Moving the Sector Towards Higher Value and Profitability Institute of Chartered Foresters. 27-28 April 2016. Newcastle, UK Robert Wilson. Wilson Walklate and Associates Ltd

Director Consulting Europe, Forest Industry, Renewables and Bioprocess, Amec Foster Wheeler Plc. Senior Director, Capitalmind (M&A Advisory) Project Board and Owners Advisor. Wren Renewables.

…Other (non-renewable) industries have peaks, we have choices.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

‘000 m3ob standing UK Grown Softwood

Forecast supply

Long term forecast supply

Actual

Agenda 1.Wall of wood 2.Base Camp or Next Summit. Peak Wood.

Moving the Sector Towards Higher Value and Profitability

(1)

(2)

Source: Forestry Commission Statistics

1.

GFC

GFC. Global Financial Crisis

*Market Attractiveness. Based on import replacement (local market) and European growth (export potential) **Competitiveness. Based on profitability potential – new mill – primary production only. Fibre and wood quality Direction of value added opportunity

The matrix mapped market attractiveness & competitiveness for opportunities in UK – the position is a reflection of the specific opportunity relative to its business sector - not relative to each other.

Wall of Wood – Mapping Value and Profitability in 1990s to Early 2000s

2.

Competitiveness**

Market Pulp

Bioenergy (integrated, ROCs)

Particleboard

OSB MDF

Wood cost is 40-70% of cost of manufacture

Market Attractiveness*

Cartonboard (CTMP)

LWC/SC (Magazine)

White Kraft packaging

Sawmilling EWP

EWP were defined as: Structural Composite Lumber: Laminated Veneer Lumber (LVL) Parallel Strand Lumber (PSL). Oriented Strand lumber (OSL)

Lumber Based Products Glulam Combination Products I-Joists and Beams

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

‘000 m3ob standing UK Grown Softwood

Forecast supply

Long term forecast supply

Actual

sawmills

pulpmills panels fencing woodfuel other exports

3.

Bioenergy. Integrated

(Companies invested and pulled themselves towards top-right of the matrix)

Wall of Wood – Mapping Value and Profitability in 1990s to Early 2000s - Outcome

“Forestry sector £4.1 billion GDP, 40,000 people are employed in the forestry and primary wood processing, 55% of Britain's woods are properly managed, 2/3 of timber is imported, 2-3 biggest forest products market in Europe” (Grown in Britain)

Viewed as a total sector (home-grown, primary and secondary*) • GDP >£15 billion (~55% is secondary, ~25% is primary (~home-grown), ~20%

distribution and recycling) • Turnover of ~£50-60 Bn p.a. • >450000 FTE, >50000 businesses.

*Primary wood: for example – sawmills, wood panels, fencing materials. Primary paper: pulp and paper, merchants

*Secondary wood: for example – EWP, furniture, kitchens, cabinets, windows, joinery, pallets, decking, garden

furniture, roofing, timber-frame, shopfitting, crafts. Secondary paper: converting, corrugating, distribution. 4.

This makes the UK sector comparable in total turnover and scale to: • Forest sectors: Finland, Sweden or Germany. • Total Forest Sector comparison to UK Industries: < Electrical; < Construction; ~

British Automobile; >British Aerospace; >Chemicals/Pharma; > Textiles; >>>Steel.

Imports. Love them or leave them. Both – every new home-grown product directs revenue and benefits back to UK forests and forest owners... but also Imports underpin and open up the huge UK market for forest products and secondary markets*.

Wall of Wood – Mapping Value and Profitability in 1990s to Early 2000s

Base Camp or Next Summit – Value and Profitability into the 2020-60s

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

‘000 m3ob standing UK Grown Softwood

Actual

(1)

(2)

GFC

‘Decline’, cyclical

‘Expansion’ Targets ? - UK population, contribution, northern renewal,

‘Level’ forest estate, smoothed

Illustrative ‘scenarios’

45 years

5.

Hardwood Potential Supply

Forecast supply

‘Decline’. Worst case •Mill shuts, job loses •Other benefits loss •Increasing imports •Replanting ?

‘Decline’. Portfolio Rationalisation •Industry growth and investment – elsewhere (off-shore, secondary) •Disconnect and marginalisation of value flow back to the UK resource

‘Level, smoothed’. •Is level = (relative) decline ? Presence, relevance, matured •Do better with what we have. Value add, but R&D spend ? •Replanting, restocking ? •Investment – maintain, consolidation

Illustrative ‘scenarios’

‘Expansion’. •Full potential. Underharvesting, (re-,new)Planting, hardwood, short rotation, genomics…Maximisation •Multipliers – wood, non-wood. Investment •Stronger value flow back to UK resource.

6.

Base Camp or Next Summit – Value and Profitability into the 2020-60s

Programme/Task force for full potential. • Forest funds. Less suited – UK/Europe. • Nordic owner structures – best returns • Farmer programmes. European successes • Industry – Step up in resource stimulation • Government/FC/Private. Stronger targets

About 40% of home-grown would be highly exposed should home-grown supply decline

There is a cost to doing nothing

The New Competitiveness – Value and Profitability into the 2020-60s

7.

Wood Cost. Will still be 40-70% of cost of manufacture. UK is 3rd quartile cost, and aligned with major supply countries Sweden and Finland. Improvement since ‘wall of wood’ (snapshot) – harvesting & transport decreased 15%, and re-allocated to stumpage.

Energy Cost. Stays volatile and uncertain. Security drives investment.

Bio-business. Volatile and uncertain. On 40 year development path so far. Drive to renewables remains heavily influenced by Government decisions and fossil fuel prices. Molecular focus.

Profitability. Strong performance since the ‘wall of wood’. Well established platform.

5% 10%

Sales Growth p.a

0%

5%

10%

15%

Profit (EBIT) Growth p.a

Nordic Sawmilling

UK Sawmilling

2005-14/15

Other Leading

New Competitors to Biomass. Oil, coal…. Bacteria, yeast, algae, agriculture (sugar, corn), waste (bagasse, husks, stover), MSW. Select products where biomass is best fit.

Biomass Advantage. Huge availability, plantation technology, complementary to food, higher density, C5/C6 (pentoses and celluloses)….. recalcitrant feedstock (lignin).

Base Camp or Next Summit – Value and Profitability into the 2020-60s

‘3 scenarios’ and new mapping to include growth into Secondary and also Bio-businesses (segments - biopower, biofuels, biochemicals, biomaterials)

Market Attractiveness

Competitiveness

Cartonboard (CTMP)

LWC/SC (Magazine)

Sawmilling Particleboard

OSB MDF Secondary

White kraft packaging

Biomaterials, biochemicals

Liquid Biofuels. European strategy is Electrification

Bioenergy (integrated, ROCs) Waste to energy (integrated, CfDs, landfill tax)

EWP

EWP also includes: Cross Laminated Timber Timber frame Pre-fab. Offsite. Housing Structural Composite Lumber: Laminated Veneer Lumber (LVL) Parallel Strand Lumber (PSL). Oriented Strand lumber (OSL)

Lumber Based Products Glulam Combination Products I-Joists and Beams

• No reason to change current mapping base – add more. • Include potential of fibre based sector, growth into secondary, bio- • Consider a ‘bio generator’ (molecular based businesses) • Task force – the targets for ‘full potential’ resource and hardwood.

WtE. examples

Cellulose

derivatives

Ligno-

sulfonate Biogas

CO2 Ethanol

Ethanol products

•fuels

•chemicals

Steam, electricity &

district heating

Speciality

cellulose Energy

R & D

Process

Engineering

Extractives

Adjacency and Return on Site The Domsjö Biorefinery cluster in Örnsköldsvik

9.

Are we missing a pulp mill/bio-generator ? (and molecular know-how)

Other Pathways – Specialist bio-conversion – site hosting

Joint venture between Norske Skog (Boyer Mill) and Circa Group will build a $6.6 million (demonstration) plant that will produce about 50 tonnes of a chemical called Levoglucosenone/Cyrene (alternative to solvents derived from petroleum in a range of pharmaceutical and agricultural products).

Norske Skog Boyer. Annual production is around 290 000 tonnes of newsprint, improved newsprint, book grades and light weight coated grades

JV • Requirement is for hosting sites – not

necessarily a pulp mill. • Norske Skog builds and leases the plant.

Ops, utilities, raw materials (sawdust – ‘could use any biomass’)

• Circa Group leases technology and knowhow , and has off-take agreement for marketing, sales and product

Extend this concept to other site partners…… Wood products, Automobile, Aerospace, Chemicals/ Pharma, Textiles…making the required biomaterial, biochemical

10.

Packaging Bioplastic (~5Mnt, ~1% of $market) Hygiene Non-wovens substitute Aerospace, Automobiles Carbon and materials based ‘Dupont’. Nomex, Kevlar, Nylon Pharma Solvents Sweeteners….. Chemicals. Specialties Bio alternative Reach alternative

11.

Getting Started – Value and Profitability into the 2020-60s

Start with End-Users/Uses, Key Routes to Market

• Grow from the underlying infrastructure – raw materials, bioenergy, supply chain.

• Adjacency. ‘Nearby’ and parallel products • Return on Site. Leverage industrial sites

Build the Structure and Portfolio

• Industrial/strategic partners • Banks and equity investors. • Derisking – raw materials, technology,

operations, offtake. Volumes, prices • Agencies. GIB and Infrastructure and

Projects Authority UK (large scale)

Get Ready for Financing !

Conclusions

12.

The Sector achievement is highly impressive in (world) terms of building a resource, investment to process and market this, based on competitive advantage. This, plus imported forest products, combined with high UK recycling rates for paper and wood, has created the second largest forest products market in Europe. In total, this sector is a larger contributor (GDP, employees FTE, Sales) than Steel, Aerospace, Chemicals/Pharma or Textiles and about equivalent to Automobiles. It has a key role in the UK’s future, rural development, northern powerhouse (and equivalents), value added, plus meeting social and environmental objectives. Key challenges and task forces: Achieving the full potential of the resource. Bringing this potential into play, then building the resource for the future decades, based on sector targets of contribution to a growing UK. Sector Investment. From the above, updating the Sector strategy in terms of target products and markets, incorporating the growth in bio-business opportunities (biopower, biofuels, biochemicals, biomaterials), investment and infrastructure.

Moving the Sector Towards Higher Value and Profitability Institute of Chartered Foresters. 27-28 April 2016. Newcastle, UK Robert Wilson. Wilson Walklate and Associates Ltd

Director Consulting Europe, Forest Industry, Renewables and Bioprocess, Amec Foster Wheeler Plc. Senior Director, Capitalmind (M&A Advisory) Project Board and Owners Advisor. Wren Renewables.

….Other (non-renewable) industries have peaks, we have choices.