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Growing Pulpwood in China What Does UPM Kymmene’s Withdrawal Tell Us? By Christian Cossalter, CIFOR Workshop on “Rethinking Tropical Plantations” Bogor, 7-10 December 2004 Updated April 2005
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Growing Pulpwood in China
What Does UPM Kymmene’sWithdrawal Tell Us?
By Christian Cossalter, CIFOR
Workshop on “Rethinking Tropical Plantations”Bogor, 7-10 December 2004
Updated April 2005
November 15, 2004
UPM announced its withdrawal from the planned joint venture company in Zhanjiang, Guangdong Province.
According to a letter of intent signed in 2003, the task of the joint venture company was to investigate and make preparations for wood supplies for a possible future pulp mill.
The decision to withdraw was made after studies of the local conditions and the availability and cost of wood for a modern large-scale pulp mill were conducted.
Overview
UPM Withdrawal – Contributing Factors
China: a part of the international scene
Current development in Southern China
Specific situation in Western Guangdong
UPM’s Corporate Strategy
Conclusions
Capacity expansions in China for paper and board products far exceed eventhe most optimistic forecasts of demand growth in the next three years;
If installed and projected capacity is to be fully utilised, China will have toincrease its paper and board exports;
Overcapacity = lower prices = additional challenges for exporters of Chinesepulp & paper products;
The current capacity of Chinese paper and board manufacturers to competeon international markets is questioned;
UPM Withdrawal -- Contributing Factors
China on the international scene
Pape
r &
Boa
rds
Source: Ilkka Kuusisto, Jaakko Pöyry Consulting, Shanghai, Sept. 2004; Roger Wright, Hawkins Wright, Sept. 2004
UPM Withdrawal -- Contributing Factors
China on the international scene
World production capacity is increasing faster than demand. Previsions for 2005 – 2008 are:
A 1.2 Million tonne-capacity increase for BSKP (Bleached Softwood KraftPulp): 2/3 in Europe and 1/3 in South America;
A 5.52 Million tonne-capacity increase for BHKP (Bleached Hardwood Kraft Pulp): 67.5% in South America; 22% in China; 6.5% in South EastAsia; 2% in South Africa; 2% in Europe.
Woo
dPu
lp
Source: Roger Wright, Hawkins Wright, Sept. [email protected]
Fuxing – UPM Kymmene
UPM Withdrawal -- Contributing Factors
Current development in Southern ChinaThe planned Fuxing – UPM Kymmene joint venture company
Product: Bleached Hardwood Kraft PulpCapacity: 700,000 Air Dry TonnesRaw Material: 100% woodPulpwood needs: 2.9 million m3 (solid under bark)Expected Start up: Initially 2006
APP QinzhouPulp: 0.3 million ADT CTMP Paper: 0.6 million tonnes
APP Hainan1.2 million ADT
Stora Enso BehaiPulp: Concept under studyPaper: 0.6 million tonnes
UPM Withdrawal -- Contributing Factors
Current development in Southern China… and the competing projects
One ‘mega’ mill in Hainan which came on stream in January 2005
2 projected mills in Guangxi atan advance stage of preparation
ADT: Air Dry TonnesCTMP: Chemi-Thermo Mechanical Pulp
Currently, there is no site in all Southern China with existing plantation resources able to sustain, from year one, a new pulp mill with a capacity of over 250,000 ADT;
Realistically, all 3 provinces*, working together, should be able to build up enough plantations for feeding 2 ‘Mega’ mills
* Guangdong province; Guangxi Zhuangzhou Autonomous region and Hainan province
UPM Withdrawal -- Contributing Factors
Current Development in Southern China
UPM Withdrawal -- Contributing Factors
Current Development in Southern China
However, it is very likely that regional politics will prevail:
In reality, the minimum that can be expected is one mill per Province;
Growing pulpwood for feeding a mill across the Provincial boundary,is not an option that any Provincial Government would accept as a long– term arrangement/strategy
As a consequence the entire region is likely to suffer from a chronicwood fibre shortfall
UPM Withdrawal -- Contributing Factors
UPM Kymmene’s Plan in Western Guangdong
UPM Kymmene’s wood procurement strategy was built on 3 pillars:
‘Self-Managed’ plantations on 50,000 ha of land (to be rented) at anaverage distance of 85 km to the future mill;
Long-term wood procurement contracts with a number of existingplantation owners (mainly State Forestry or Agricultural Farms) on60,000 ha of plantations at an average distance of 135 km to the futuremill;
Outgrower programme on 90,000 ha, mainly on collective land at anaverage distance of 130 km to the future mill;
UPM Withdrawal -- Contributing Factors
UPM – Kymmene’s Plan in Western Guangdong
Proposed mill site
Zhanjiang Prefecture
Maoming Prefecture would provide 80% of the wood once the cruising speed is reached
A total of 200,000 ha to be established between 2003 and 2007
UPM Withdrawal -- Contributing Factors
UPM Kymmene’s Plan in Western Guangdong
Implementing this plan has raised several issues and challenges:
The ‘land issue’ [limited availability of land for additional plantations];
The challenge of obtaining priority access to the existing wood resources;
The challenge of growing and buying pulpwood at competitive costs;
The challenge of involving large number of farmers in a long-term woodprocurement plan
UPM Withdrawal -- Contributing Factors
The land Issue
High population density and consequently strong pressure on land
Western Guangdong has a rural population of 10.48 million, of which 4.08 million reside in Zhanjiang prefecture.
In rural areas of Zhanjiang1/:
1 mu (670 m2) of arable land and 1.08 mu (720 m2) of forestland
Ranges of variation2/ for 7 villages of Eastern Guangxi (Pu Bei county and Bo Bai county):
Rice field Dry agricultural land Hill land / Forest land0.37 to 1 mu 0.1 to 0.4 mu 1.75 to 10.8 mu= 250 to 670 m2 = 67 to 270 m2 1,170 to 7,200 m2
Rice field + dry agricultural land (at village level)
0.47 to 1.2 mu equivalent to 315 m2 to 800 m2
Per
capi
ta la
nd a
vaila
bilit
y
Sources:1/ Fuxing – UPM Kymmene feasibility study, Nov. 20032/ CIFOR survey, March 2005
Density and distribution of human population in China
Year 2000
[email protected]: Deng Xiang Zheng, Chinese Center for Agricultural Policy, 2004
UPM Withdrawal -- Contributing Factors
The land IssueDuring the last decade, the price for leasing agricultural land has escalated
USD per hectare
7.5
146128
73
128
91
219
0
50
100
150
200
250
1990 1995 2000 2005
Dong Hai F. F
Private investor
Hue Hai MDFplant
Sources:
UPM Withdrawal -- Contributing Factors
The Land Issue
USD 30-90
USD 110-220
USD 55-125USD 200-250
Range of prices for renting farm/collective land(in USD/ha/year)
0
50,000
100,000
150,000
200,000
250,000
1991 1998 2001
The area of public land allocated to forestry has slightly decreased
Cities Leizhou Forest Bureau Agriculture Bureau
Hectares
USD 18-30USD 55-90
UPM Withdrawal -- Contributing Factors
Access to Existing Wood Resources
Source: Zhanjiang Forestry Bureau & Fuxing – UPM Kymmene Feasibility Study
Zhanjiang
139,190 ha4,881,274 m3
72 km
Maoming
29,890 ha1,184,200 m3
124 km
Yangjiang
17,759 ha; 691,280 m3; 214km
Jiangmen
28,607 ha670,392 m3
374 km
Area (in ha) & Volume ( in m3) of existing closed-canopy stands of eucalypts & acacias in 4 Prefectures
Average hauling distance (in km) to mill site
UPM Withdrawal -- Contributing Factors
Access to Existing Wood Resources
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Zhanjiang Maoming Yanjiang Jiangmen
Young Middle-age Near-mature Mature Over-mature
Area (in ha)
In reality, what is available ?
Source: Zhanjiang Forestry Bureau & Fuxing – UPM Kymmene Feasibility Study
UPM Withdrawal -- Contributing Factors
Access to Existing Wood Resources
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Zhanjiang Maoming Yanjiang Jiagmen
Young Middle-age Near-mature Mature Over-mature
Volume (in m3)
In reality, what is available ?
[email protected]: Zhanjiang Forestry Bureau & Fuxing – UPM Kymmene Feasibility Study
UPM Withdrawal -- Contributing Factors
Access to Existing Wood Resources
Existing fast-growing eucalypt plantations in Western Guangdong produce 1.8 to 1.9 million m3
annually:
350,000 m3 go to 2 MDF mills and 1 fiber board mill;
1.4 to 1.5 million m3 are processed into chips and shipped to other destinations;
A small share goes to local small plywood mills
UPM Withdrawal -- Contributing Factors
Access to Existing Wood Resources
Mid-2004 most optimistic forecasts indicated that about 0.43 million BDT of chips* could be re-routed to the Zhanjiang mill.
* This accounts for approximately:
60% of the volume of wood chips currently shipped out of Zhanjiang port;
30% of the needs of the Zhanjiang millwhen full production is reached
2005 trends indicate that the Rizhao pulp mill in Shandong Province has become the main buyer and volumes shipped to this destination are increasing.
UPM Withdrawal -- Contributing Factors
Raising Pulpwood & Wood Chips Costs:
+ 23.3% and + 17.4% respectively during the last 18 months
Global Weighted Mean Cost of Pulpwood Zhanjiang Cost for Pulpwood and Chips
60
70
80
90
100
110
120
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Conifer pulpwood USD / bdmt Hardwood pulpwood USD / bdmt
0
20
40
60
80
100
120
0 2 4 6 8 10Sept June March2003 2004 2005
36.5 41.4 45.0
92.0100.5 108.0
USD / green tonne for pulpwoodUSD / bdmt for wood chips
Chips (FOB)
Pulpwood (Mill Gate)
USD / bdmt
Source: J.T.A. Wood Resources International, 2004 & CIFOR (2003 -2005) [email protected]
UPM Withdrawal -- Contributing Factors
Raising Wood Costs: A Regional Market Strongly Distorted
Costs (C & F) of Japanese Imports of Hardwood Pulpwood Chips withComparative Trends for Weighted Rest-of-World Average Delivered
Costs for Hardwood Pulpwood
[email protected]: J.T.A. Wood Resources International, 2004
The Rest-of-World meandelivered cost of hardwoodpulpwood varies between30.8% and 54.1% of Japan’scosts.
Mean over the 1991-2004Period is 40.9%
UPM Withdrawal -- Contributing Factors
Is there any hope that large numbers of farmers will enter into the pulpwood-growing business?
133,000 ha of sugar cane fields in Zhanjiang Prefecture alone.
UPM – Kymmene Feasibility Studies indicated that:
When the price of sugar cane is down to USD 19.5 / tonne and the price paid to farmers for eucalypt wood is up to USD 27 / tonne, planting eucalypts becomes more profitable;
With China being a WTO’s member sugar import quotas are set to increase steadily. The domestic sugar production will have to go through substantial re-structuring 1/ . Production will logically come to an end in the less productive / more marginal processing plants and growing estates;
1/ At the end of 2002 production costs of Zhanjiang sugar plants were assessed to USD 268 / tonne and price (CIF Zhanjiang ) of imported sugar to USD 231 / tonne;
UPM Withdrawal -- Contributing Factors
Is there any hope that large numbers of farmers will enter into the pulpwood-growing business?
Or will sugar cane be replaced by:
Peanuts, sweet potatoes and cassava in the adjacent hills ?
Banana, vegetables and pineapplesIn the plains ?
UPM Withdrawal -- Contributing Factors
Main Challenges
November 15, 2004
UPM announced its withdrawal from the planned joint venture company in Zhanjiang, Guangdong Province.
According to a letter of intent signed in 2003, the task of the joint venture company was to investigate and make preparations for wood supplies for a possible future pulp mill.
The decision to withdraw was made after studies of the local conditions and the availability and cost of wood for a modern large-scale pulp mill were conducted.
UPM Withdrawal -- Contributing Factors
Securing adequate wood supply & containing wood costs
50,000 ha of + Full control over plantation management and cost self-managed plantations: of silvicultural operations;
- Costs of renting land re-assessed periodically;- No guaranty that the area of land available for rent
would reach 50,000 ha
Contracted wood production + Quantity of wood delivery and price fixed by contractover 60,000 ha of plantations - Contracts would have included a clause allowing
re-alignment of sale prices with export prices;
- No guaranty that the total area of ‘ contracted plantations’ would reach 60,000 ha;
A ‘membership’plantation + Repayment of UPM Kymmene’s loans & technical programme over 90,000 ha support with a share of the wood harvest
- No guaranty that the remaining portion of wood harvest that plantations owners could sell at market price wouldprovide returns attractive enough to provide large-scaleinvolvement of farmers
Wha
t are
the
real
pos
sibi
litie
s ?
UPM Withdrawal -- Contributing Factors
Overall Wood Supply to the Planned Zhanjiang Pulp Mill
Structure of the overall wood supply
Self –managed Membership Purchased Plantations Programme at market price
Scenario 1: 30% 8% 62%
Scenario 2: 35% 10% 55%
Scenario 3: 40% 12.5% 47.5%
UPM Withdrawal -- Contributing Factors
Overall Wood Supply to the Planned Zhanjiang Pulp Mill
Assumptions
Self-managedplantations
‘Membership Programme’
Contracted plantations
50,000 ha of plantation established All wood production costs reduced by 20% 1/
9-year cycles with 2 harvests: year 5 (planted crop) and year 9 (coppiced crop)Wood delivery: Scenario 1: 91 tonnes at age 5 and 73 tonnes at age 9
Scenario 2: 106 tonnes at age 5 and 85 tonnes at age 9Scenario 3: 122 tonnes at age 5 and 97 tonnes at age 9
Scenario 1: 58,500 ha planted (65% of the original programme implemented) delivering 8% of the overall wood requirement as re-payment of loans & assistanceScenario 2: 72,000 ha planted (80% of the original programme implemented) delivering 10% of the overall wood requirement as re-payment of loans & assistanceScenario 3: 90,000 ha planted (100% of the original programme implemented) delivering 12.5% of the overall wood requirement as re-payment of loans & assistance
Wood sold at market price
1/ In comparison to costs obtained by best performingenterprises in Western Guangdong [email protected]
UPM Withdrawal -- Contributing Factors
Estimated Mean Pulpwood Costs
Estimated Mean Wood Costat mill gate for planned Zhanjiang millUSD/green tonne
Source of wood supplies
Self Membership MarketManaged Programme Price
30% 8% 62%35% 10% 55%40% 12.5% 47.5%
41 42 43 44 45 46 47 48USD/green tonne
Market price of pulpwood at mill gate
scenario 1
scenario 2
scenario 3
UPM Withdrawal -- Contributing Factors
UPM Kymmene’s Corporate Strategy
UPM Kymmene has shares in Forestal Oriental (Shell), a major Uruguayan forest owner;
Assets include highly productive eucalyptus plantations which – after expansion – would form the resource base of a large scale (~1 million tonnes/year) pulp project (Botnia project);
Assessment of the feasibility of the Botnia project is still underway. However, it seems that UPM has already sufficient reasons for giving the Botnia project a higher investment priority than the Zhanjiang project : less uncertainties and more guaranty of better financial performances
UPM Withdrawal -- Contributing Factors
Conclusions
Zhanjiang and Maoming Prefectures have the largest wood fiber resource made of fast-growing plantations of all Southern China. This resource represents 85% of the resource base that a pulp mill with a designed capacity of 700,000 ADT would need to sustain its production. Currently, Zhanjiang and Maoming’s existing timber resource is, for a large part, committed to other users;
A 700,000 ADT pulp mill in Zhanjiang could source approximately 30% of its wood requirement from existing plantations through long-term wood procurement contracts. Approximately 70% of its wood needs would have to come from new plantations.
There is no guaranty that Zhanjiang and Maoming prefectures could provide enough land for new pulpwood plantations due to a number of other competing land uses;
UPM Withdrawal -- Contributing Factors
Conclusions
The less the land available for core plantations the more a pulp company has to rely on outside purchases to meets its wood requirements. In southern China market prices for pulpwood are well above the rest-of-world mean cost for delivered pulpwood;
At the time UPM took the decision to withdraw from the Zhanjiang project it was very unlikely that the weighted mean cost of wood to the mill, considering all sources of supply (self-managed plantations, contracted plantations and membership programme), could be less than USD 30 per metric tonne of green wood. Since then local market prices have continued to escalade. At current (April 2005) local price of USD 45 per delivered green tonne of debarked pulpwood, the mean cost of a total wood delivery to the mill (approximately 3.05 million metric tonnes) would be in the order of USD 32 to 33 per green metric tonne. This raises questions about the economic competitiveness of wood-based pulp production in this part of China;
