China s s influence on the global market

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1 China s s influence on the global market PRICEWATERHOUSECOOPERS OOPERS 19 TH Annual Global Forest and Paper Industry Conference May 2006

2 Global Paper Markets are mature Printing and writing papers account for about two thirds of bleached chemical market pulp demand World demand for P&W has grown at only 1.4% p.a. in the last five years > US GDP +4.6% pa > Per capita P&W -1.4% pa P&W demand since 1998 > developed nations +0.7% pa > developing nations +6.9% pa

3 Global P&W Production thousand tonnes Growth p.a West Europe 34,333 38, % North America 30,493 27, % Japan 11,754 11, % Sub-total 76,580 77, % South Korea 2,015 2, % China* 1,621 3, % Sub-total 3,636 6, % Others (est.) 13,405 16, % Total 93, , % USA P&W demand down -2.7% Q1 2006

4 Conversion of P&B moves to China China s s exports grew from $325 bn to $752 bn (=43% GDP) Exported goods packed in cartons and cases, protected with tissue Accompanied by guarantees, instructions, labels, leaflets etc Apparent consumption of P&B overstated in China, understated in N. America and W. Europe China s s P&B demand growth depends on exports US Dept Commerce say China GDP +9% compared with USA +4% Should be China +9%, IF USA is +4% If 1.5 million t China to USA % p.a. Western Europe % North America % Japan % Sub total % China % Others % Sub total % Total %

5 Historical Market pulp demand since 2000 (5 years), by region China 5,007 Other Asia 2,015 West Europe 323 East Europe 642 North America* 222 Latin America 370 Japan -734 Total growth since 2000: 7.8 million t -1, ,000 2,000 3,000 4,000 5,000 *growth is definitional/statistical thousand tonnes China accounts for 64% of demand growth since 2000

6 China the population Total 1,300 million average disposable income = US$660 in 2004 (USA $32,000) Huge inequality in income distribution > Urban 500m - $1024 per capita > Rural 800m - $316 > Rural unemployed 240m > Rural migrants 145m > Working 500m > Working in SOE 350m

7 Household income in China Unequally distributed $ ,000 16% >$15,000 $ % 1% 78% of households have an annual income of less than $5000 <$1000 Just 6% of 29% households (28 million in all) have an income greater than $10,000/year This 6% of households account for 28% of total income $1000-5,000 49% Total of 363 million households in 2004

8 China the economy GDP +9% p.a. ($1.75 trillion in 2005) > +9.4% in Q > +9.2% in calendar 2005 > +10.2% in Q Driven by, investment > Foreign investment boom ($55bn in 2004), but it has slowed in > Gross fixed investment ~ $820 billion in % of GDP

9 China the economy Exports in 2005, $752 billion; imports $650 billion > Trade surplus forecast $102 billion (double 2004), $202b with USA > 90% of world s s toys,50% cameras,70% copiers > Current account surplus 7% of GDP in 2005? Increasing trade tensions, particularly with the US and Europe (to a lesser extent) Gross savings 50% of GDP > Households save 25% of income because no pension, no healthcare, for better education, lack of consumer credit But capital inflow does not result in stronger Yuan > $853bn foreign exchange reserves > +2% appreciation against US$ since July > Just increased interest rates to cool down lending

10 China - Problems Banking system is inefficient because savings and foreign money inflow is wastefully invested in supporting SOE and in new capacity/infrastructure Growth is driven by exports and investment in new capacity, not by domestic demand > Consumption is rising, but not as fast as incomes. Savings rate is increasing. > Investment driven partly by the pressure to recycle these savings Banks are technically insolvent - non-performing loans >45% of loan book (US$900 billion is PWC estimate) Reform financial sector will be expensive Paper and board industry also over-invested

11 37.2% of statistics are made up on the spot especially in China

12 Official statistics Growth Newsprint 1,850 2,070 3,000 1,150 Printings Coated 1,800 2,400 3,000 1,200 Uncoated 9,200 9,600 10,200 1,000 Tissue 3,100 3,470 3, Packaging 4,000 4,800 4, Cartonboard 4,600 5,500 6,700 2,100 Liner 6,000 6,800 8,300 2,300 Medium 6,000 6,700 8,100 2,100 Specialities 1,250 1,660 1, Total 37,800 43,000 49,500 11,700 Plus 5 million tonnes imports gives 54 million apparent demand

13 Paper Industry structure Hawkins Wright The New China industry > Capacity >50,000 t/y using imported fibre (woodpulp & wastepaper) > Some smaller mills producing woodfree papers > Mills built since 1996 The Old China industry > Mills using predominantly non-wood fibres and domestic wastepaper > Mills built before 1996 > We cannot define Old China with any confidence, but it doesn t matter as grades not comparable to international qualities

14 New China apparent consumption, 2005 Production Import Export Apparent consumption Newsprint 1, ,915 Printings 0 Coated 2, ,600 Uncoated 1, ,025 Tissue & Specialities 1, ,290 Cartonboard 3, ,590 Liner 7,000 1, ,690 Other Packaging 1, ,145 Total 20,000 4,815 1,560 23,255 - But up to 50% of printing papers and 65% of Packaging grades could be exported in converted form - Chinese domestic consumption <15 million t

15 Over 80% of New China production in four provinces Heilongjiang Inner Mongolia Jilin Xinjiang Tibet Qinhai Liaoning Beijing Tianjin Hebei Ningxia Shanxi Shandong Gansu Shaanxi Henan Jiangsu Anhui Shanghai Wuhan Sichuan Hubei Zhejiang Jiangxi Hunan Guizhou Fujian Yunnan Guangdong Guangxi Guangzhou Industry is concentrated in the coastal provinces near to the export manufacturing zones

16 Pulp imports, 2005 Total imports 7.2 million tonnes USA 9% Other 13% Canada 28% Brazil 8% Indonesia 19% Chile 11% Russia 12% China accounts for 50% of Russian pulp exports

17 Capacity expansions thousand t/y Confirmed capacity additions Total additions Newsprint (incl. swing PMs) , ,085 Woodfree , ,445 Total Graphic ,170 +1, ,530 Cartonboard +1, ,140 Corrugating +1,710 +1,050 +2,050 +3, ,490 Total Packaging +2,710 +1,800 +2,300 +4, ,630 Total others ,159 TOTAL +3,257 +4,253 +3,969 +5,175 +1, ,319 New China capacity end 2003 estimated 15 million t/y

18 Woodfree capacity investments In million t/y of woodfree capacity > Dagang PM3, Huasheng PMs, UPM-Kymmene PM2, Sun paper > Swing PMs Jiangxi Chenming, Yueyang Woodfree demand in 2004: 3 million t/y Unconfirmed projects of RGM (APRIL), Nine Dragons, APP, Nippon, Oji, Yinhe, Tralin, & Huatai amount to 4 million t/y Other investments in Asia > Hankuk (Korea) +200,000 t/y Q42005 > APRIL (Indonesia) +415,000 t/y Q42006 > Thailand- three machines under study

19 Conclusions Chinese market continues to be oversupplied and Paper prices have fallen back > Mills are flexible and markets less rigid than in the west > Paper stocks high so some downtime Credit squeeze affecting paper mills and their customers and their customers customers > Profitability is the big unknown but corporate ambitions driven more by size than profits Hard for Chinese mills to compete with integrated Thai, Indonesian & European mills in export markets > Pulp market remains volatile, Renminbi adjustment? > Sino-foreign JVs (IP & Sun, AWA & Chenming, Sappi & Moorim & Chenming, Stora & Huatai, Marubeni & Yinge Jituan) and marketing alliances China will continue to be a big market for fibre for the foreseeable future but a price sensitive one

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