Estimating & Projecting Woodchip Exports – A First?

There are several ways to establish likely near term future trade activity in any commodity. Wood chips are no different.

IndustryEdge has just published, in the subscriber-only Wood Market Edge*, what we think may be the first estimate and projection for wood chip exports based on tracking of shipping movements. Both are based on less than one year’s prior data and are focussed on aggregate exports of wood chips from Australia.

The estimate is for the month of April 2014. The formal trade data for that month will only be available on 7th June. Even allowing for delays as we checked the analysis, our estimate of 430.0 kt is available two weeks prior to the formal data.

The projection is for the month of May 2014 and implies that in total, some 455.0 kt of wood chips will be exported from Australia over the course of May.

Currently, we calculate the margin for error on the estimates could be as high as 12%. However, when we back cast the methodology onto prior data, in 50% of cases, the margin for error was a more acceptable +/-3%. We expect accuracy will improve over time.

Like all methods, this approach has its advantages and disadvantages. One advantage is that it does not rely on accessing data from very busy people undertaking the exports. It is accordingly, less laborious and prone to human error. On the flip-side, one disadvantage is that gross ship weights are different to the quantity of wood chips loaded to each ship and the historical ratio of one to the other moves around more than is desirable.

While there are some methodological issues to solve, the data is also less reliable now than it will be in the future, because the number of observations is limited, although growing continuously.

Next month we will publish the accuracy of the estimate for April 2014 and a new estimate for May 2014.

In the meantime, if this analysis is of interest, please contact us.

* Subscribers to IndustryEdge wood market trade data services receive Wood Market Edge on a complimentary basis. Individual subscriptions are AUD1,000 (plus GST in Australia) per annum. Wood Market Edge is published 11 times per year because we take January off.

 

info@industryedge.com.au

+61 3 5229 2470

www.industryedge.com.au

ABC Tissue Announces Manufacturing Expansion – EXCLUSIVE

Melbourne, 16th October 2015: Published today in the subscriber only Pulp & Paper Edge, from Australia’s only dedicated paper, products and fibre supplies market analysis and intelligence service, IndustryEdge.

ABC Tissue, the manufacturer of Australia’s market-leading Quilton toilet paper brand has announced it will expand, renovate and further integrate its manufacturing base in Australia. Once completed, its development program will make it the largest tissue manufacturer in the region.

Based on the information supplied by the company, IndustryEdge’s estimate is that by the end of 2017, ABC Tissue’s manufacturing capacity will almost triple and will be close to 140,000 tonnes per annum, equivalent to approximately 50% of Australia’s demand and 40% of combined demand for Australia and New Zealand.

In a lengthy and exclusive phone conversation on Wednesday 14th October, ABC Tissue’s Marketing Director & General Manager, Sunny Ngai advised that the company’s expansion plans had changed, accelerated and were more ambitious than had previously been advised.

Mr Ngai commenced the conversation by stating ABC Tissue was announcing it will build a second new tissue machine, at an as yet undisclosed location, to commence operations in 2017. In addition, Mr Ngai advised the company will invest in a rebuild of its oldest tissue machine (Brisbane PM1). This will increase its capacity from <5,000 tonnes per annum to approximately 25,000 tonnes per annum, to come on line in late 2016.

By 2017, the company’s manufacturing profile will include five tissue machines, in at least two and potentially three locations in Australia:

  • Sydney PM1 – 30,000 tonnes per annum (currently in operation)
  • Sydney PM2 – 35,000 tonnes per annum (2016)
  • Brisbane PM1 – 25,000 tonnes per annum (2016)
  • Brisbane PM2 – 25,000 tonnes per annum (currently in operation)
  • Undisclosed PM1 – 25,000 tonnes per annum (2017)

ABC Tissue already has one tissue machine (Sydney PM2) under construction at its Sydney headquarters. That 30,000 tonne per annum tissue machine will commence operation in 2016. Mr Ngai stated that the company had decided to integrate the new Sydney PM2 with its existing converting operations, to ensure it retained its advantage as the manufacturer with the lowest operating costs in the region. This decision has increased the size of the company’s investment and introduces a short delay to the commencement of operations of the new machine.

Beyond maintaining their domestic competitive advantage, Mr Ngai provided a compelling reason for focusing on keeping production costs low. ABC Tissue sees its main competition in the future as importers of tissue stock and of converted tissue products. Being a lower cost producer is critical to that objective, but it is all the more important if the company intends to export beyond Australasia.

IndustryEdge put this to Mr Ngai who commented that export opportunities are extensive for high quality product. He stated that unlike many companies, ABC Tissue considered that manufacturing in Australia was an advantage that was too often ignored.

Strategic analysis of ABC Tissue’s plans

Despite having little more than a day to consider this major development, IndustryEdge has prepared a brief analysis of what is the most significant news in the Australasian industry in a long time.

At a macro level, ABC Tissue is set to become the market leader, not just by category (it holds the largest market share in the major toilet paper category), but of the entire sector. It has long eschewed participation in most industry forums. Its approach to these activities in coming years will be important for them and for the sector, as a whole.

It is hard to disagree with Mr Ngai’s statement that the company’s major competitors may soon be importers. In the meantime, every other manufacturer will be focused on ABC Tissue. So will the importers.

When it expands from its current approximately 20% of Australasian tissue making capacity, ABC Tissue will become a large tissue manufacturer. However, it is important to note that the company’s footprint is already larger than its approximately 55,000 tonnes per annum of tissue manufacturing. IndustryEdge estimates ABC Tissue converts something close to double that volume each year.

Scale is extremely important in manufacturing, but size also comes with its challenges. Maintaining its capacity utilization will be key for ABC Tissue, which is why it must focus on retaining and extending its status as the lowest cost producer. Its integration investment in Sydney is telling in that respect.

Large though it will be, ABC Tissue will still be dwarfed by giants like Asia Pulp & Paper whose local presence is through Solaris Paper (Australia) and Cottonsoft (New Zealand).

The company’s pulp import approach is well established, but will be all the more critical in future because it will be less able to ‘switch off’ its tissue machines and import tissue stock for domestic conversion. The investment in this rank of paper machines must be fed with pulp, so that it can return its owners the funds they have invested into it. This may reduce the flexibility from which ABC Tissue has flourished.

Certainly, the company will need to ensure it retains existing sales and markets and must, relatively quickly, expand its market opportunities.

How it does that will be critical to its success and to future market dynamics. By the end of 2017, ABC Tissue will need to place what we estimate is an additional 25,000 tonnes of tissue products per annum, or around 8% of the estimated Australasian market in that year. That seems feasible.

A lower Australian Dollar is already holding back imports. Expectations of further depreciation may improve the position for domestic manufacturers compared with importers, but pulp is the major input cost and it is purchased primarily in US Dollars.

In that context, one matter that was not discussed in our conversation with Mr Ngai was whether ABC Tissue would diversify its product range or its supply strategy. One option may be to expand its relatively minor Away From Home (AFH) market.

New machines bought at right time and price

It has been rumoured for some months that when it purchased Sydney PM2 (the machine currently being installed), ABC Tissue had purchased not one, but two tissue machines. Early in 2015, IndustryEdge was advised by a supplier to ABC Tissue that the price of the two machines was ‘very cheap’. The purchase was reportedly transacted at a time when the supplier was very keen to book future work.

Mr Ngai confirmed the dual purchase, but would not specify the actual purchase price. He did state that the total price the company paid for the two tissue machines was below market rates and was much lower than the estimated AUD30M the company paid for Sydney PM1 in 2007. (The total cost of that project was estimated at the time to be AUD65M).

Is Melbourne calling?

The privately owned company is headquartered in Sydney, has a second manufacturing base in Brisbane and conversion capacity in Perth.

Mr Ngai would not be drawn on speculation that the additional tissue machine would be installed into a new facility in Melbourne. He did state that the company has land and real estate interests in Melbourne and provided a reminder that its footprint already included three states (New South Wales, Queensland and Western Australia).

There is no certainty about the future, but IndustryEdge can now reveal it was recently made aware that the owners of ABC Tissue have been actively seeking industrial real estate in Melbourne.

Big changes for the Australasian industry

The significance of the ABC Tissue development program for the Australasian market cannot be under-estimated.

IndustryEdge’s assessment of the combined Australian and New Zealand market was just 334,000 tonnes in 2014-15, plus imports of pre-converted tissue products. Moreover, on a trend basis, tissue demand is very stable in developed economies like Australia and New Zealand, growing more or less in line with population growth. Latest forecasts, contained in the 2015 edition of the Pulp & Paper Strategic Review that will be released in early November, suggest the combined Australasian tissue market will amount to 346,000 tonnes per annum by the end of 2017.

After its developments are fully implemented, ABC Tissue’s capacity of 140,000 tonnes per annum will amount to 41% of regional demand and 39% of regional capacity.

The capacity of other manufacturers to withstand these additional pressures is not immediately clear. Those with higher costs are obviously most under pressure.

If Mr Ngai is right that ABC Tissue will be the lowest cost manufacturer in total and that all of its tissue machines will operate at lower cost than any other tissue machine in the region, capacity reductions from other manufacturers are likely and perhaps inevitable.

As IndustryEdge has regularly reported, prices of toilet paper sold in Australia’s supermarkets have never been lower in real terms, and they continue to fall. In recent months, branded toilet paper has retailed in twenty-four packs for as low as AUD9.00 or AUD0.375 per roll. Few of the manufacturers can sustain those prices. If ABC Tissue’s entire operations operate at lower cost than all other operations in the region, their competitive advantage is almost assured.

Pressure on importers

Being the lowest cost domestic manufacturer is one thing, but effectively competing with the growing volume of tissue imports, both of tissue stock and converted tissue products, will always be challenging.

As the chart below shows, imports of tissue stock for conversion in Australia have grown 6.2% per annum over the last decade.

Australian Imports of Tissue Stock by Country of Origin: 2005 – 2015 (ktpa)

Source: ABS & IndustryEdge estimates

Tissue stock imports will fall as a result of ABC Tissue’s plans. The company has long been one of the major importers of tissue stock into Australia. Its operational strategy has been to optimize its manufacturing, importing tissue stock and converting it when pulp was more expensive. The company would shut its tissue machine as and when required, as outlined above.

Just as important, the value of imports of converted tissue products have been growing at 8.8% per annum over the last decade, as the chart below shows.

Australian Imports of Converted Tissue Products by Grade: 2005 – 2015 (AUDM)

Source: ABS & IndustryEdge estimates

It is important to note that most converted tissue products are measured only by their value. However measured, import growth presents an opportunity for import replacement. That at least is how Mr Ngai describes it.

In the wrap up

Manufacturing in Australia is often described as a difficult gig. The last decades have seen significant declines in Australia’s manufacturing base, including in the paper products sector.

Where demand has increased, as it has done for tissue and tissue products, it has largely resulted in increased imports. These imports are now a mainstay and have a strong place, competing as branded products and in the growing private label market.

ABC Tissue is proving that domestic manufacturing is a viable alternative, despite it going against the orthodox view. Their development plans are little short of stunning for the Australian and New Zealand tissue market.

By 2017, ABC Tissue’s 140,000 tonnes per annum of production capacity will eclipse its competitors, altering the market’s structure and continuing the changes impacting the pulp and paper industry’s most dynamic sector.

www.industryedge.com.au

info@industryedge.com.au

Carter Holt Harvey, Oji and the Australasian Fibre Advantage

In this month’s edition of our flagship Pulp & Paper Edge (Edition 122, August 2015), we published an interview with Dr Jon Ryder, the CEO of Carter Holt Harvey Pulp, Paper & Packaging (CHH PPL). Now under the ownership of the Japanese based but global Oji Paper Holdings and its partner INCJ, the reinvigorated CHH PPL seems to be experiencing a renaissance that is worth understanding.

It was an interview, so IndustryEdge will allow Dr Ryder’s comments to speak for themselves.

Here’s part of what one of the Australasian region’s truly significant strategic thinkers and leaders had to say when asked what the differences were, with the business being owned by Oji, instead of by private equity:

There are lots of minor differences; however there is one large and really very significant difference. Under the private equity ownership model, steady cash flow is required to service debt and there is little rationale to invest in projects that have a longer-term payback. Hence, there was limited investment and growth under the old model. The new owners have very long-term strategic plans that include investment and growth for our business. … the focus for the business has definitely taken  a positive step forward.

In the interview, Dr Ryder went on to discuss the region’s Radiata pine resources and their importance to the manufacture of cardboard boxes both in New Zealand and Australia, but especially in Asia. Unusually for an interview, Dr Ryder even handed us a chart that shows the importance of that softwood fibre, which we re-produced in the feature interview.

Because we love to share, if you are interested in the full interview. You can read it by clicking below.

If you want to review other material from Pulp & Paper Edge, click here to register for our ‘Free Stuff’. That will also allow you to check out samples of our other work and download a range of materials that we think you will find useful.

PPE_Edition 122_August 2015_Feature Interview

Mid-Rise Apartments Right for Wood & Timber Building Systems

In a busy week for the IndustryEdge team, we delivered three significant presentations, on completely different topics.

First, on Monday, we delivered some detailed preliminary research findings on polymer-coated fibre packaging. We will have more to say about this in future months.

Second, on Tuesday, we presented material on mid-rise apartment developments and wood and timber building systems at a fantastic symposium organised by the Australian Forest Products Association (AFPA), Forest & Wood Products Australia (FWPA), ForestWorks and the Australia Timber Importer’s Federation (ATIF). We will say a little more about this shortly, as it was the stand out event of a highlight filled week,

Third, on Friday, our ongoing and comprehensive program of market research and analysis in the pulp and paper sector was delivered to DANA’s annual Wood Fibre Outlook Conference. We focussed on why virgin fibre is so sought after in boxes and paperboard delivered to Asia.

The second and third presentations are available from our website.

Returning to the mid-rise apartment issue, as we outlined at the symposium, all the emphasis is on apartments that account for close to 50% of housing approvals over the last year or more. This can be seen in the chart below.

Aug1

However, the assumption that all of these apartments are high rise, is a significant exaggeration.

Over the year to the end of May 2015, apartments of 4+ Storeys accounted for 63.1% of the total of all apartments, with the remainder made up of townhouses and flats up to 3 Storeys. This is depicted in the chart below.

Aug2

As the ‘Mid-rise’ (lets say up to 8 Storeys) apartment boom continues to provide ‘infill’ to increase the density of Australia’s most sprawling urban environments, wood, wood products and timber building systems may be able to play a unique role. There is little doubt that humans benefit from more organic buildings, including those made from natural materials, especially wood.

The Symposium was conducted at the Library at Docklands, a recently constructed four storey timber building, a great example of the opportunities for timber building systems in more than just residential buildings.

With more than 1.1 million new mid-rise apartments expected to be built by 2030, there are plenty of opportunities for wood, especially as part of timber building systems.

For further details on this topic, click here.

China Deal Offers Nothing for Wood Products Sector

The recently signed China Australia Free Trade Agreement (ChAFTA), still to be progressed through the Australian Parliament, offers little for the wood products sector, reducing few of the important tariffs for Australian exports to China.

Imports to Australia, from China, are now tariff free, almost without exception. In exchange for free access to Australia’s market, China has granted Australian firms limited access to its markets, with few products enjoying entry into China on a tariff free basis.

In the case of wood product exports to Australia, there are essentially three groupings of tariff amendments (although the details are more extensive):

  • Zero tariffs remaining in place
  • Existing tariffs reducing to zero
  • Existing tariffs remaining in place

Wood products that already enjoy a zero tariff when exported from Australia to China are raw resources such as woodchips and logs and products that have never been made in Australia (especially made from bamboo, unsurprisingly).

Wood products that will see reducing tariffs are included in the following table.

Products Current tariff Final tariff Number of Years
Charcoal 10.5% 0 5
Hoopwood (split poles, piles, pickets, stakes etc) 8% 0 5
Coniferous plywood veneers 8% 0 5
Coniferous non-plywood veneers 4% 0 1
Meranti & tropical veneer 4% & 10% 0 2 & 5
Other veneer 3% 0 1
Coniferous floorboards and parquetry pieces 7.5% 0 5
Bamboo and broadleaved (hardwood) floorboards and parquetry pieces 4 0 1
Bamboo and tropical plywood 12%, 10%, 8% & 4% 0 5
Wooden packing crates 7.5% 0 5
Casks and barrels (some) 16% 0 5
Builders joinery (eg. Doors and Windows) 4% 0 1

The cynical would suggest that the Chinese are reducing tariffs on products that are not manufactured in Australia or intermediate products (veneers) that would allow Chinese manufacturers to make plywood instead of domestic manufacturers.

However, it is when examining the areas where no tariff change will occur that cynicism may be most appropriate. The table below details these. Australia produces particleboard and MDF (medium density fibreboard), plywood and panels. However, it has largely been frozen out of Asian markets, including those in China, for these elaborately transformed resources.

Products Current tariff
Particleboard, OSB, MDF 4% & 7.5%
Broadleaved (hardwood) plywood 4% & 10%
Broadleaved (hardwood) handles and tools 16%
Broadleaved (hardwood) pallets 7.5%

Imports of plywood to Australia, mainly but not only from China, have long been a source of complaint because of product regularly failing to meet Australian Standards, including those related to consumer and product safety. For further details on this, go to www.ewpaa.asn.au.

In simple summary, when it comes to wood products, Australia’s raw resources are welcome in China, but the country’s most elaborately transformed products are not. The ChAFTA seems to confirm this sentiment.

Further details are available at http://dfat.gov.au/trade/agreements/chafta/Pages/australia-china-fta.aspx.

Contact IndustryEdge for more detailed analysis and advice.

Australian Forest Harvest – 22.9 Million m3 in 2014

Australia’s total harvest was 22.9 Mm3 in 2014, up marginally from the prior year. But as the 2015 edition of the Forest & Wood Strategic Review demonstrates, not all species and sectors are experiencing growth.

As expected, the softwood harvest, dedicated to solid wood production, grew, as did the plantation hardwood harvest, which is focussed on the international pulpwood market.  This can be seen in the following chart from the Strategic Review.

Strength in other elements of the harvest cannot hide the ongoing decline in the native forest harvest. The native forest harvest for saw and veneer logs has declined at an average 7.2% per annum over the last decade. Research for the Strategic Review indicates the saw and veneer log harvest from native forests totalled just 1,724 km3 in fiscal 2014, as the chart below shows.

Although there was a modest recovery in the native forest pulpwood harvest, over the last decade, it has declined by an average 10.9% per annum and is less than one third of its peak.

The bright spot for hardwood is of course, the harvest of plantation resource, the vast majority of which is destined for the global pulp market. For the year to the end of June 2014, the plantation hardwood pulpwood harvest was 5,568 km3, a position from which it has continued to grow. As a result, in calendar 2014, Australia’s hardwood chip exports totalled 4,579.2 km3, driven by furiously increasing demand from China, as the chart below shows.

Starting with a thorough analysis of forestry and plantation resources and ownership, the Review details roundwood removals by state and species. It addresses wood chips and logs, including detailed analysis of exports and global pulp markets.

The 2015 Strategic Review builds on IndustryEdge’s ongoing research, analysis and intelligence services, including the monthly Wood Market Edge and monthly Forest & Wood Market Trade Data. In all the Strategic Review includes more than 200 charts and tables, presented in the highest quality.

Sawnwood, including production in each state, per capita consumption and implied interstate trade are covered extensively, as are wood panels, including plywood, particleboard and MDF. Analysis of the paper and paperboard sector and energy and alternative markets are included. Trade data includes comprehensive import and export tables and charts that accompany detailed tables and charts for Australian production and consumption.

Samples from the 2015 edition of the Forest & Wood Strategic Review are available from www.industryedge.com.au.

Coated sheet imports tumble

Recent months have seen imports of a number of advertising and publishing grades fall for short periods, before recovering soon after. In particular, this has impacted the coated woodfree grades and sheeted products in particular.

While the impact has been significant in the large volume C2S 150 gsm sheeted grade is not subject to restrictions and provides a very useful example. The last twelve month’s imports are displayed in the following chart.

Imports of Coated Woodfree Sheets (C1S) >150 gsm by Country: Mar ’14 – Feb ’15 (ktpm)

CWF

Source: ABS

The import trade for heavier-weight sheeted grade has experienced some turbulence over the last year, however the drop off from October 2014 has been dramatic and sustained. The average import volume over the five month to end February 2015 has been just 287 tpm, down from an average 1,734 tpm for the seven months prior.

It is equally plain to see that the country that has taken virtually all of the pain is Korea. Chinese suppliers have also been hit, but not as dramatically. We anticipate, based on industry advice, that Korean suppliers have also taken large import declines in other sheeted grades, but as described earlier, the confidentiality restrictions make that situation opaque.

Countries providing continuing supply are diverse and delivering almost meaningless volumes, though the continuation of supply from the United Kingdom is the only stability left in the grade, at this time.

The only conclusion that can be drawn is that the major importers – merchants in the main – are running down inventories before new purchases are made. Different financial years may contribute to that approach and no merchant, especially one under financial pressures, will be in a position to hold very much stock.

The depreciation of the Australian Dollar has made supplies from some Asian countries, Korea and China in particular, far less competitive compared to the European supplies. This is because the Euro has also declined. That is also impacting the trade. IndustryEdge is aware that switching has occurred in part or in full, by a number of merchants.

Doubtless the Korean producers and their Chinese counterparts (mainly Asia Pulp and Paper), are continuing to pursue market share in Australia, but thanks to currency, they face difficulties in doing so.

In the next edition of Pulp & Paper Edge [Edition 119], in May, we will provide a three-quarter market review and provide full year forecasts for major printing and communication grades.

Originally published in Pulp & Paper Edge in April 2015. For subscription and service enquiries, contact info@industryedge.com.au.

March Woodchip Exports Expected to be Highest Ever

It now appears certain that when the formal trade data is released in early May, Australia’s woodchip exports for MQ’15 will approximate 1,530 kbdmt, just above the record set in DQ’14.

At an estimated 640.8 kbdmt, March 2015 will see the highest ever level of monthly woodchip exports from Australia. This is just 11 kbdmt less than our early projection for the month, made last month.

Aided by the depreciation of the Australian Dollar, Australia’s exports of woodchips are almost at full speed. Any faster and the risk of delivery failures would be relatively high.

Shipments of woodchips from Australia remain dominated by hardwoods. In March, hardwood supplies accounted for 92.1% of total supply. Doubtless there are some ports that could export more, but in other ports, shipments are almost literally at their limit.

Underscoring this, of the twenty-three vessel departures in March, seven were from Portland and five each left Bell Bay and Bunbury. The major export facilities are, simply put, nearing full capacity. Evidence of this can be seen by avid woodchip ship watchers, who will have noticed several ships sitting out of port waiting for days at a time, for their turn to fill their holds with cheap Australian woodchips.

In March, our estimates suggest exports to Japan will total 290.7 kbdmt, to China, 271.1 kbdmt and to Taiwan, 79.0 kbdmt. Our rough estimate is that softwood exports will account for approximately 10% of the total, all of which will make their way to Japan.

Ultimately, the robust position of the export market can be explained in part by many factors, including low sovereign risk, sound logistics and management and of course, fibre yield and quality of the Eucalyptus chip compared with the Asian competitor, Acacia. However, there is only one real explanation for the strength of the market – the depreciation of the Australian Dollar is fundamental.

Australian hardwood chips in particular are entering the international market at ever-lower prices, while at the same time, hardwood pulp prices are on the rise. At the same time, paper prices are at best stable and in some cases are in decline.

Our colleagues at Hawkins Wright in the United Kingdom report that paper producer margins have collapsed and in some cases are negative. Their capacity, especially in Europe, to pay more for pulp is limited and that will flow through to global pricing.

On face, the pulp producers are making money at both ends of the transaction, both from paying lower woodchip prices and being paid higher prices for their pulp. There are implications for suppliers of pulp wood, especially if the pulp producers seek to maintain their own margins into the future.

Right now, the capacity to supply from Australia, at a price that ensures the competitiveness of the mountain of woodchips leaving the country, is driven by the depreciated Australian Dollar and little else.

First appeared in Wood Market Edge in April 2015. Contact info@industryedge.com.au for subscription and other service enquiries.