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Trends and Developments in the Chinese and Industry

International Forum on Investment and Finance in China’s Forestry Sector September 22-23, 2004, Beijing, China Ilkka Kuusisto Associate Principal Jaakko Pöyry Consulting, Shanghai Agenda

Paper and Will the growth continue? consumption

Production and capacity Where will the production be additions located and who will operate it?

Future fibre supply Is there enough fibre? Where will it come from?

2 Global Consulting and Engineering Group

„ Client- and technology-oriented globally operating consulting and engineering firm „ Core operations based on three know-how clusters: 1. forest industry 2. energy, and 3. infrastructure & environment „ Global market leader in forest industry „ Strong international position

3 Paper and paperboard Will the growth continue? consumption

Production and capacity additions

Future fibre supply

4 Global Paper and Board Consumption

Over the past 23 years, global paper and paperboard consumption has grown 3.0% a year or a total of 165 million tons.

Million tons 350 + 3.1 %/a Rest of World

300

+ 3.4 %/a Non-Japan Asia 250

Japan 200

150 Europe

100

50 North America

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

5 Co-existence of Media Historically, electronic media has not threatened the growth of paper based communication – in many cases the paper industry has benefited from it.

- Paper consumption, million t/a - 40 40 and pr/wr paper Expansion of consumption in Western Europe Internet/WWW CD-ROMs 30 Laser Printers 30

Satellite PCs TV Cable TV 20 20 Mini VCR Colour Computers TV Printing and writing 10 Mainframe 10 Computers Radio Cinema Newsprint TV 0 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

6 103TTS01 Innovations and Paper-based Packaging Paper remains a very competitive packaging material. New innovations and applications help maintain its position against other materials and systems.

- Consumption, million t/a - 200

Smart packaging Digital printing 150 Non-impact printing Microflutes

Lightweighting 100 Barrier technology

Aseptic liquid packaging 50

World consumption of packaging paper and board 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

7 103TTS01 GDP Growth by Region

…and the rapid economic growth in Asia will underpin the growth in paper consumption.

Japan Asia (excl. Japan and China) China

1997 1.6 1997 4.4 1997 8.8 1998 0 1998 0.4 1998 7.8 1999 0.8 1999 5.9 1999 7.1 2000 2.8 2000 5.3 2000 8.0 2001 0.4 2001 3.8 2001 7.3 2002 0.2 2002 4.4 2002 8.0 5.9 9.1 2003 2.5 2003 2003 2004 5.8 2004 8.3 2004 4.2 2005 5.6 2005 7.7 2005 1.8 2006 5.5 2006 7.6 2006 1.9 2007 5.5 2007 7.0 2007 1.8 2008 5.7 2008 7.3 2008 2.1 L-t trend 5.4 L-t trend 7.7 L-t trend 1.3 % change02468 in GDP 0246810 02468

Source: Consensus Forecasts and OECD 8 World Demand for Paper and Paperboard

World demand for paper and paperboard continues to grow. With an average growth rate of 2.2 percents a year, it will reach 450 million tons by the year 2015.

Million tons 500 Forecast Rest of the World

400 Latin America

Rest of Asia

300 China

Japan 200 Eastern Europe

Western Europe 100

0 North America 1980 1985 1990 1995 2000 2005 2010 2015

9 Growth of Paper and Paperboard Demand Most of the growth will take place in more volatile emerging markets.

Demand growth %/a Emerging Growth 5 Eastern Europe Markets China Asia excl. 4 Japan & China Latin America

3 Africa

Average 2.2 %/a 2 Oceania Western Europe Traditional Strongholds Japan 1 North America

0 0 20406080100 Share of consumption in 2000 (325 million tons), %

10 Growth of Paper and Paperboard Demand Woodfree papers and tissue show highest growth rates, packaging boards account for substantial volume growth.

Demand growth %/a 4

Coated Uncoated woodfree woodfree Tissue Average 2.2%/a 3 Corrugating materials Coated mechanical Cartonboards Uncoated 2 mechanical Newsprint

1

Sack paper Other grades

0 0 20 40 60 80 100 Share of consumption in 2000, %

11 Paper and paperboard consumption

Production and capacity Where will the production be additions located and who will operate it?

Future fibre supply

12 Consolidation and Globalization Search for markets, assets and competitive advantage drive consolidation and globalization

Trade policy & Market growth legislation

Search for Search for improved new markets efficiency & growth Globalization of Resource availability customers Search for strategic assets & capabilities

Regional cost Competitive pressure advantages

13 Leading Global Paper and Paperboard Producers Truly global companies are yet to emerge but many companies have by now established Asian presence.

Regional Capacity Distribution, 2004/IIQ

Stora Enso International Paper UPM Oji Georgia-Pacific Weyerhaeuser Nippon Unipac Holding Smurfit-Stone Container Abitibi-Consolidated SCA North America M-real Western Europe Asia Pulp & Paper Eastern Europe Norske Skog Latin America MeadWestvaco Asia Other Mondi

0 2000 4000 6000 8000 10000 12000 14000 16000 18000 - Capacity, 1000 t/a -

14 Paper Industry Concentration 1997 vs. 2002

The is still relatively fragmented with top five firms controlling only 20-40% of regional capacity.

Combined capacity share of top five firms (%) 60 1997

2002

40

20

0

North Western Asia Latin World America Europe America

15 Industry-level Benefits of Consolidation Consolidation helps to bring price stability.

Price volatility vs. industry concentration

- Standard deviation, % - 16 Global price, regional concentration for pulp 14 BHKP 12

Testliner BSKP 10

Uncoated Kraftliner 8 woodfree

6 Newsprint LWC 4 SC 2

0 20 40 60 80 100 - Concentration of Top 5, % -

16 Changes in Investment Conduct The past 10 years has been a decade of acquisitions.

- Investment spend, % of sales - 25 %

20 %

15 % 12.3%

10 % 2.4% 20.7%

1.8% 1.5%

11.2% 5 % 7.0% 6.9%

0 % Total Acq. New Other Total Acq. New Other inv. lines capex inv. lines capex. 1991 - 1995 1996 - 2000

17 Acquisition and Investment Activity Consolidation has mainly taken place in developed, slow growing, mature markets. Asian companies are still growing through new investments.

North America, Europe and Japan China and Rest of Asia

Acquisitions Acquisitions 10 %

55 % 45 % 90 %

Fixed Investments Fixed Investments

Source: JP Research 18 Global Capacity Growth Non-Japan Asia’s share of global capacity investments has grown significantly

100 % Asia

Rest of World 80 Japan China

60

Europe

40

20 North America

0 1970s 1980s 1990s 2001-2006

Source: JP Research 19 Capacity Expansion Projects in China Over the next five years, China will lead the world in capacity growth. Company Capacity 1000 t/a Grade Location Time APP Ningxing Zhonghua 700 Duplex board Zhejiang 2004 APP Hainan Jinhai Pulp 1000 Bl hardwood pulp Hainan 2005 APP Gold East Paper 700 Coated woodfree Jiangsu 2005/2006 APRIL 400 Uncoated woodfree Guangdong 2006/2007 APRIL 1000 Bl hardwood pulp Shandong n.a. Daewoo Paper 300 Coated woodfree Heilongjiang 2006 Dongguang Jia Hui (Sun) 300 Duplex board Guangdong June 2004 Dongguang Jia Hui (Sun) 300 Duplex board Guangdong August 2005 Foshan Huafeng 300 Duplex board Guangdong 2005 Hebei Pan Asia Long-Teng 330 Newsprint Hebei 2005 Jiangxi Chenming Paper 400 LWC Jiangxi 2004 Lee & Man Paper Mfg. 250 Unbl testliner Jiangsu 2004 Lee & Man Paper Mfg. 350 Recycled medium Jiangsu September 2004 Lee & Man Paper Mfg. 400 Testliner/medium Guangdong 2005 Nine Dragons 250 Recycled medium Guangdong August 2004 Nine Dragons 250 Recycled medium Guangdong August 2004 Nine Dragons 300 Unbl testliner Guangdong 2005 Ningxia Meili Paper Industry 300 Folding boxboard/duplex Ningxia 2005 Oji Paper 400 Coated woodfree Jiangsu 2006 Shandong Cheming 400 Folding boxboard Shandong 2005 Shandong Cheming Qihe 300 Recycled medium Shandong n.a. Shandong Huatai 450 Newsprint/LWC Shandong 2005 Shandong Jin Feng Yuan 450 Duplex board Shanghai/Fengxian n.a. Shanghai Zhonglong Paper 300 Testliner/medium Shanghai/Pudong 2004 StoraEnso Suzhou Paper 450 Coated woodfree Jiangsu n.a. UPM-Kymmene 450 Uncoated woodfree Jiangsu 2005 Wuhan Chenming 300 Cartonboard Hubei n.a. Wuxi Long Chen Paper 400 Testliner/medium Jiangsu 2007 Yuen Foong Yu Paper 500 Testliner/medium Jiangsu 2006 Yuen Foong Yu Paper 500 Testliner/medium n.a. n.a. Yueyang Paper 300 Folding boxboard Hunan n.a. Zhanjiang Wood Pulp Mill 700 Bl hardwood pulp Guangdong n.a. 20 TOTAL ABOVE 13730 Paper and paperboard consumption

Production and capacity additions

Is there enough fibre? Future fibre supply Where will it come from?

21 Global Consumption of Fibre

World consumption of papermaking fibre is forecast to grow from 350 million tons in 2003 to 460 million tons by the year 2015, or 2.3%/a on average. Million tons 500

Forecast

400

300 Recovered paper

200 Non-wood pulps Sulphite pulps UKP

BHKP 100

BSKP Mechanical/semichemical 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

22 Average Papermaking Fibre Furnish in the World Wood pulp is still the most important papermaking raw material, but recovered paper continuously increases its share of the total – today about 48% of the total Percent 100%

90% Forecast Recovered paper 80%

70% Non-wood pulps

60% Sulphite pulps

50% UKP 40% BHKP 30% BSKP 20%

10% Mechanical/semichemical

0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

23 Recovered Paper Collection and Consumption – 2003 North America is the great provider of recovered paper for Asia.

Million tons 50 58% 50% 9.3 6.9 4.1 45 2.0 2.7

40 0.7 1.5 35 40% 0.4 30

25 65% 20 Recovery rate 15 Consumption Collection 10

5

0 Western Europe North America Non-Japan Asia Japan 12New Capacity in China 11 million tons of new papermaking capacity came on stream in China during the past three years. To keep these machines running requires nearly 8 million 10tons of recycled fibre as well as virgin wood pulp.

Million tons 8 Pulp & 6 fillers

Containerboard Mixed 4 Cartonboard

Printing and writing Newsprint OCC 2

ONP 0 2002 2003 2004 RCF required

25 Recovered Paper Imports into Mainland China Large part of the increase in consumption has come from imports.

14 Million tons

White 12

Mix 10

8 ONP

6

4

OCC 2

0 '95'96'97'98'99'00'01'02'03'04 Note: 2004 estimated based on Jan-Jul statistics 26 Recovered Paper Imports into Mainland China USA, Europe and Japan are the largest import sources, but they have just about reached their limits. Other countries cannot export more, either. 14 Million tons

Others 12 Korea Canada Japan Australia 10 Hong Kong

8 Europe

6

4 USA

2

0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 Note: 2004 estimated based on Jan-Jul statistics 27 Water Wheel Continuous additions of fibre are needed to offset losses.

Virgin Wood Pulp Minerals and Additives

Process Losses Production of () Paper Trade Paper Trade in Paper Used for Paper Consumption of Products Production Paper

Collection of Paper Recovered Other Uses Not Collected Paper Trade of Old Paper (tissue, library books, burned, etc.) 28 Paper and Paperboard Collection Cycle Fibre quality decreases over time until it disappears in the recycling process.

- Volume of raw material - 120 Without virgin fibre injection, paper & paperboard industry 100 would run out of raw material within 6 months. 80 Collection 45%/Round 20 Days

Collection 50%/Round 20 Days 60 Collection 60%/Round 20 Days

Collection 60%/Round 30 Days 40

20

0 0 20 40 60 80 100 120 140 160 180 200 220 240 Days

CALCMOD2/ILE 29 Growing Stock of Forests There is plenty of wood in the World. It is just not all in the right places. China must secure a reliable and sustainable source of wood for its industry. 63.7 -billion m3- 16.9 22.6 13.0 6.8 7.5 12.7 9.5 1.8 1.1 4.9 4.9

107.4 37.1

55.1 3.8

7.9 0.5 Total 380 billion m3 0.9 Softwood 126 billion m3 2.0 Hardwood 254 billion m3

30 Conclusions ƒ The global demand for paper and paperboard continues to grow ƒ The industry growth is shifting outside traditional supply areas, especially to Asia and increasingly to China ƒ The industry remains fragmented, especially in Asia ƒ Acquisitions have become an important driver of corporate growth, but capacity growth continues in China ƒ Recycled fibre will soon constitute over 50% of global paper industry’s fibre raw materials ƒ Traditional supply sources cannot continuously increase their exports of recovered paper ƒ Domestic collection must be developed and improved to meet a growing part of the fibre mix ƒ Non wood pulp must be developed into a viable alternative ƒ World has enough wood to meet the growing demand but it is not all located in the right places. ƒ China will have to develop sustainable source of wood to help meet its growing demand for fibre.

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