think that land will only continue to be under forest cover for the following reasons:

1. The owners want to maintain forest cover for environmental goods and services (which are almost always “outside the market”).

2. From a financial perspective, the land can’t make it in agriculture.

Net-net, we expect the demand for bio-energy to raise the relative price of agricultural products and absolute price of wood. Two potential implications:

• A decrease in the “intensive margin” of forestry. The best forestry lands will be used for agriculture or other bio-energy crops (e.g., palm oil).

• An increase in the “extensive margin” of forestry.

Energy Conclusions

68

• Companies will increasingly view traditional forest commodities and energy as joint products.

• The continued growth of the bio-energy sector will create “winners” and “losers” (but the producers of bio-fuel will not make an abnormal profit due to the competitive market).

Energy Conclusions

69

Winners from bio-energy:

• Tropical countries (which enjoy higher crop yields and lower land/labor costs).

• Owners of the feedstock (and especially the land).

• Owners of the key technologies (provided there is adequate patent protection).

• Solid wood processors (who now have an alternative outlet for residues).

Energy Conclusions

70

Losers from bio-energy:

• Existing users of wood fiber (e.g., producers of pulp/paper/non-structural panels)• Gov’ts must be careful in how they encourage the bio-energy

sector.

• Compared to bio-energy, pulp & paper production generates 13x more employment and 8x more value value-added.

• Forest dwellers without property rights

• Non-market goods & services at the “extensive margin”

• Biodiversity?

Energy Conclusions

71

By 2020 we expect a number of changes in the structure of the global forest products industry:

• The emergence of large integrated, multi-product forest companies in Brazil, Russia and China.

• While the Brazilian and Russian companies are expected to focus on utilizing their domestic wood resource, the Chinese (and Indian) companies are expected to actively pursue foreign direct investment in their pursuit of fiber.

• International Paper, Stora Enso and UPM-Kymmene are expected to be the only global companies in the industry. However, they are also expected to have a greater product focus than most of their emerging competitors.

General Conclusion

72

• Most North American companies are expected to continue the trend toward producing fewer products, but to do so over an expanded geographic area. They are also expected to grow primarily through mergers & acquisitions as opposed to greenfield investment.

• The Canadian solidwood companies are expected to continue to focus their growth in capacity within the United States. (However, the Canada/U.S. Softwood Lumber Dispute is expected to continue since U.S. timberland will be under different ownership.)

• Continuing growth in the ownership of timberland by institutional investors will result in the need for public forest management agencies to increase their funding of “public goods” like protection against fire, insects and disease.

General Conclusion

73

• We expect environmental concerns to constrain the rate of industry expansion in China, India and much of South America.

• Countries like Brazil and Indonesia are also likely to come under increasing social constraints, particularly as they relate to dealing with land use.

• The cost competitiveness of emerging countries is expected to deteriorate over time in response to increased land, wood and labor costs and appreciating currencies.

• Although the southern hemisphere will continue to enjoy an absolute advantage in forestry, the comparative advantage may be shifting back to the northern hemisphere. This is especially true for the United States and Russia.

General Conclusions

74

• Mr. Roberts is a Managing Director with CIBC World Markets Inc., an investment bank with 23 offices around the world and over 2,600 employees. He leads CIBC’s Paper & Forest Products Research Team, and is also responsible for the bio-fuels sector. His primary responsibility is to lead a team of analysts in advising financial institutions (e.g., pension/mutual funds) on their investments in the global paper & forest products industry. He is consistently ranked by institutional investor surveys as one of the top equity research analysts covering the forest products industry.

• Mr. Roberts specializes in international commodity markets, and has collaborated with a number of international forestry organizations to gain a global perspective on the paper & forest products sector. He has over 30 years of experience related to various aspects of the forest products sector. Prior to joining the investment business, he was Chief of Industry and Trade Analysis with the Canadian Forest Service.

• In addition to his work with CIBC World Markets Inc., Mr. Roberts is also• An Adjunct Professor in the Department of Forest Resource Management at

the University of British Columbia (Vancouver); • Guest Scholar, IIASA - International Institute for Applied Systems Analysis

(Austria);• On the Board of Executives of the Sloan Center for Paper Business and

Industry Studies at the Georgia Institute of Technology (Atlanta, Georgia); and• Serves in an advisory capacity for a range of government, industry, and NGO

groups.

• Mr. Roberts has a Bachelor’s degree in Agricultural Economics from the University of British Columbia, a Master’s degree in Forestry Economics from the University of California at Berkeley, and both an MBA and doctoral studies in International Finance and Economics from the University of Chicago.

Appendix: Bio of Don Roberts

trade and industry in transition: a global perspective through 2020 don roberts, managing director...

Documents

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