london pulp week conference files

1. 5 ways to adapt
to declining/changing
paper markets
November 2009
Stig Andersen Stig Andersen
Nordea CMB
March 30, 2009

2. There is growing evidence of European paper demand being
at a paradigm shift, going from long term growth to decline.
12000 16000
US paper demand development
European paper demand development
(12m rolling)
(12m rolling)
11000
14000
Newsprint
10000
12000
9000
Office paper
10000
8000
8000
Office paper
7000
Newsprint
6000
6000
5000 4000
New sprint SC LWC UWF CWF
4000
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
3000
Please consider the impact on the
environment before printing this e-mail
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2 10/11/2009 - Paper free/less office eventually a reality?
New sprint SC LWC UWF CWF

3. Furthermore, there is growing evidence that Europe will not
be able to keep up its net exports. Thus, shipments from
Europe will likely perform weaker than demand.
Most of the developed world also
experience the same paradigm shift in European LWC development
paper demand
(12m rolling)
10000
Asia used to be a net importer, but is, after
major capacity build-up, becoming a net
exporter of paper
8000
Currency is, of course, a wild card
European paper exports
(12 month rolling)
2500
6000
2000
Growth:
4000 Shipment > demand
Growth:
Shipment < demand
1500
2000
1000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
500
3 10/11/2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
SC LWC UWF CWF
Shipments Demand Exports

4. Assuming this demand (and shipments) paradigm shift as
given, how do you make money/survive in such a (declining)
market? What are your options?
We show 5 different options/solutions:
Option 1: do like NOKIA or Haindl
Option 2: do like Borregaard or SCA
Option 3: do like AbitibiBowater
Option 4: do like ….
Option 5: do like UPM
4 10/11/2009

5. Option 1: Exit/quit
Leave the industry or the segment – rebuild your company – find other
business opportunities
Either through rebuild of existing assets to produce other grades or through
complete industry exit
– This is, however, a costly option today – as assets are hard to sell for a decent
price (current poor second hand market for capacity)
– Thus, leaving the industry as a result of bankruptcy has a higher likelihood
(than being done voluntarily) the next 12-18 months.
Examples:
Haindl Papier
Left the industry, sold at peak Left the rubber business, and instead went into a
completely new business area (mobile phones),
which at that time was small – but with a potential
5 10/11/2009

6. Option 2: Go niche/higher value added
Leave the commodity game, and instead
– go niche - find a niche you have or can develop a competitive edge within,
and/or
– move higher on the value chain (produce value added products, products with
high R&D intensity).
– this is a well known strategy, applied for years, mostly (but not purely) by
smaller producers. Enclosed a few examples..
Specialty paper/packaging From pulp to higher value Further down the value chain,
added bio chemicals closer to end consumer
6 10/11/2009

7. Option 3: Restructure – learn supply control
Stay within commodity, but…
Learn supply control/discipline – learn to adjust capacity (production) to demand –
whatever demand is – and as such keep operating rates high enough to secure
healthy prices.
This has, partly successful, been applied in N. America over the past decade (within
the industry), and in other industries globally
Newsprint N. America Newsprint N. America
800 800 105%
“Successful” 15200 “Successful”
100%
700 13200 700
95%
11200
600 600 90%
9200
85%
500 500
7200 80%
Consumption down 40% Consumption down 40%
Prices up 60% Prices up 60%
400 5200 400 75%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
7 10/11/2009
Price Shipments from NA US consumption Price Oper. rate N.Am 12 m roll Oper. rate N-Am monthly

8. Supply discipline – will it work in Europe?
It will not work without a major consolidation/restructuring
Europe is still too fragmented
Industry concentration - newsprint
Newsprint market share - Europe Newsprint market share - N. America
Mkt. share Europe N . Am
Stora Enso Top 1: 19% 43% AbitibiBowater
Top 3: 49% 72%
UPM White Birch
Top 5: 63% 87%
Norske Skog Kruger
Holmen Catalyst Paper
Kondopoga Norpac
Quite a different picture
Other Other
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50%
8 10/11/2009

9. Supply discipline – will it work in Europe?
You have to restructure enough to:
– Reach a concentration high enough to successfully be able to practice supply
control (need 1-2 players controlling roughly 50% of capacity – and taking a
price leadership)
– Lift entry barriers – avoiding new entrants to free ride. Have to be able to lift entry
barriers substantially. Without lifting these, you just pave the road for new entrants –
benefitting from the restructuring – and consequently ruining the possibility of succeeding
in capacity control – through adding new capacity.
Industry concentration - newsprint
Newsprint market share - Europe Newsprint market share - N. America
Mkt. share Europe N . Am
Stora Enso Top 1: 19% 43% AbitibiBowater
Top 3: 49% 72%
UPM White Birch
Top 5: 63% 87%
Norske Skog Kruger
Holmen Catalyst Paper
Kondopoga Norpac
Quite a different picture
Other Other
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50%
9 10/11/2009

10. How to lift entry barriers sufficiently?
The industry cost curve is today (too) flat
Thus, ordinary focus on efficiency, modern machines and economy of scale is likely
not enough to lift entry barriers sufficiently to prevent new entry. A pure and new
newsprint or SC or CWF mill will likely be able to compete head-on with existing mills - how else
to explain the three most recent new mills / PMs in Europe
Another variable has to be introduced – to substantially move lower on the industry
cost curve (and as such make the lower part of the curve steeper) – to clearly out
compete new entrants
Have then to work on group level – through integrating production (in a large
combine) – making the sum of production lower on the cost curve than a single
product player can manage
And that brings us to Option 4….
10 10/11/2009

11. Option 4: Form BioCombines
BioCombines - Integrated production
of pulp, paper & board, bio energy,
bio chemicals, mechanical wood, etc.
With synergies between the different
parts of the combine that make
competitive advantages vs single
product producers (1+1+1 > 3 on the
income side, and <3 on the cost side)
These are giant (and very expensive)
set-ups, that works best for green
fields
They will be done in partnership with
energy/oil/chemical companies
Thus, this is not a short term solution,
but it is a long term one – and what
we consider the business model of the
future within forest industry
11 10/11/2009

12. Option 5: Form BioCombines (brown field version)
Similar to Option 4…
But where you try to integrate pulp, paper & packaging, bio energy, bio chemical,
mechanical wood, etc. at existing mills – not necessarily situated within the same
industrial compound.
We already today see some examples of this option being rolled out, also within
the Nordic region.
This brown field version can be combined with Option 2 (niche, higher value
added focus), either right away – or longer term, when green fields are entering
the market.
Green fields, however, will be the long term winner within commodities, where you
will have the advantage of maximum integration within the same compound.
These large bio combines will be built where costs are lowest, a similar picture as
we have seen within pulp production the past decade
12 10/11/2009

13. Additional slide – if time permits
Interesting new constellations
BioCOMBINES – the new business model
BioCombines - Integrated production of
BioEnergy Pulp, paper & board
pulp, paper & board, bio energy, bio
chemicals, mechanical wood, etc.
Adding energy/oil companies, we get
the necessary expertise in energy
processing and sales/ distribution (the BioCombine
downstream part of bio energy).
And the energy/oil companies achieve
the necessary/wanted/legislative blend
of renewable based energy in their
portfolio. BioChemicals Mech. Wood
Chemical companies have a pressure to
partly replace petro chemicals with bio
chemicals
…. and that brings us to some
interesting new constellations of
industry structures and products
13 10/11/2009

14. Additional slide – if time permits
New constellations
Energy industry Oil industry
We see in particular four industries that will
Forest industry Petrochemical
Chemical Industry
play a major role related to bio energy / bio industry
combines, and we expect all four to
undergo major paradigm shifts,
seeking new platforms, related to bio
energy
Forest Energy
Based on this we expect to see a industry industry
migration of new constellations of
BioCOMBINES – the new business model
industry structures and products
among these four today fairly
BioEnergy Pulp, paper & board
BioCOMBINE:
separated industries.
P&P production
Thus, we could see the oil/energy/ Mech. wood production
BioCombine
petrochemical industry as new owners Bio Energy (heat and fuel)
in, or JV/cooperation partners with, Bio chemical production
forest industry / bio chemical industry
- as a way of getting access to the BioChemicals Mech. Wood
important infrastructure (wood & Chemical
Petrochemical Oil
biomass sourcing, and logistics) and industry industry
fibre knowledge.
14 10/11/2009

15. Nordea &
Forest Industry
The forest industry and its cluster is a
focus area for Nordea
Over 100 years experience of financing
the industry in the Nordic countries,
with a house bank position for
numerous players
Capitalizing on the Nordic experience,
we have gradually moved from
Nordic to global reach, establishing
new clients and market know-how in
Asia, Latin America, Eastern Europe,
North America and Oceania.
Closing remarks: Nordea is a big lender to this industry – and we thus pay close attention to the industry. Of course, there are challenged ahead
– but there are also opportunities – from the renewal paths we showed earlier. Thank you for your attention.
15 10/11/2009