Transcript No Slide Title
Outlook for Book Publishing Papers
BMI Management Conference May 3, 2005 Presented by: John Maine, Vice President
RISI Growth Projections for 2004 Presented to BMI in May of 2004 U.S. GDP Euro GDP U.S.Inflation – CPI Euro Inflation- CPI U.S./Euro Exchange N.A. P&W Demand Euro P&W Demand Last Yr’s Fcst. ’04 Actual 4.7% 1.9% 4.4% 1.9% 1.7% 1.7% 1.33 3% 5% 2.7% 2.1% 1.24 4% 5% 2
Economic Outlook
3
GDP Outlook: U.S. Policy-Induced Growth Phase Nearing End
Low Interest Rates, Massive Federal Spending, Tax Cuts, and Weak $ Have Fueled the Economy, But are Now Reversing
Tighter Policy and High Energy Prices Threaten Expansion
Consumer Sector Is Vulnerable
–
Job Growth Disappointing; Debt Loads High
Declining Profits Will Dampen Investment
Expect Below-Trend Growth in 2 nd Half of 2005 4
Are Households Prepared for Rising Interest Rates?
15% 14%
Household Debt Service as % of Disposable Income
12% 14% 10% 13% 8% 6% 12% 4% 11%
Personal Savings Rate (right)
10% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 2% 0%
5
The U.S. Recovery Will Fade in 2005 4% 3% 2% 1% 0% -1% -2% 9% Real GDP Growth, Annualized Percent Change 8% 7% 6% 5% Potential GDP Growth 95 96 97 98 99 0 1 2 3 4 5 6 7 6
Canadian Dollar and Euro Rising to a Peak in 2005 US$ per CN$ 0.9
US$ per Euro 1.5
0.85
0.8
0.75
0.7
0.65
CN$ Euro 1.4
1.3
1.2
1.1
1 0.6
0.55
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 0.9
0.8
7
U.S. Economy Near-Term Outlook 2003 2004 2005 2006 2007 Real GDP % Ch.
Consumer Prices-% Ch.
Fed. Funds Int. Rate-% 3.0
2.3
1.1
4.4
2.7
1.3
3.6
2.8
3.1
3.3
2.4
3.9
3.7
2.5
4.2
8
End-Use Recovery In Magazines and Catalogs is Slowing, But Book Publishers Remain Strong
9
U.S. Magazine Ad Pages Peaked in 2004 and Will Show Little Growth in 2005/2006 1.50
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
seasonally adjusted monthly ad pages Index 1982=1 98 99 0 1 2 3 4 Source: RISI Index created from PIB data 5 Feb, 2005 6 7 10
U.S. Catalog Circulation Drops in Response to Cost of Paper & Postage in 2006 5.0
Billions of Catalogs Mailed/quarter 4.8
4.6
4.4
4.2
4.0
3.8
3.6
97 98 99 0 1 2 3 4 5 6 7 Data: RISI 11
U.S. Shipments of Printing and Writing Paper to Book Publishers Remains High (000 tons per month, seasonally adjusted) 110 105 100 95 90 85 80 75 70 65 98 99 0 1 2 3 4 5
Source: AF&PA
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U.S. Book Publishers Starting to See More Books Printed in Asia, Leading to Less Growth in Demand for Book Paper from U.S. Paper Mills 13
Asia Now Exports $1.2 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1995 2004 1995 $0 $500 $1,000 $1,500 $2,000 $2,500 Value of Books Imported into the U.S., Million $ Other Canada China Hong K.
Sing.
Other Asia 14
China Becomes Dominant Exporter of Printed Books to the U.S.
450 400 350 300 250 200 150 100 50 0 U.S. imports of printed books, millions of books Canada China Hong Kong UK Mexico Sing.
S.
Korea 1995 2004 15
U.S. Imports of Printed Products from China $700 Million Real 2004 Dollars $600 $500 $400 $300 $200 $100 $0 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 Books including Children's Greeting Cards all other 16
Outlook for Paper Demand Shows Decelerating Trend from Robust 2004
17
Demand Growth Waning in 2005/2006
Slowing economy
Rising costs for paper
Postal rate hikes
Loss of market share to Internet 18
N.A. Demand for Printing and Writing Papers (million short tons) 35 35 34 34 33 33 32 32 31 99 0 1 2 3 4 5 6 7 19
Grade Trends
Uncoated Freesheet
–
Declining Trend Since 1999
Coated Freesheet
–
Competition from Hi-Bright Mechanical and Asian Imported Sheets
Coated Mechanical
–
Good Demand Growth, Supply Shortage
Uncoated Mechanical
–
High Growth, SC Substituting for LWC and MF Hi-Bright Substituting for Uncoated Freesheet Offset 20
Ctd. Free. %ch Ctd. Grwd.
%ch Unc. Free. %ch Unc. Grwd.
%ch N.A. P&W Demand by Grade (Thousand Tons, % Change) Total %ch U.S.Gdp %ch 2004 5,988 7% 6,561 7% 14,203 1% 6,675 7% 2005 6,095 2% 6,580 0% 14,284 1% 6,913 4% 2006 6,154 1% 6,580 0% 14,288 0% 6,959 1% 2007 6,261 2% 6,616 1% 14,587 2% 7,121 2% 33,427 4% 4.4% 33,871 1% 3.6% 33,980 0% 3.3% 34,585 2% 3.7% 21
Prolonged Miramichi Strike to Keep Publishing Markets Incredibly Tight in 2005
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Impact of Miramichi Strike
495,000 tons of Capacity Likely to be Idle for 6-9 Months
–
8% of North American Ctd. Mech. Capacity
– – –
56% of UPM North American Ctd. Mech. Capacity 12% of UPM Overall Ctd. Mech. Capacity 3% of Combined Capacity for all North American and European Producers 23
How Will the Supply Shortage be Alleviated
Supply Shortage Measured at 350,000 tons
–
Assuming 9-month strike
More Imports From Europe
–
Shift supply to Rauma and others
Reduced Demand
–
Shift to other grades
–
Exacerbated by potentially higher prices
Temporary Supply Boost
– –
Postpone downtime for maintenance/rebuilds Shift swing machines from coated woodfree 24
U.S. Imports of LWC From Europe Surge in 2005 to Fill Supply Gap (000 short tons) 1,100 U.S. Offshore Imports of Ctd. and Unct. Mechanical Paper 1,000 900 800 700 600 500 400 Ctd. Mech.
Unc. Mech.
99 0 1 2 3 4 5 6 7 25
Major World Coated Mechanical Paper Capacity Changes in 2004-2007 (tonnes) Leipa, Germany 300,000 Taishan Paper, China Yueyang, Hunan China Shandong Huatai, China 140,000 125,000 est. (1) 175,000 est. (1) Chenming, Jiangxi China 200,000 est. (1) July 2004 Q3 2003 Q4 2003 Q4 2005 Q4 2004 (1) These are newsprint machines that will also make LWC. We have assumed 50/50 split Figures are metric tonnes 26
Coated Mechanical Operating Rates (adjusted to exclude strike-idled capacity) 97% 95% 93% 91% 89% N. Amer.
Europe 87% 85% 99 0 1 2 3 4 5 6 7 27
700 650 600 550 500 450 400 350 300 250 200 U.S. Imports of CFS From Asia About to Overtake Europe (000 short tons) Asia Europe 99 0 1 2 3 4 5 6 7 28
Major World Coated Freesheet Paper Capacity Changes in 2004-2007 (More Than 100,000 tonnes) Lecta, Condat France Stora Enso, Kimberly Appleton, C. Locks Burgo, Belgium 120,000 186,000 113,000 600,000 APP (Gold East) China UPM, Jiangsu China Oji, Jiangsu China 700,000 150,000 est. 400,000 April, China Greenfield 225,000 est. APP, 4 Mills 260,000 est. Figures are metric tonnes 2003-2005 2003-2005 Late 2004 On hold Early 2005 Q3 2005 2007 2007 Q4 2004 29
95% 93% 91% 89% 87% 85% 83% 81% 79% 77% 99 Coated Freesheet Operating Rates 0 1 2 3 4 5 N. Amer.
Europe 6 7 30
Major World UFS Capacity Changes in 2004 2007 (More Than 100,000 Tonnes) Sun Paper, Shandong China 160,000 April Kerinci, Indonesia 450,000 UPM, Jiangsu China Mondi, S. Africa Portucel, Portugal April, Guangdong China Hankuk, S. Korea 300,000 net 250,000 500,000 225,000 est. 200,000 Q3 2004 Q3 2006 Q3 2005 Late 2005 2006 2006/2007 Q4 2005 Ballapur, India 250,000 Note: Two large new PMs are under study in Brazil by IP and Ripassa/VCP End 2007 Figures are metric tonnes 31
Uncoated Freesheet Operating Rates 95% 93% 91% 89% 87% 85% 83% 99 N. Amer.
Europe 0 1 2 3 4 5 We continue to include 250,000 tons of temporarily idle capacity at IP in these numbers 6 7 32
Major World UGW Capacity Changes in 2004 2007 (More Than 90,000 Tonnes) Abitibi, Alma, QC Fraser (Katahdin), Maine 227,000 163,000 Bowater, Calhoun, TN StoraEnso, Maxau, GY 72,000 UPM, Voikkaa, FN Irving, St. John, NB -100,000 130,000 StoraEnso, Wolfsheck, GY -155,000 120,000 StoraEnso, Kvarnsv., SW 420,000 Figures are metric tonnes May 2004 May 2004 May 2004 April 2004 Jan. 2005 Nov. 2005 Q3 2004 Nov. 2005 33
97% Uncoated Mechanical Operating Rates N. Amer.
Europe 95% 93% 91% 89% 99 0 1 2 3 4 5 6 7 34
Average Profitability for U.S. vs. European Printing and Writing Paper Mills 25% 20% 15% U.S.
W. Europe 10% 5% 0% -5% 99 0 1 2 3 4 5 6 Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery 7 35
Summary
Paper Demand Growth is Decelerating
–
And will stagnate in 2006 due in part to the high cost of paper and postage
Supply Shortage of Coated Mechanical in 2005
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Will get worse if strike is prolonged into the heart of the printing season
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Imports from Europe will surge despite strong Euro to fill supply gap 36