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Outlook for Book Publishing Papers: Capacity Closures Raise Concerns of Adequate Supply to the Market Presented by: John Maine, Vice President April 2006.

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Presentation on theme: "Outlook for Book Publishing Papers: Capacity Closures Raise Concerns of Adequate Supply to the Market Presented by: John Maine, Vice President April 2006."— Presentation transcript:

1 Outlook for Book Publishing Papers: Capacity Closures Raise Concerns of Adequate Supply to the Market Presented by: John Maine, Vice President April 2006

2 2 The U.S. Economy Reacts to Higher Interest Rates, Energy Costs, and Debt (Real GDP Growth, Annualized Percent Change) Potential GDP Growth

3 3 We Assume Oil Prices Are Near a Peak (WTI Oil Price per Barrel in Current and 2004 Dollars*) In 2004 Dollars Nominal *Deflated by U.S. PPI for Finished Goods

4 4 High U.S. Home Prices Beget Risky Loans (Type of Mortgage Loan for Purchase, % of Total)

5 5 U.S. Economy Near-Term Outlook 20042005200620072008 Real GDP % Ch.4.23.53.32.84.2 Consumer Prices-% Ch.2.73.43.32.83.1 Fed. Funds Int. Rate-%1.33.24.85.05.3

6 6 Canadian Dollar Not Tracking With Euro Any More Against U.S. Dollar, but Has Become an Oil Currency US$/EuroUS$/CN$ CN$ (right scale) Euro (left scale)

7 7 North American Demand for Publishing Papers Remains Stagnant  Negative Impact of Higher Costs for Paper and Postage  Loss of Market Share to the Internet – Advertising – Retailing (catalogs) – Communication – Remitting and Billing  Minor Recovery in 2006 – Followed by no Growth in 2007 Slowing Economy Again a Factor in 2007

8 8 U.S. Catalog Circulation Backtracks due to Higher Cost of Paper and Postage in 2006-07 Billions of Catalogs Mailed/quarter Data: RISI

9 9 U.S. Magazine Ad Pages Will Gain Only 1%-2% Per year in 2006-2008 (seasonally adjusted quarterly ad pages) Index 1982=1 Source: RISI Index created from PIB data

10 10 North American P&W Demand by Grade Million Tons, % Change 2005200620072008 Ctd. Woodfree 6.87.07.07.3 %ch-3%3%0%3% Ctd. Mechanical6.56.56.66.8 %ch-1%1%1%3% Unc. Woodfree 14.514.614.414.5 %ch-4%1%-1%0% Unc. Mechanical6.86.97.17.4 %ch2%2%2%4% Total34.635.135.135.9 %ch-2%1%0%2% GDP %ch3.5%3.4%2.8%4.2%

11 11 Paper Purchased for Usage in U.S. Books by Grade (000 tons)

12 12 Paper Purchased for Use in U.S. Books in Tons and as a % of U.S. Printing & Writing Demand 000 tons% of P&W Demand

13 13 Update on U.S. Imports of Books Printed in Asia  China “booked” Another 30% Increase in Book Sales to the U.S. in 2005 – Over 500 Million Books per Year Now Imported From China – Growth in Chinese Book Sales to U.S. Has Averaged More Than 30% per Year for the Past Six Years – Dominated by Children’s Books  Asia Exported $1.3 billion in Books to the U.S. in 2005 – Equal to 4.6% of U.S. Publisher Net Sales of Books

14 14 Asia Now Exports $1.3 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1995 Value of Books Imported into the U.S., Million $

15 15 China Becomes Dominant Exporter of Printed Books to the U.S. U.S. imports of printed books, millions of books

16 16 U.S. Imports of Printed Products from China Million Real 2005 Dollars

17 17 Implications for Paper Market of Asian Imports  Most of the Growth in Paper Usage in Books is Coming From Books Printed in Asia – Quality Paper Now Produced Domestically in China, both Coated and Uncoated, so They do Not Need to Import Paper to Print Books  The Growth in Paper Demand in U.S. Printed Books is Going Primarily to Blended Uncoated Mechanical “Superbright” Offset Papers – Despite Issue With Brightness Reversion

18 18 Development of Superbright Uncoated Mechanical Offset Papers is Expanding the Use of Uncoated Mechanical Papers in Books 000 tons % of P&W Demand in Books

19 19 30% of The Canadian Fine Paper Industry Scheduled for Permanent Closure Between December 2005, and June of 2006  In Addition to Temporary Closure at Miramichi  Canadian Dollar  Wood Shortage and High Cost of Pulpwood – In East Only  Surge in Energy Costs – Losing Advantage of Low Power Rates  Inflexible Labor Rules

20 20 Recent Canadian Paper Mill/Machine Closures CoatedUncoated Free. CascadesThunder Bay180,000 tons St. Jerome10,000 tons DomtarOttawa30,000 tons35,000 tons Cornwall126,000 tons138,000 tons New West.134,000 tons WeycoPrince Albert280,000 tons Dryden155,000 tons Totals470,000 tons618,000 tons

21 21 Cash Manufacturing Costs for Softwood Pulp ($/tonne) E. Canada U.S. South

22 22 Can Offshore Imports Fill the Supply Gap?

23 23 N.A. Offshore Imports Have Captured Up to 25% of the Market for Some Grades Percentage of N.A. Demand

24 24 European Mills Are Shutting Capacity Also  Strong Euro  High Energy Costs – Idling of Some Nuclear Plants in Nordic Countries  High Transport costs – Related to Energy  Will Negatively Affect Supply of Coated Paper to North American Market from European Mills – Not Applicable to Uncoated Supply

25 25 Recent European Paper Mill/Machine Closures for Late 2005 and 2006 Coated Mech.Coated Free. UPMJamsankoski, FN121,000 tons Voikka, FN440,000 tons Kymi, FN165,000 tons StoraEnsoVarkaus, FN110,000 tons Corbehem, FR275,000 tons KlippanMolndal, SW45,000 tons Totals881,000 tons275,000 tons

26 26 European Supply of Coated Paper to N.A. Will Decline in 2006/2007 Due to Mill Closures U.S. Imports from Europe, 000 tons

27 27 Rising Asian Imports May Help Fill Supply Gap  Asian Capacity Growth is High – However, so is Asian Demand Growth – And, Chinese Government is Removing Export Tax Rebates That Will Have Some as of Yet Unknown Level of Negative Impact on Chinese Exports to the U.S. in 2007

28 28 Major Capacity Changes in Asia, 2005–2008 Thousand Tonnes Coated Woodfree APP (Gold East) China770Q2:2005 UPM, Jiangsu China165 (e)Q2:2005 April, Guangdong China 247 (e)2006/2007 Nine Dragons China2202007 Oji/Nantong, Jinangsu China4402008 Coated Mechanical Jiangxi Chenming, China*220Q2:2005 Shandong Huatai, China*220Q1:2006 Daio Paper, Japan318Q3 2007 Jilin Chenming, China100Q3 2006 Shandong Huatai, China*220Q1:2007 Korindo, Kalimantan Indonesia143Q3 2008 * Also can produce newsprint. Assumes 50/50 split.

29 29 Major Capacity Changes in Asia, 2005–2008 Thousand Tons Uncoated Woodfree April Kerinci, Indonesia457Q1:2007 UPM, Jiangsu China330 netQ2:2005 Hankuk, S. Korea220Q1:2006 Packages, Pakistan132Q1 2007 Ballapur, India275Q4 07 Phoenix Thailand176Q4 07 Uncoated Mechanicalnone

30 30 Asian Supply of Coated and Uncoated Freesheet Paper to N.A. Will Continue to Rise U.S. Imports from Asia, 000 tons

31 31 CGW Operating Rates Stay High Through 2008 Due to Capacity Closures Operating Rates Adjusted for Strikes/Lockouts

32 32 CFS Operating Rates Finally Getting Back to Normal Levels in Europe, and are Now High in North America Operating Rates Adjusted for Strikes

33 33 Unc. Mech. Operating Rates Ease After Strikes End Due to New European Capacity Operating Rates Adjusted for Strikes/Lockouts

34 34 UFS Markets are Tight in N.A. Due to Cap Closures, but Europe Still Has Oversupply Operating Rates Adjusted for Strikes/Lockouts

35 35 Average Profitability for U.S. Printing and Writing Paper Producers by Grade Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery. LWC Uncoated Freesheet Coated Freesheet


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