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Don Roberts, Managing Director 613-564-0827 Don.Roberts_at_cibc.ca Trade and Industry in Transition: A Global Perspective Through 2020 Global Natural Resources Forum – PowerPoint PPT presentation

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Title: Trade and Industry in Transition:


1


Don Roberts, Managing Director 613-564-0827 Don.Ro
berts_at_cibc.ca
Trade and Industry in Transition A Global
Perspective Through 2020
Global Natural Resources Forum U.S. Forest
Service Natural Resources Conservation
Service Oaxaca, Mexico December 2007
2
Outline
  • The recurring theme is globalization, and the
    forces that will shape the forest industry
    between now and 2020
  • Shift In The Global Footprint of Growth
  • Globalization of Capital Markets
  • Globalization of Environmental Standards
  • Globalization of Fiber Markets
  • Globalization of Energy Markets

3
1. Shift in Global Growth
Real 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.

4
1. Shift in Global Growth
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.

5
1. Shift in Global Growth
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.

6
1. Shift in Global Growth
Global Consumption Per Unit Of Real GDP
Source RISI, CIBC World Markets
  • 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.

7
1. Shift in Global Growth
  • 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
1. Shift in Global Growth
Regional Changes in Paper Paperboard Capacity
Source NLK, CIBC World Markets Corp.
  • 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
1. Shift in Global Growth
  • In the solidwood sector, China has also been the
    major source
  • of global growth in both production and
    consumption.
  • For example
  • Plywood
  • Roughly 10x increase in Chinese capacity since
    mid-1990s.
  • Now the worlds 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 worlds largest producer.
  • Significant indirect exporter, mostly in the form
    of furniture.

10
1. Shift in Global Growth
  • 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
1. Shift in Global Growth
  • 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 worlds top 50 ports
  • Will invest 50 billion in additional port
    infrastructure over the next 5 years (includes 22
    new inter-modal terminals)

12
1. Shift in Global Growth
  • Indias 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
1. Shift in Global Growth
  • 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
1. Shift in Global Growth
  • 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
2. Globalization of Capital Markets
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.

16
2. Globalization of Capital Markets
Exchange Rates To The U.S. Dollar
Source Bloomberg, CIBC World Markets.
Monthly averages, as of 11/29/2007
  • Due to its twin current account and budgetary
    deficits, the US is expected to depreciate over
    time. This will help the U.S. industrys
    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.

17
2. Globalization of Capital Markets
Index of NBSK Pulp Prices When Denominated in
Different Currencies
  • 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 Markets
Global Softwood Kraft Market Pulp, Delivered Cash
Cost To Rotterdam (Assuming C/US 0.77 vs
1.00)
1 CAD 1 USD
1 CAD 0.77 USD
  • Canada is the largest producer of softwood kraft
    pulp in the world.
  • Based on a C/US0.74 (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/US1.00, only 1 Canadian
    mill is in the lowest cost quartile and 10 are in
    the highest cost.

19
2. Globalization of Capital Markets
Percent Change From The Current To The PPP
Implied Exchange Rate (2007)
Source International Monetary Fund, CIBC World
Markets
  • 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.

20
2. Globalization of Capital Markets
  • 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
3. Globalization of Environmental Standards
  • 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
3. Globalization of Environmental Standards
  • Environmental regulations in one jurisdiction can
    have meaningful impacts in other jurisdictions.
  • EUs 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
3. Globalization of Environmental Standards
  • 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 Markets
Location of Global Hardwood Fiber
  • In general, the wood fiber is not where the
    economic growth and demand is located.

Source JP Management Consulting, CIBC World
Markets.
25
4. Globalization of Fiber Markets
Location of Global Softwood Fiber
Baltic States
Scandinavia
Alaska
Russian Federation
UK
Eastern Canada
Eastern Europe
Western Canada
Western Europe
United States of America
Iberia
China
India
Mexico
S.E. Asia
Australia
Chile
South Africa
Uruguay
Argentina
New Zealand
Source JP Management Consulting, CIBC World
Markets.
  • 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
4. Globalization of Fiber Markets
Paper and Paperboard Furnish by Region
Source JP Management Consulting
  • Wood fiber isnt 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.

27
4. Globalization of Fiber Markets
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. Chinas dependence on imported wood pulp
    will continue to rise through 2020.
  • By 2020, we expect Russias consumption of
    pulpwood will rise significantly.

28
4. Globalization of Fiber Markets
Average Delivered Conifer Pulpwood Prices for
Q3/07 (US/ODMT)
Average Delivered Non-Conifer Pulpwood Prices for
Q3/07 (US/ODMT)
Source Wood Resources International, CIBC World
Markets.
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.

29
4. Globalization of Fiber Markets
Global Average Prices For Non-Conifer Pulpwood
Source Wood Resources, CIBC World Markets.
  • 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.

30
4. Globalization of Fiber Markets
  • We are likely at an inflection point regarding
    the perception
  • of scarcity.
  • The combination of 5 shocks will likely shift the
    perception at
  • the global level from relative abundance to
    relative
  • scarcity of wood fiber
  • Continuing Growth in Asias Wood Deficit
  • Increase in Russian Log Export Tax
  • Reduction in Supply of Illegal Logs
  • Insect Infestation in Western Canada
  • Growth of the Bio-energy Sector

31
4. Globalization of Fiber Markets
  • Almost impossible to exaggerate Chinas
    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 worlds largest importer of
    logs, wood pulp and recovered paper.

32
4. Globalization of Fiber Markets
  • From 1995 to 2006, Chinas
  • 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
4. Globalization of Fiber Markets
  • Since 1995, Chinas 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
4. Globalization of Fiber Markets
  • Chinas 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
4. Globalization of Fiber Markets
  • 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
4. Globalization of Fiber Markets
  • Russias 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
4. Globalization of Fiber Markets
  • What are the empirical facts?
  • Russia contains over 20 of the worlds 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.
  • Worlds 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
4. Globalization of Fiber Markets
Disproportion of harvesting volumes and timber
processing capacities.
Source Federal Russian Forestry Agency.
39
4. Globalization of Fiber Markets
  • 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
4. Globalization of Fiber Markets
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.
  • Russias higher export tax and policies to
    encourage consolidation expected to decrease
    illegal harvesting.

41
4. Globalization of Fiber Markets
  • 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 regions 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
Source Government of B.C.
42
4. Globalization of Fiber Markets
  • 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
4. Globalization of Fiber Markets
  • 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
4. Globalization of Fiber Markets
  • 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
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
  • Convergence of the fuel, food and fiber markets
    is expected to occur over time.
  • The underlying forces driving this convergence
    are related to
  • Environmental Security (i.e., climate change)
  • Economic Security (i.e., rising price of oil)
  • National Security (i.e, dependence on Middle East
    and Russia for fossil fuels)
  • 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
5. Globalization of Energy Markets
Food, Fuel and Fibre Prices (Q1/00 to Q3/07)
Source Bloomberg, Wood Resources, CIBC World
Markets
  • 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?

49
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
Global Biofuels Financings Q1/05-Q1/07
Source New Energy Finance
  • Totaled US2.5 billion in 2005 and US4.7
    billion in 2006.
  • At US2.44 billion in Q1/07, at an annual run
    rate of almost US10 billion in 2007.
  • But overall financings have fallen in H2/07.

51
5. Globalization of Energy Markets
Fuel Ethanol Production in the U.S.
Source U.S. Energy Information
Administration/Renewable Fuels Association
  • 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
    blenders credit, and equivalent tariff on
    imports (Cellulosic ethanol also gets an extra
    0.50/gal)

52
5. Globalization of Energy Markets
  • 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 USDAs 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
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
  • 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 govt. 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
5. Globalization of Energy Markets
  • Economics Of Biofuels
  • Four key variables
  • The price of oil (the main substitute)
  • The cost of the feedstock (50-80 of AVC)
  • The conversion technology and,
  • Regulations, which stimulate demand.
  • Currently, all four of these variables are in a
    state of flux.

56
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
Estimated Scale Economies For Hardwood-based
Cellulosic Ethanol
Source SunOpta Bio Process Inc.
  • 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

58
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
  • 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
5. Globalization of Energy Markets
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
5. Globalization of Energy Markets
Source Wood Pellet Association of Canada.
  • 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.

64
5. Globalization of Energy Markets
Source Wood Pellet Association of Canada.
  • 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.

65
5. Globalization of Energy Markets
  • 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
    lt20,000 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
5. Globalization of Energy Markets
  • 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/ton8.78/GJ, and most
    consumers pay 11-14/GJ for natural gas.

67
Energy Conclusions
  • We think that land will only continue to be under
    forest cover for the following reasons
  • The owners want to maintain forest cover for
    environmental goods and services (which are
    almost always outside the market).
  • From a financial perspective, the land cant 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.

68
Energy Conclusions
  • 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).

69
Energy Conclusions
  • 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).

70
Energy Conclusions
  • Losers from bio-energy
  • Existing users of wood fiber (e.g., producers of
    pulp/paper/non-structural panels)
  • Govts 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?

71
General Conclusion
  • 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.

72
General Conclusion
  • 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.

73
General Conclusions
  • 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.

74
Appendix Bio of Don Roberts
  • 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 CIBCs 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 Bachelors degree in
    Agricultural Economics from the University of
    British Columbia, a Masters 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.
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