Fiber Raw Materials Markets: Pressure Builds on Traditional Sourcing Model

Presented by: Rod Young Chief Economic Advisor RISI

Containerboard is the Biggest Consumer of Fiber in the P&B Industry

World Consumption Estimated at 402 Million Tonnes in 2010 With 164 Million Tonnes of Wood Pulp
Translating into 700 Million Cubic Meters of Wood

And 218 Million Tonnes of Recovered Paper

Dominance of Containerboard Mainly Due to Size of Sector

Also to Fiber Intensity of Product Area That is, Little Usage of Coatings and Fillers

World Fiber Consumption by Major Paper and Board Grade - 2010

(Million Tonnes)
402 million tonnes

Other Paper & Board 22% Tissue 8%

Containerboard 39%

Newsprint 9%

Printing & Writing 22%

Containerboard Industry Started to Shift To Recovered Paper in the 1990s

Low Prices as Recycling Rates Jumped in Developed World Environmental Concern on the Part of End Users Improved Papermaking Technology

Shift Accelerated Over the Past Decade

Rapidly Rising Containerboard Demand in Fiber-Short Regions Still Lower Cost Than Virgin Fiber in Most Regions Aggressive Investment in New Technology in China

Furnish Shares of World Containerboard Production

0.8 0.7 0.6 0.5 0.4
0.3 0.2 0.1 0

Wood Pulp Nonwood *Rec Paper

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

*Net of fiber loss

China Uses the Most Recovered Paper in its Containerboard

Reflecting the Lack of Virgin Fiber and Strong Demand

Other Developing Regions Are Also Heavy Users of Recovered Paper

Still Lower Cost Than Virgin Fiber in Most Regions

Developed Regions Tend to Use More Virgin Fiber

With North America at the Top End of Spectrum

Recovered Paper Share of Containerboard Furnish by Region

120% 100% 80% 60% 40% 20%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
China Latin America Japan Europe Other Asia North America

Rapid Growth in Containerboard Usage of Recovered Paper

Has Been a Major Factor Boosting Recovery Rates Especially in the Case of Old Corrugated Containers (OCC)

World Recovery Rate for All Grades Reached 56% in 2010

With OCC Hitting a Very High 79%

Mixed and High Grade Recovery Rates Remain Relatively Low

At 40% and 35%, Respectively, in 2010

World Recovery Rates for Major Recovered Paper Grades

0.80 0.70 0.60 0.50 0.40
0.30

0.20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Total ONP OCC HGR Mixed

Recovery Rates in the Developed World Have Reached a Very High Level
As Chinese Papermakers Scour the World for Fiber And Governments Encourage Waste Reduction

Japan Leads the World with an 80% Recovery Rate

With Oceania and Western Europe Not Far Behind

Recovery Rates Remain Much Lower in the Developing World

Recovery Rates in Major World Regions

0.80
0.70

0.60 0.50 0.40 0.30

0.20

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Japan
China

Western EU
Other Asia

North America
Latin America

Recovered Paper Prices Have Risen Steadily Over the Last 10 Years
Reflecting the Increasing Tightness in the Markets And Rising Costs Associated with Digging Deeper into the Waste Stream

Major Factors Boosting Costs Include:

Processing Lower Quality Material, Especially from SingleStream Systems Reaching Further Geographically for Supplies

Prices for Major Bulk Grades Delivered to China (US$/Tonne)

300 OCC 250 200 150 100 50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

ONP Mixed

Recovered Paper Prices Have Surpassed Virgin Prices in Some Regions

With the US South Being the Prime Example Partially as a Result of the Depressed Wood Products Business

Other Regions Will See the Same Phenomenon

Since Recovered Paper Prices Are Set by the Chinese While Virgin Fiber Prices Are Set on a Regional Basis

US OCC Price and Equivalent Price of Softwood Fiber for a US Southern Kraftliner Mill (US$/Tonne)
250 OCC 200 150 100 50
0

SOFTWOOD

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Economics Continue to Favor Recovered Paper in China

OCC Prices Still Lower Than Virgin Fiber, Especially Imports Energy Costs are Relatively Low, With On-site Coal Plants Latest Technology on New Paper Machines Much Lower Capital Costs Since Kraft Pulp Mill Not Required

Chinese Papermakers Are Scrambling to Find New Sources of Recovered Paper

But All of the New Containerboard Projects Still Based on This Fiber

Latest listing of Chinese Containerboard Expansions

Company
Lee &Man Hunan Shuanghua Paper
Foshan Gold Rich Paper

Location
Guangdong Hunan
Guangdong

CAP Date
500 100
100

Grade

2011Q1 Recycled Liner 2011Q1 Recycled Medium

2011Q1 Recycled Medium

Fujian Liansheng Paper Hebei Baoding Orient Paper Shouguang Meilun Paper Nine Dragons Paper Nine Dragons Paper Longyuan Paper Taikang Mill Zhejiang Yongtai Paper Zhejiang Jian Paper Packet

Fujian Hebei Shandong Tianjin Tianjin Henan Zhejiang Zhejiang

300 360 600 400 400 200 200 650

2011Q1 Recycled Medium 2011Q1 Recycled Medium 2011Q1 White-top Liner 2011Q2 Recycled Liner 2011Q2 Recycled Liner 2011Q2 Recycled Medium 2011Q2 Recycled Liner 2011Q2 Recycled Liner

Latest listing of Chinese Containerboard Expansions

Company
Zhejiang Jian Paper Packet

Location
Zhejiang

CAP Date
250

Grade

2011Q2 Recycled Medium

Lee & Man Fujian Lishu Pulp & Paper

Fujian Liansheng Paper

Chongqing Fujian
Fujian

400 200
450

2011Q4 Recycled CNT 2012Q1 Recycled Medium

2012Q1 Recycled Liner

Fujian Liansheng paper Nine Dragons Nine Dragons Yuen Foong Yu

Hebei Changtai Paper

Fujian Fujian Fujian Jiangsu

Hebei

350 350 300 450

500

2012Q2 Recycled Medium 2012Q2 Recycled Liner 2012Q2 Recycled Liner 2012Q2 Recycled CNT
2012Q4 Recycled Medium

Lee & Man Nine Dragons Paper

Hubei Liaoning

900 600

2012

Recycled CNT

2013Q3 Recycled CNT

World Containerboard Demand Will Continue to Closely Track the Economy

Although Industrial Production Should Slow Relative to GDP As Developing Regions of the World Shift Toward More Services

Lighter Weights of Containerboard Will Slow Tonnage Growth

Driven by Higher Fiber Prices Improving Paper Machine Technology Environmental Concerns

World Containerboard Demand and Usage Rate Relative to GDP (Million Tonnes and Tonnes/Million 2005$)
250 2.15 2.10 2.05 2.00 1.95 1.90 1.85 1.80 1.75 1.70 1.65 1.60

200 150
100

50
Demand Usage Rate

0 1990 1994 1998 2002 2006 2010 2014 2018

Vast Majority of Containerboard Demand Growth Will be in Developing Regions

Strong Economic Growth Higher Share of Industrial Production in General Economies

However, Growth Will Slow Relative to Historical Performance

Shift Toward More Service-Based Economies Higher Prices for Containerboard and Corrugated Boxes Increasing Environmental Concerns with Respect to Packaging

Growth in Containerboard Demand by Major Region (2010-2020)

Million Tonnes 40

35 30 25 20 15
10 5

0
China Other Asia except Japan Latin Middle Europe North Japan and America East and America Oceania Africa

Containerboard Production Will Continue to Follow Demand Regionally

Ability to Produce Quality Products from Recovered Paper Boxmakers Looking for Short Lead Times for Board High Transport Costs for Containerboard Between Regions

China Will Continue to Post the Largest Increases in Output

Followed by Other Developing Countries Although Exports Will Rise from North America

Growth in Containerboard Production by Region (2010-2020) Million

Tonnes 40 35
30 25

20 15 10 5 0 China Other Asia except Japan Latin Middle Europe America East and Africa North Japan and America Oceania

Chinese Production Will Still be Based Heavily on Recovered Paper

Even Though Recovered Paper Costs Will Rise Relative to Virgin Aggressive Efforts to Expand Domestic Collections

Other Developing Regions Will Remain Dependent on Recovered paper

Lack of Virgin Fiber Economics of Building New Capacity

Developing Regions Will Look to Nonwood Fiber as an Alternative

Recovered Paper Share of Containerboard Furnishes in Developing Regions

1.1 1.0 0.9
0.8

0.7 0.6 0.5 0.4

China

Other Asia

Latin America

Middle East

Africa

Upward Pressure on Recovered Paper Prices from Rising Usage in Developing World
Will Make Virgin Fiber an Attractive Alternative in Some Developed Regions

North America, Particularly the US South, Will See Rising Virgin Share of Furnish
Recovered Paper Costs Stay Considerably Higher Than Wood Costs

Opportunity to Shift Output from Woodfree Papers to Containerboard

Limited Growth in Domestic Demand Will Encourage Incremental Expansion

However, Virgin Share Will be Constrained by:

Need to Install New Recovery Boiler Capacity Environmental Credentials of Recycled Containerboard

Recovered Paper Share of North American Containerboard Fiber Furnish and Containerboard Exports (Thousand Tonnes)
0.6
0.5

0.4 0.3 0.2 0.1 0 1992 1994 1996 1998 2000 2010 2012 2014 2016 2018
1990 2002 2004 2006 2008 2020

9000 8000 7000 6000 5000 4000 3000 2000 1000 0

Exports

Furnish Share

Europe Will be Hit by Cross Currents

Limited Virgin Supplies in the West Will be a Problem Accelerating Move Toward Lightweight Recycled Products Increasing Recycled Containerboard Demand in the East Investment in Virgin Capacity in Russian Far East

Oceania Will Likely See More Virgin Capacity

While Japan Will Remain Recycled Based

Recovered Paper Share of Containerboard Fiber Furnish in Developed Regions

1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
1990 1992

Japan Oceania Europe

On a Worldwide Basis, Recovered Paper Share of Containerboard Fiber Furnish

Has Not Yet Already Reached a Critical Level, at 83% And 72% After Fiber Losses in Pulping Process Leaving 28% as Virgin Fiber, With 24% Being Wood

Regionally, There Are Already Problems

Requiring Imports of Higher Virgin-Content Recovered Paper

However, the Recovery Rate of OCC Has Reached a Critical Level

At 80% on a Worldwide Basis Leaving Little Room for Further Increases

Recovered Paper Share of World Containerboard Furnish and OCC Recovery Rate
0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 Furnish Share Recovery Rate

Further Discussion Points:

How Low Can Basis Weights Go for Containerboard? How Can Papermaking Technology Better Utilize Fiber? How Much Hardwood Can Be Used in Kraftliner? Will a Cost-Effective Nonwood Pulping Technology be Developed? To What Extent Will Energy Uses Impact Virgin Fiber Pricing? Which Paper Grades Will be Affected First by High Recovered Paper Prices? Will Virgin Containerboard Prices Drop Below Recycled Prices? Will a More Cost-Effective Technology be Developed to Incrementally Expand Recovery Boiler Capacity?