How To Know If Natural Gas Prices Affect The Paper And Pulp Industry

Transcription

1 Impact of Volatility in Natural Gas Prices on Pulp and Paper Producers March 13, 2014 BETTER INTELLIGENCE. BETTER DECISIONS.

2 Recent News Headlines Call Attention to Natural Gas Price Impact on Pulp and Paper Industry Verso Paper to Idle Bucksport Mill for Two Weeks 1/11/2014 (USA) Verso Paper Corp. will idle its Bucksport mill for about two weeks to control inventory amid a flood of paper supply on the market and a spike in natural gas prices. The mill will shut down by January 17. The companys biomass boiler will remain in operation and produce electricity during the shutdown. Gorham Paper and Tissue to Lay off 20 to 50 Employees 1/6/2014 (USA) Gorham Paper and Tissue will lay off between 20 and 50 employees, and run only one or two of the companys four paper machines. The company attributed the announcement to the recent surge in natural gas prices. The company CEO Mike Cummings announced what he termed a temporary restructuring in an sent to employees on January 3. Cummings said it was unclear how many employees may opt to retire, and the exact number of layoffs wont be known for a couple of weeks. Natural Gas Price Spike due to Extreme Cold Causes Three-Day Shutdown at Gorham Paper Mill 12/23/2013 (USA) Gorham Paper and Tissue shut down production for three days (Dec 14 through 16) due to hike in natural gas prices caused by extreme winter cold. About 100 employees were temporarily laid off Saturday, Sunday, and Monday as production and shipping operations were shut down. Some Maine Paper Mills Forced to Idle Lines as Price of Power Soars 12/20/2013 (USA) Some Maine paper companies such as UPM Madison and Huhtamaki molded fiber mill curtailed production or shut down parts of their operations last weekend after extreme cold led to a spike in wholesale prices for natural gas and electricity. Source: FisherSolve MarketIntel News 2

3 Overview US Natural gas prices are expected to rise in the mid term but there is great uncertainty about the magnitude If unexpected changes in natural gas prices can cause a mill to shutdown, a number of questions are raised Are certain segments of the pulp and paper industry more sensitive to natural gas volatility? Which companies have the greatest financial risk associated with longer term natural gas price increases? Which sites are subject to business-threatening effects of sudden and significant spikes in natural gas prices? All of the analysis shown in the presentation was done using FisherSolve 3

4 Are certain segments of the pulp and paper industry more sensitive to natural gas volatility?

5 North American Tissue and Towel Producers Use Considerably More Natural Gas in Their Process This greater dependency is driven by low levels of integration and the use of gas-intensive drying technology 5

6 Only 13% of Energy at Tissue and Towel Sites Comes From Low Cost Pulping Liquor Most Tissue and Towel sites are non-integrated 6

7 Which companies have the greatest financial risk associated with longer term natural gas price increases?

8 Among Tissue & Towel Producers, P&G Uses Significantly More Gas Per Ton Than Major Rivals P&G has no integrated mills and uses more gas-intensive, through air dryer (TAD) technology For P&G, natural gas contributes more than three times as much per ton to total cost than for G-P 8

9 Natural Gas Prices are Expected to Rise, But There is Great Uncertainty About Just How Much U.S. Energy Information Administration 9

10 What-If Analysis Shows P&G s Cost per Ton Is Much More Sensitive to Gas Price Volatility $52 $80 $30 If market prices rose to offset the cost increase incurred by P&G, G-P and KC become more profitable. If prices rise to offset G-P s cost increase, P&G and KC suffer 10

11 What-If Analysis Shows P&G s Cost per Ton Is Much More Sensitive to Gas Price Volatility Natural gas price volatility is not an existential threat to any of these companies. P&G spends about $80 $100 million per year on gas, but $52 their net income is more than $2 billion per year. Understanding how each company s cost would be impacted is important, but it is $30 also important to view these costs in a broader context If market prices rose to offset the cost increase incurred by P&G, G-P and KC become more profitable. If prices rise to offset G-P s cost increase, P&G and KC suffer 11

12 Let s examine the risk in other segments

13 Within the Packaging Segment, Recycled Board Producers Have Much More Exposure Bubble size represents total annual spend on natural gas 13

14 Most Recycled Board Producers Are Tightly Grouped, but Sonoco is Less Dependent Company TPY Sites # of Sites using Gas RockTenn 985, Graphic Pkg 964, Sonoco 941, Caraustar 581, Bubble size represents total annual spend on natural gas The per ton figures apply to those sites burning gas, the size of the bubble shows the company s total spending on gas 14

15 The Major Containerboard Producers Are Tightly Grouped, but PCA Has Very Little Exposure Bubble size represents total annual spend on natural gas Company TPY # of Sites Sites using Gas IP 12,888, RockTenn 7,326, G-P 4,102, PCA 2,525,

16 In Kraft Board, MWV Uses Almost One-Half as Much Gas per Ton as IP Company TPY # of Sites Sites using Gas MeadWestvaco 2,510, IP 1,685, Graphic Pkg 1,303, G-P 846,

17 PCA Spends More Than Twice as Much per Ton on Gas as Domtar to Produce Uncoated Freesheet Bubble size represents total annual spend on natural gas PCA Company TPY # of Sites Sites using Gas Domtar 3,189, IP 1,906, PCA 984, G-P 936, Gorham Paper curtailed operations due to a spike in natural gas prices 17

18 Catalyst Is Clearly Separated From Its Peers, Using Very Little Gas to Make Uncoated Groundwood Bubble size represents total annual spend on natural gas Company TPY # of Sites Sites using Gas Resolute 1,576, Catalyst 817, J.D. Irving 458, Pacific West 440, UPM temporarily shutdown its Madison mill due to a spike in natural gas prices 18

19 All of NewPage s Coated Freesheet Sites Use Natural Gas, Sappi Has Very Little Exposure Bubble size represents total annual spend on natural gas Company TPY # of Sites Sites using Gas NewPage 1,972, Sappi 1,188, Verso 581, Arjowiggins 309,

20 Among Coated Groundwood Producers, Verso Clearly Has More Exposure to Natural Gas Bubble size represents total annual spend on natural gas Company TPY # of Sites Sites using Gas NewPage 1,195, Verso 745, Resolute 445, UPM 326,

21 Summary of Gas Use Across Segments and Companies North American Tissue and Towel producers have significantly more exposure to risk from natural gas price volatility on a cost-per-ton basis than producers of other grades P&G is particularly sensitive to changes in natural gas prices because of its lack of pulping facilities and use of gas intensive drying technology Risk from natural gas volatility can be managed through hedging vehicles, but that insurance comes at a cost We have focused on rising prices in this analysis, but falling prices present a profit opportunity for some 21

22 What about short term shocks from sudden and severe natural gas volatility?

23 Excerpt from the U.S. Energy Information Administration Natural Gas Weekly Update (Jan. 8, 2014) Natural gas spot prices increased at most locations during the report week in response to extremely high weather-driven demand. The Henry Hub spot price posted a slight overall increase from $4.33/million British thermal unit (mmbtu) to $4.35/mmBtu yesterday Regional price variations were much more pronounced, with some Northeast prices rising to greater than $70/mmBtu in trading Monday. 23

24 Overview Verso recently closed its Bucksport mill for two weeks due, in part, to a sudden increase in the price of natural gas Gorham Paper and Tissue, UPM-Madison, and Huhtamaki each announced curtailments or shutdowns attributable to a spike in natural gas prices in the Northeast USA Can spikes in natural gas prices really have this kind of business-threatening impact to a specific site? The Bucksport example provides the answer 24

25 Printing and Writing Sites in the Northeast US Have the Greatest Sensitivity to Changes in Gas Prices Bubble size represents total annual spend on natural gas Northeast mills use more natural gas per ton and pay more for it than any other region 25

26 Among US Coated Groundwood Producers, Bucksport Has High Usage and Likely Pays a High Price for Natural Gas Bubble size represents total annual spend on natural gas Because of their heavy use of gas, a sudden and significant price increase would be very harmful 26

27 Cost, USD per FST Under Normal Circumstances, There Is a Sizeable Gap Between Bucksport and the Low Cost Producer $140 per ton gap Mfg. Cash Cost and Cumulative Production Bucksport, Verso US - Midwest US - Northeast US - Southeast ,000 1,500 2,000 2,500 3,000 Cumulative Production, FST per Year (x1,000) The cost curve is generic for all CGW products. Bucksport s cost for their specific peer product group may be different 27

28 Cost, USD per FST But When Gas Prices Spike, the Gap Becomes Unmanageable 1, $430 per ton gap Mfg. Cash Cost and Cumulative Production Bucksport, Verso US - Midwest US - Northeast US - Southeast ,000 1,500 2,000 2,500 3,000 Cumulative Production, FST per Year (x1,000) Cost curve shows changes in position when natural gas price in the Northeast US spikes to $60/mmBtu 28

29 Conclusions Sudden and extreme spikes in the price of natural gas can have a business-threatening impact on an individual site Current conditions make sites in the Northeast US more likely to experience harm from price volatility The problem is one of pipeline capacity to delivery gas as opposed to a shortage of gas in the ground Any site with heavy dependence on natural gas as fuel source is subject to potentially market-tilting impact Understanding and managing the risk is key to insulation from damage 29

30 Thank you for your time. Tedd Powers Senior Consultant Fisher International, Inc. +1 (573) NORTH AMERICA LATIN AMERICA EUROPE BETTER INTELLIGENCE. BETTER DECISIONS. NORDIC ASIA PACIFIC HQ 50 Water Street So. Norwalk, CT USA