Transcript No Slide Title

RISI Paper Market Outlook: A Possible
Recession and Its Impact on Book
Paper Markets
John Maine
Vice President
May 2008
The U.S. Economy… Headed into Recession?
(Real GDP Growth, Annualized Percent Change)
9%
8%
Potential GDP Growth
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
2
Weak Dollar and Strong External Demand Will Limit
Damage to Manufact’g but Consumer Hit Hard in 08
(Ind. Prod. Index, Real Consumer Spend, % Change Above year-ago by Quarter)
8.0%
6.0%
Real Consumer Spending
4.0%
2.0%
0.0%
-2.0%
Industrial Production
-4.0%
-6.0%
0
1
2
3
4
5
6
7
8
9
3
The Recession Will be a Consumer-Led
Recession

Impact of Housing, Labor Markets, Stocks and the WealthEffect
– Job Insecurity
– Reduced Spending

Magazines, Catalog, and Retail Will be Impacted
–
–
–
–
Reduced Ad Spending
Slower Retail Spending
Move to Internet
Use Cheaper and Less Paper
4
Magazine Ad Pages to Decline 3.6% in 2008 With A
Risk of A Larger Drop
(PIB Magazine Ad Pages, Year-over-year Percent Change)
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
Recession Years
-10.0%
-12.0%
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9
5
Catalog Circulation Will Fall Again in 08 In addition to
Exhibiting Less Pagination
(RISI Catalog Circulation Index, Year-over-year Percent Change)
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
Recession Years
-6.0%
-8.0%
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9
6
North American P&W Demand by Grade
Million Tonnes, % Change
2006
2007
2008
2009
Ctd. Woodfree *
%ch
6.6
8%
6.0
-10%
5.7
-5%
5.9
2%
Ctd. Mechanical
%ch
5.9
1%
6.0
3%
5.8
-4%
5.8
1%
Unc. Woodfree *
%ch
13.0
0%
12.4
-5%
11.9
-4%
11.7
-2%
Unc. Mechanical
%ch
6.1
-1%
6.2
1%
6.1
-1%
6.1
1%
31.6
2%
2.9%
30.5
-3%
2.2%
29.5
-3%
0.9%
29.5
0%
2.2%
Total
%ch
US GDP %ch
*Includes bristols and cotton
7
North American Five-Year Growth Trends for 2008
to 2012 by Grade (000 tonnes)
200
-8.2%
-2.8%
0
0.5%
1.8%
-200
-400
-600
-800
-1000
-1200
Total P&W
Coated
Unc. Free
Unc. Mech
8
Paper Purchased for Use in U.S. Books in Tonnes
and as a % of U.S. Printing & Writing Demand
1,700 000 tonnes (metric)
% of P&W Demand 8.0%
1,650
7.0%
1,600
6.0%
1,550
5.0%
1,500
1,450
4.0%
1,400
3.0%
1,350
2.0%
1,300
1.0%
1,250
1,200
0.0%
95 96 97 98 99
0
1
2
3
Paper Used in Books
4
5
6
7
8
9
10 11 12
Share of U.S. Demand (% )
9
Paper Purchased for Usage in U.S. Books by
Grade (000 tons)
500
450
400
350
300
250
200
150
100
50
0
Coated
Mechanical
Coated
Freesheet
2005
Uncoated
Mechanical
2006
Uncoated
Freesheet
2007
10
Update on U.S. Imports of Books Printed in
Asia

China $ Sales of Books to the US jumped another 15% in 2007
– 616 Million Books per Year Now Imported From China
– High Component of Children’s Books (185 million)
– Growth Rate of 20% Per Year for Past Five Years

Asia Exported $1.5 billion in Books to the U.S. in 2007
– Equal to Nearly 5% of U.S. Publisher Net Sales of Books
11
Asia Now Exports $1.5 Billion in Books to the U.S.
Market Compared With $0.6 Bill. in 1996
2007
Other
Canada
China
Hong K.
Sing.
Other Asia
2006
1996
$0
$500 $1,000 $1,500 $2,000 $2,500 $3,000
Value of Books Imported into the U.S., Million $
12
U.S. Imports of Printed Products from China
$1,200
Million Real 2007 Dollars
$1,000
$800
$600
$400
$200
$0
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7
Books including Children's
Greeting Cards
all other
13
Euro Area Growing Modestly, But no Recession
Euro Area Real GDP Growth, Annualized Percent Change
6%
5%
Potential GDP Growth
4%
3%
2%
1%
0%
96
97
98
99
00
01
02
03
04
05
06
07
08
09
14
European Demand for Printing and Writing Paper
Supported by Growth in the East
36.0
Million Tonnes
32.0
28.0
24.0
20.0
16.0
96 97 98 99
0
West
1
East
2
3
Central
4
5
6
7
8
9
SouthEast
15
European P&W Demand by Grade
Million Tonnes, % Change
2006
2007
2008
2009
Ctd. Woodfree
%ch
9.0
3%
9.2
2%
9.3
1%
9.6
2%
Ctd. Mechanical
%ch
7.7
2%
8.0
4%
8.1
1%
8.3
2%
Unc. Woodfree
%ch
11.6
1%
11.8
1%
11.7
0%
11.9
1%
5.6
7%
5.8
3%
5.8
1%
5.9
2%
34.0
3%
2.9%
34.8
2%
2.6%
35.0
1%
1.5%
35.7
2%
2.1%
Unc. Mechanical
%ch
Total
%ch
Euro Area GDP %ch
Includes Eastern Europe
16
European Five-Year Growth Trends for 2008 to
2012 by Grade (000 tonnes)
4.6%
1600
1400
1200
1000
800
6.8%
6.1%
600
6.0%
400
1.1%
200
0
Total P&W
Ctd Free
Ctd Mech
Unc. Free Unc. Mech
17
Asian P&W Demand by Grade
Million Tonnes, % Change
2006
2007
2008
2009
11.3
4%
12.0
6%
12.8
6%
13.4
5%
Ctd. Mechanical
%ch
2.8
7%
2.9
3%
3.1
6%
3.3
5%
Unc. Woodfree
%ch
21.6
4%
22.5
4%
23.1
3%
23.6
2%
Unc. Mechanical
%ch
1.7
-8%
1.7
3%
1.9
8%
2.0
5%
37.5
4%
8.0%
39.2
5%
8.0%
40.8
4%
7.1%
42.2
3%
6.6%
Ctd. Woodfree
%ch
Total
%ch
GDP %ch
18
Asian P&W Paper Demand Growth
by Country, 2006-2009 (Thousand Tonnes)
China/HK
Japan
South Korea
India
2006 Total: 1320
2007 Total: 1688
2008 Total: 1645
2009 Total: 1414
Taiwan
Other
-1000
0
1000
2000
3000
4000
5000
19
Asian Five-Year Growth Trends for 2008 to 2012
by Grade (000 tonnes)
9000
21%
8000
7000
6000
5000
29%
15%
4000
3000
28%
2000
25%
1000
0
Total P&W
Ctd Free
Ctd Mech
Unc. Free Unc. Mech
20
World Demand Summary for
Uncoated Woodfree
Million Tonnes
2006
2007
2008
2009
North America
%ch
Europe (1)
%ch
Asia
%ch
Latin America
%ch
Middle East, Africa,
and Oceania
13.0
0%
11.6
1%
21.6
4%
3.3
9%
3.5
7%
12.4
-5%
11.8
1%
22.5
4%
3.4
2%
3.7
6%
11.9
-3%
11.7
0%
23.1
3%
3.5
2%
3.8
4%
11.7
-2%
11.9
1%
23.6
2%
3.6
3%
4.0
5%
Total World
%ch
53.1
3%
53.7
1%
54.0
1%
54.8
1%
(1) Includes Western, Central, South Eastern and Eastern Europe
21
World Demand Summary for Coated Woodfree
Million Tonnes
2006
2007
2008
2009
North America
%ch
Europe (1)
%ch
Asia
%ch
Latin America
%ch
Middle East, Africa,
and Oceania
6.6
8%
9.0
3%
11.3
4%
1.3
12%
1.8
5%
6.0
-10%
9.2
2%
12.0
6%
1.3
5%
1.9
5%
5.8
-2%
9.3
1%
12.9
6%
1.4
3%
2.0
3%
5.9
1%
9.6
2%
13.4
5%
1.4
4%
2.1
5%
Total World
%ch
30.0
5%
30.5
1%
31.3
3%
32.3
3%
(1) Includes Western, Central, South Eastern and Eastern Europe
22
Supply Issues

Mergers Yield Fewer Options for Buyers

Capacity Declining Rapidly in North America and Europe

European Mills Shun North American Market Due to Euro

Asian Coated Shipments to North America Rise
23
Mergers Lead to Dominant Player in Each Sector
24
North American Market Share in the Peak of the
Last Cycle Vs. Now for the Top Three Producers
in each Segment
70%
60%
50%
40%
2000
2007
30%
20%
10%
0%
Newsprint
Unc.
Mech.
Ctd. Unc. Free. Ctd. Free
Mech.
25
European vs. N. Amer. Combined Market Share of
Top Three Producers in 2007 Indicates Further
Consolidation to Come in Europe
70%
60%
50%
40%
30%
20%
10%
0%
Newsprint Unc. Mech. Ctd. Mech. Unc. Free.
Europe
N. Amer.
Ctd. Free
Asia
26
N.A. Paper Mill/Machine Closures (000 Tonnes)
UGW
2007
CFS
CGW
UFS
IP
Pensacola
NewPage
Luke
GP
Wauna
100
Boise
Wallula
220
UPM
Miramachi
Tembec
St. Francisville
Domtar
Gatineau
Dirigo
Gilman, Vt
Fraser
Madawaska
Domtar
Port Edwards
Domtar
Baileyville
AbitibiBow
Fort William
AbitibiBow
Dolbeau
Kruger
Three Rivers
Totals 2007
318
90
450
280
90
23
64
82
64
31
113
150
88
135
388
460
532
933
27
N.A. Paper Mill/Machine Closures (000 Tonnes)
UGW
2008
CFS
CGW
UFS
Wausau
Groveton, NH
95
Neenah
Urbana, OH
35
Domtar
Port Edwards
117
IP
Bastrop, LA
225
Domtar
Dryden, ON
177
New Page
Rumford, Me
New Page
Niagara, WI
Kruger
Three Rivers
68
AbitibiBow
Donnacona
160
AbitibiBow
Dalhousie
AbitibiBow
Belgo
AbitibiBow
Gatineau
Totals 2008
62
50
230
40
260
45
573
62
280
649
28
North American Capacity Closures Announced for
2007 and 2008 (000 tonnes)
13% of
Demand
1800
1600
1400
1200
16% of
Demand
1000
14% of
Demand
800
9% of
Demand
600
400
200
0
Unc. Mech
Ctd. Mech
Ctd. Free
Unc. Free
29
European Paper Mill/Machine Closures (Tonnes)
CFS
2006
Burgo
Marzabotto
UPM
Voikka
Kymi
Stora Enso
2007
400,000
150,000
250,000
100,000
Scheufelen Scheufelen
15,000
Klippan
Molndal
45,000
UPM
Jamsankoski
M-Real
Sittingbourne
210,000
Gohrsmuhle
100,000
Myllykoski
Dachau
Andapak
Belgium
Stora Enso
Reizholz
Totals
SC
70,000
Corbeham
Varkaus
CGW
110,000
230,000
80,000
215,000
700,000 1,060,000
215,000
30
European Paper Mill/Machine Closures (Tonnes)
CFS
2008
CGW
Stora Enso
Summa/Anjala
M-Real
Kangas
100
Stora Enso
Anjala
155
SC
80
Totals
255
80
European Paper Mill/Machine Expansions (Tonnes)
CFS
2008
Myllykoski
Totals
Plattling, GY
CGW
SC
380
380
31
European Paper Mill/Machine Closures (Tonnes)
UFS
2007
M-Real
Wifsta, Sw
175,000
Stora Enso
Berghuizer, Ne
235,000
Various Small
Be, Fr, Sp
2008
Mondi
Szolnok, Hu
140,000
2009
M-Real
New Thames, Uk
230,000
Totals
845,000
European Expansions
Dec 07
Q3 09
65,000
UFS
Stora Enso
Varkas, FN
95,000
Portucel
Setubal, PT
500,000
32
Euro and Canadian Dollar Will Remain Strong
Against Key Paper Supply Regions, Limiting
Supply from Those Regions in 2008
$1.50
$1.30
US$ per Euro (L)
$1.40
$1.20
$1.30
$1.10
$1.20
$1.00
$1.10
$0.90
$1.00
$0.80
$0.90
$0.70
US$ per CN$ (R)
$0.80
$0.60
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
33
European Supply of Printing and Writing Papers
to U.S. Market is Declining due to the Strong Euro
2,500
U.S. Imports From Europe (000 Tonnes)
2,000
1,500
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ctd. Free.
Ctd. Mech.
Unc. Mech.
Unc. Free.
34
US Coated Freesheet Offshore Imports by Source
1,600
(000 Tonnes)
1,400
1,200
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Europe
Asia
35
US Coated Mechanical Offshore Imports by
Source
1,200
(000 Tonnes)
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Europe
Asia
36
US Total Coated Paper Offshore
Imports by Source
1,600
(000 Tonnes)
1,400
1,200
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Europe
Asia
37
U.S. Coated Paper Imports From China by Month
000 tonnes per month
45
40
35
30
25
20
15
10
5
0
J F M A M J J A S O N D J F M A M J J A S O N D J
2006
2007
2008
Ctd Free
Ctd. Mech
38
U.S. Coated Mechanical Paper Imports From
China by Month – Sheets vs Rolls
000 tonnes per month
45
40
35
30
25
20
15
10
5
0
J F M A M J J A S O N D J F M A M J J A S O N D J
2006
2007
2008
Rolls
Sheets
39
Operating Rates Get Extraordinarily High in 2008
Despite Possibility of a Recession, Especially for
Coated and Uncoated Mechanical Grades
100%
Operating rates, North America
98%
96%
94%
92%
90%
88%
86%
Unc. Free.
Unc. Mech.
Ctd. Mech.
Ctd. Free.
84%
82%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
80%
40
Printer Inventories of Paper
(Days of Supply, seasonally adjusted)
55
53
51
49
47
45
43
41
39
37
35
Days
Coated Mech.
Total Paper
2003
2004
2005
2006
2007
2008
Data Source: Calculated by RISI from IDEAlliance data
41
U.S. Publishing Paper Pricing by Quarter
($/short ton)
$1,050
$1,000
$950
$900
$850
$800
$750
$700
$650
$600
$550
0
1
Ctd. No. 3 60 lb.
SC-35 lb
2
3
4
Ctd. No. 4 50 lb.
50 Lb UFS Offset
5
6
7
8
Ctd. No. 5 40 lb.
42
Average Profitability for Coated Freesheet Paper
Producers in Europe and U.S.
25%
20%
West Europe
15%
10%
5%
0%
-5%
0
1
2
3
4
5
6
7
8
9
10
U.S.
-10%
Profitability defined as (price-cost)/cost. Costs are total costs
including depreciation, interest, SG&A, and delivery.
43