Forest – Energy – · PDF fileCONFIDENTIAL AND PROPRIETARY Any use of this material...

Forest – Energy – Chemicals A trio for the future?

Peter Berg – McKinsey & Company

Stockholm, May 22, 2013

PPT-seminarium

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1

Today’s discussion

Can the Paper & Forest Products Industry transform to a bio-based platform for energy and chemicals?

But some fundamental challenges…

And the challenge of trans-formation

Several prerequisites in place…



▪ Large parts of the industry in need of a new direction

▪ Interest in “green”

▪ Fundamental technology often there, or under development

Several prerequisites in place…


Pulp and paper Total Returns to Shareholders (TRS) since 1999 is more or less flat (except for South America)

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

TRSIndexed, 100= 1 Jan 1999, measured in EUR

2013121110090807060504030201001999

Global Pulp & Paper Industry value creation

SOURCE: Datastream, McKinsey analysis

North America

South America

China

Europe


Among large Swedish and Finnish industrials, P&P has characteristics of low attraction to both bondholders and shareholders

-5

0

5

10

15

20

25

30

35

0 1 2 3 4 5 6 7 8 9 10 11

Average ROCE 2010-2012Percent

Credit rating

CCC+ B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A

Engineering

Energy

P&P

Investment gradeSpeculative grade

SOURCE: Standard & Poors; Company annual accounts; McKinsey analysis


Demand for “green” products is driven more by consumer goods and industrial companies (and regulators) rather than by consumers themselves

SOURCE: Interviews

▪ “Cleaner air . . . more power from less gas”▪ “An idea we can all feel good about”

One planet

▪ “Mission is sustainable growth”▪ “Decreasing environmental footprint”▪ “Deriving 25% of our revenue from non-

depleteable resources by 2010”

Social responsibility

▪ “From bean to cup… measures to minimize environmental footprint”

▪ “Recyclability and reusability”▪ “As long as it reduces the environmental footprint,

it will work”

Positive contributions

▪ “Cut our contribution to greenhouse emissions by 20%”

▪ Use of PLA in packaging

Environmental stewardship

▪ “Will spend a minimum of $100 million buying recycled materials”

Doing the right thing

▪ More than 80% postconsumer recycled high-density polyethylene (HDPE) in Aveda bottles

Producer responsibility

Companies are interested in sending a “better-than-we-were” message


In principle, the possibilities are there for the forest products industry

Chemicals▪ Reducing petro-

chemicals (CO2 etc.)▪ Specific properties

(e.g., degradable)

Power▪ Reduce consumption of

fossil fuels▪ Improve CO2 footprint

Construction▪ Reduce resource use

(energy, steel, cement, etc.)▪ Improve CO2 footprint

Packaging▪ Reducing food waste▪ Increasing shelf-life▪ Substituting petro-based▪ Bio-degradable packaging

Textiles▪ Reduce water need▪ Reduce use of fertilizer,

biocides, etc.▪ Reduce oil consumption

Transportation▪ Reduce oil consumption▪ Material substitution, e.g.,

carbon fibers, composites)▪ Improve CO2 footprint

EXAMPLES



▪ Can it be big enough, fast enough?

▪ Can you make money of it?

▪ Are the markets there?

▪ Is wood the best base to work from?

But some fundamental challenges…


Growing a new industry takes time

SOURCE: Skogsstyrelsen; EuroStat; Energimyndigheten; SCB; BIL Sweden; Global Markets Direct

0

5

10

15

20

25

30

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Production value, SEK billions

Bioenergy, end users, Sweden

“Miljöbilar”, Sweden

Bioenergy, raw materials, Sweden

Biopolymers, global

Digital consumer electronics, Sweden

Wind power, Sweden


100

110-120

130-140

PriceIndex

Volume (Mt)

32

32

3555

100

2010

9313

15

41

2004

-9%33

2015

28

91

17.5 15.2 14.2 -19%

Medium strength steel (400-600 MPa)

High strength steel (>600 MPa)

Low-C “mild” steel (<400 MPa)

100

115-135

90-100

EBITDA marginIndex

The higher prices for high-strength steel cannot compensate for the volume loss

In addition, margins decline due to difficulties to transfer costs to customersRevenues, index

SOURCE: Arcelor web-site, ThyssenKrupp web-site; expert interviews; McKinsey analysis

Sheet metal for auto industry, EU-25

High-strength steel for the car industry may be value-added, but not necessarily value creating for the steel producers


In Sweden, the demand for woody biomass for power generation and district heating is not expected to grow significantly

SOURCE: Energimyndigheten; McKinsey analysis

Swedish biofuel demand, base scenario; TWh

Biofuels supplied for electricity production

Biofuels supplied for district heating

4.9

2.7

21.8

17.0

4.816.2

13.5Wood

Refuse & peat

22.4

18.5

3.9

4.53.4

3.9

50.7

27.0

19.2

2010

46.8

31.7

11.7

2000

23.8

14.3

Wood

Refuse

Peat & other

2030F

53.5

28.2

19.7

5.6

2020F

5.6

CAGR 2010-2030FPercent

2.5

2.6

-0.6

1.6

1.8

1.6

Total

Total 0.7


Priced below the coal floor

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

20092008200720062005200420032002 2013201220112010

Natural gas price

Residual fuel oil

Distillate - Gulf coast

Central Appalachian coal2

Futures

1 As of Oct 3, 2011; Converted at heat content of 6.02 for Gulf Coast RFO; 5.72 for Gulf Coast No.2; 26.45 MMBtu/ton for Central Appalachian Coal2 SOx and NOx costs included; CO2 costs not included; Adjusted for 20% efficiency gap between CCGT and coal plant

SOURCE: EIA; Energy Velocity; Bloomberg, Baker Hughes, McKinsey analysis

PriceUSD/MMBtu1

Large-scale extraction of U.S. shale gas is changing the energy landscape, with implications on biofuels


Feed2,000 USD/ton

Performance plastics

7,100 USD/ton

Phenolreplacement

2,000 USD/ton

Biomass

LigninCellulose

Hemicellulose

Monomer

extraction

Incineration

Monomer

modification

Enzymatic

digestion

INDICATIVE

Epoxy3,000 USD/ton

Energy

Ethanol Butanol

Monomer

SOURCE: McKinsey

It is not only the forest products industry that can produce lignin

Market price; USD/tonne


1.6

2.2

2.7

N/A1

1.1-1.4

2.0-3.6

1.2-2.21.2-2.0

SOURCE: NREL; FO Licht; USDA, Datastream, UNICA; IEA; Expert interviews; Academic publications; Company websites, McKinsey BIO survey, Platt’s

Widespread 2G biofuels adoption is hindered by the current lack of competitiveness against alternatives

1 Hydrogenated or catalyzed pyrolysis oil is currently very technically challenging, and a commercial opportunity is difficult to estimate

USD per gl, 2020 expected

Gasoline and renewable substitutes production cost

Chemical and biochemical conversion

Oil NWEat 125 USD/bbl

Oil NWE at 100 USD/bbl

Corn ethanol

Cane ethanol

Solar ethanol

Oil NWE at 75 USD/bbl

Pyrolysis gasoline



▪ How do we develop products?

▪ How do we take them to market?

▪ Can companies manage such radical transformations?

▪ How? What is required?

And the challenge of trans-formation…


What level of R&D investments are needed to usher in the “bio-era”?

SOURCE: OECD; McKinsey

0

5

10

15

20

25

30

1995 1999 2003 20090

5

10

15

20

25

30

1995 1999 2003 2007

Basic metals, metal products

Pharmaceuticals

Chemicals and chemical products

P&P, publishing

Manufacturing

Country total

R&D intensity, SwedenR&D spend as percent of production value

R&D intensity, FinlandR&D spend as percent of production value


In Pharma R&D, externalization is evolving with more players taking a role

License/ acquire from small biotech

Wholly owned assets

License/ acquireSelective

out-partnering

Pre-competitive partnerships

Academia/ National labs Late stage

risk sharingco-develop

Wholly owned assets

Traditional Model Future Model

CRO 20% CRO 50%

Early start-up options

SOURCE: McKinsey analysis


Across the value chain, large oil majors like BP have many biofuel JVs and cooperative agreements – but not with forest products companies?

Technology R&D (enzymes, additives, processes)

Virtual

Real

Virtual

Logistics

Real

1G

2 G

Seed/agronomy/ feedstock development

Logistics, storage, distribution

Biofuels production

Wholesale/ trading

Blending/ marketing/ retail

Biomass access

� BP has a dedicated Alternative Energy business with ~5,000 employees, and investments throughout the value chain

� Total investment in biofuels to date is ~$1.5 B

SOURCE: Company Web site; public announcements; expert interviews

A C

A F

B

A E

H I

G

H

AC

DF

B

A C D

B


Value chain barriers can set up significant challenges for the adoption of new products

24.8

13.1

7.7

3.9

Very complex

ComplexSimpleVery simple

Major new infrastructure required▪ Composting facilities▪ New sorting process

Contamination of existing waste management streams

Consumer behavior▪ Source separation

Time to adoption of 58 major plastics applications, by value chain complexityYears (average)

Example of value chain barriers in biodegradable plastic


Key requirements to respond to/ benefit from discontinuities

Typical performance

Capital market and VC performance

exceeds that of individual companies

in the long term

Incumbent companies

�

Capital markets/ selected VCs

�

Can individual companies even manage discontinuities?

� �

� �

� �

� �

Management models that assume/ seek out discontinuities

Organization structures and operating systems that drive new business creation

Ability to search for new business opportunities on the periphery of current operations

Willingness to cannibalize existing businesses to drive new opportunities

Willingness to trade secure current revenue streams for higher growth opportunities

SOURCE: Dick Foster: “Creative destruction”


Some forest products companies have managed to go through major transformational changes in relatively short time – Example Ahlström

SOURCE: Ahlström (IVA VIII presentation 2009)

McKinsey & Company | 2121SOURCE: Datastream

Stock price performanceIndexed as of January 1995

Some do it better – FujiFilm massively outperformed Kodak as they were going through the challenging digitalization period

0

20

40

60

80

100

120

140

160

180

200

220

1/1/96 1/1/98 1/1/00 1/1/02 1/1/04 1/1/06 1/1/08 1/1/10 1/1/12


R&D▪ Higher spend levels and new

approaches?

Market understanding ▪ Value chain understanding!▪ Don’t get stuck in “product forward”

Cooperation▪ With the right players in the value chain

Organization, skills, business model▪ Likely very different needs from today

Beware of “value added”▪ Go for value creating instead

In summary – and way forward

To capture the opportunities of a forest-energy-chemicals trinity

IF the bio-route is the way forward, huge efforts and dedication are needed to transform

But several pressing issues around markets and value creation need to be addressed

The need for the forest products industry to transform – and the interest – is there

McKinsey & Company | 23SOURCE: Source

Text

Thank you

Forest – Energy – · PDF fileCONFIDENTIAL AND PROPRIETARY Any use of this material...

Documents

Transcript of Forest – Energy – · PDF fileCONFIDENTIAL AND PROPRIETARY Any use of this material...