Dissolving Pulp: the Great Comeback “It's All About Cotton!”

Dissolving Pulp: The Great Comeback “It’s All About Cotton!”

TAPPI PEERS Dissolving Pulp Forum 2-3 October, 2011

Gordon Floe, Pöyry Management Consulting PRESENTATION CONTENTS

• How it all Got Started • Background • History and Turnaround • Textile Fiber Consumption • Price Correlations • Conclusions: How Will it all End?

• Pöyry is a global consulting and engineering company dedicated to balanced sustainability and responsible business

• 7 000 experts in about 50 countries • Project experience in over 100 countries • 15 000 projects annually

• Net sales in 2010 EUR 682 million • Listed on the NASDAQ OMX Helsinki

URBAN & MOBILITY WATER & ENVIRONMENT • Urban planning • Water • Real estate development • Wastewater • Transport planning • Waste • Rail infrastructure • Environment • Road infrastructure • Construction management • Building design

INDUSTRY ENERGY • Pulp and paper • Hydropower • Chemicals • Thermal power • Minerals processing • Bio-renewables • Oil and gas • Nuclear energy • Transmission and distribution

Market history, development and characteristics

1884 1924 Hilaire de Chardonnet, later Comte de The word rayon was taken into use. The Chardonnet, invented a fabric he called introduction of staple fiber came shortly artificial silk. thereafter.

Early 1890’s 1930’s-1950’s Three British scientists, Beadle, Bevan Sales of viscose fibers grew very rapidly and Cross, found that cellulose could be with the rayon process the clear winner dissolved as xanthate after treating it with among the different production alkali and carbon disulphide. techniques. Viscose peaks in early 70’s

1904 1970’s- early 2000’s The sale of the patent rights to a French In early 1970’s, inexpensive synthetic textile company Courtauld -beginning of fibers (polyester), started to drive large-scale industrial production of viscose fibers into a long-lasting decline. dissolving pulps.

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 7 October 2011 BACKGROUND Dissolving pulp is a family of pulps with high alpha-content, which are used in a multitude of end-uses, as illustrated below. The key focus of this discussion is viscose pulp used in the textile industry.

Cotton linters pulp Common Substituting end uses products

High-alpha/high grade • Cigarette tows • Paper, cotton, • Films synthetic fiber pulps Acetates: • High quality plastics • Synthetic films 1.6 million tons • Acetate yarn , fibers • Plastic • Natural silk, cotton Acetate • Explosives • Food industry • Pharmaceutical • Highly miscellaneous Low-alpha pulps Lyocell • Cotton linters pulp Ethers/ • Cosmetics • Special paints • Synthetic fibers, etc. 3.3 million tons Others: • Binders and glues • BHKP paper pulp (vs. • Artificial leather low alpha CMC) • Etc.

• Textile industry • Cotton, wool • Non-wovens • Synthetic fibers, fluff Viscose • Cord and industrial pulp Viscose: yarn • Steel and polyester • Cellophane • Polyethylene, • Sausage skin polypropylene Total 4.9 million tons • Sponges • Natural, collagen (incl. cotton linters pulp) and plastic casings

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 8 October 2011 BACKGROUND- DEMAND BY END-USE High-grade products such as acetates, especially cigarette filter tow, are expected to grow fast. Viscose products have declined in the past, but are now expected to increase fast due to rapid growth in Asia and reduced supply of cotton.

Demand by End-use in 2010 End-use Future trend Viscose products Nitrates Others Ethers 3% 1% ‒ Rayon staple ++ 12% ‒ Rayon filament +/- ‒ Rayon cord +/- ‒ Cellophane & others +/- Total +/- Acetate 15% Acetate products • Filament - • Cigarette filter tow ++ • Other acetates + Viscose 69% Total + Nitrates +/- Ethers (CMC etc.) ++ Total market 4.9 million tons* Others +

*Including 1.1 million tons cotton linters for various end-uses, mainly Grand Total + viscose (in China), nitrates and other very high-alpha products

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 9 October 2011 HISTORY AND TURNAROUND World consumption of dissolving wood pulp decreased from 4.9 million tons in 1980 to about 3 million tons in 2001 but has been rising since. In the early 1970’s, inexpensive synthetic fibers, (nylon, polyester, polypropylene), started to drive viscose fibers into a long-lasting decline. End- uses other than textile faced problems as well. Explosives were developed from non-cellulose raw materials and rayon tyre-cord was replaced by a combination of polyester and steel reinforcement fibers in car tires. Demand recovery now back to 1980 levels; estimated at 4.9 million ADt/a in 2010 and could reach 5.2 million in 2011

Million tons 6

5 Rest of the World

4 Rest of Asia

3 China

2 Japan 1 Europe

North America 0 1980 1985 1990 1995 2000 2005 2010

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 10 October 2011 WHAT’S DRIVING THE TURNAROUND? More positive DP demand drivers than negative

Population Growth Economic Growth and Industrialisation in Environment / and Demographic Increasing Purchasing High Population Technology Changes Power Areas

•Young in developing •High energy price & •Globalisation •New applications and countries substitution end-uses •Industrialisation of •Population growth in •Life-style changes developing world •Substitution of polyprop. general in non-wovens •Convenience •Limitations in the cotton supply •Tech. dev. in textiles & •Economic growth/ non-wovens. New private consumption •Competition for applications and end- Growth in the average land uses + the technical per capita income, •New applications development especially in the and end-uses (especially viscose emerging markets use in textile blends ) •New end-uses •Renewability

•Population decline •Substitution by even •Protectionism •High investment costs & aging higher value products

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 11 October 2011 TEXTILE FIBER CONSUMPTION BY GRADE Textiles is a 575 billion USD industry with approximately 3.5 - 4% average annual growth. Viscose fiber is a small part of the total and is most dependant on economic growth fashion trends and cotton availability/pricing. The major change in textile fiber consumption over the past 30-40 years has been the growth in synthetics.

Total Word Textile Fiber Consumption, 1970-2011e 90

80 Wool and silk 70

60 Cotton

50 Cellulosic 40

Millions tons ofMillions 30 Polyester 20

10 Other Synthetic 0 1970 1980 1990 2000 2010

Source: Oerlikon textile, Pöyry estimates

Fiber Consumption in the Textile Industry Fiber Type Synthetic (oil) Cotton Other Natural Viscose Total Million 41 24.5 1.5 3 70 tonnes % 59 35 2 4 100

• The low share of viscose fiber of the total fiber volume used in textiles means that if viscose replaces 1% of synthetic fiber, dissolving pulp demand goes up by nearly 11% and if viscose replaces 1% of cotton, nearly 6% more dissolving pulp is needed.

• Substitution has been the most important driver over the past few years . The biggest change has been seen in the interplay between cotton and viscose due to the recent drop and future limitations in cotton supply. The main benefit of viscose versus cotton is better security of supply due to its apparent immunity to seasonal weather conditions and predictable capacity of supply. ‒ Spinning and other techniques needed in textile production have been developed to allow more cotton/viscose blends. Most of the substitution has taken place in these blends through a gradual introduction of higher shares of viscose fibers in those applications where the special features of dissolving pulp based fibers can be utilized.

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 13 October 2011 NOMINAL PRICE CORRELATIONS 2000-2010 Dissolving pulp prices in China vis-à-vis BSKP, cotton and oil prices in 2000-2010. The link between cotton and dissolving pulp prices has strengthened over the last several years. Small changes in cotton supply result in large changes in DP demand. Cotton US cents/pound USD/ton Oil USD/barrel 1600 160 BSKP Dissolving Pulp CHN 1400 140 Crude Oil Cotton 1200 120

1000 100

800 80

600 60 NSBSKP Cotton 400 Western Liverpool 40 Brent Oil Europe Index 200 20

0 0 2000 2002 2004 2006 2008 2010

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 14 October 2011 COTTON PRODUCTION AND CONSUMPTION After several years of consumption exceeding production, stocks were very low, lowest level in 14 years. In 2010/2011 cultivation area estimated up by 9%, production 16% and consumption 4%. Which means a further small decline in stocks.

30.0 Consumption Production 25.0

20.0

15.0

10.0

5.0

0.0 2001-02 2004-05 2007-08 2010-11

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 15 October 2011 OIL AND COTTON OUTLOOKS High cotton price drives up cultivation area in 2011-12 season – weakening demand/supply and prices from Q2/2011. The International Cotton Advisory Committee (ICAC) foresees the cotton acreage to be reduced from historical trend of 33 million hectares to 32 million hectares by 2020, however yield improvements will result in marginal production increases. Real 2010 USD/t 200

180 Forecast 160

140

120 Crude Oil, Brent

100

60 Cotton, Liverpool Index 40

0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 * Crude Oil Brent, USD/barrel. ** Cotton Liverpool Index, US cents/pound.

• Demand outlook for textile growth over the decade at 2+%/yr is significant. Much of the demand growth will be taken by synthetics. • However market demand is strong enough to allow the balance of supply (natural and viscose fibers) to increase, although by a smaller proportion than synthetics • The supply constraints of cotton are serious and the supply forecast for 2020 by ICAC would allow only a marginal growth of cotton. This would allow cotton to capture only a small portion of core demand growth leaving viscose fibers a significant market opportunity in substitution . • The demand outlook for dissolving wood pulp based viscose is attractive, yet volatile to development of cotton supply and general market development. Assuming a slightly pessimistic or optimistic general market outlook for textile fibers would have a significant impact on the viscose market opportunity.

COPYRIGHT@PÖYRY TAPPI PEERS Dissolving Pulp Forum 17 October 2011 WHAT DOES THIS MEAN FOR DISSOLVING PULP PRICES? Sharp upturn from mid 2009, due to economic recovery, cotton shortages and high commodity prices in China. Peak price of $2600 in May; July-Aug fall-off to $1150- 1200, Sept pricing back up a bit (high season for textile business) With robust demand outlook and swings in supply (both cotton crops and new DP capacity), expect continued volatility

2010 USD/t 2300 Peak prices at 2600, mainly upside risk during Q2 2011, big increase in cotton Forecast 2100 volumes and additional supply of diss pulp drive price down during 2 nd half 2011 1900 Real 1700

1500

1300 ?? 1100

900

700 Nominal 500

300 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

* Prices in China CIF or C&F; Deflator used for real prices US WPI.

CONTACT: NAME: GORDON FLOE MAIL: [email protected] PHONE: 604-443-1014