1. North American Containerboard Outlook
Ken Waghorne
Vice President, Paper Packaging
August 2013

2. Today’s Agenda Economic Overview North American Domestic Demand
Global Trade Issues
Asia
Europe
Latin America
Rest of World
Other Factors Affecting Prices
RISI’s North American Price Projections

3. Global Economy Improving Moderately
Annual Real GDP Growth
Global economy is improving, but fairly gradually – a soft recovery I would call it.
Mature economies continue the deleveraging process – the recovery from years of credit fueled growth
China’s economy is undergoing a much-needed but potentially disruptive transition
Europe remains in a seemingly never-ending crisis
And developing economies are contending with a slower growing world
Seems like at this point, we have a three speed world
The US economy is accelerating, though overall growth this year similar to last year.
Other advanced economies are growing slowly, or as in the case of Europe, in a prolonged recession
Emerging economies have slowed, but growth is still decent.
China – should grow right around 8% this year and about the same next year
LatAm – around 3.5%, accelerating a bit in 2014.
Japan – still to early too judge. Undertaking some very aggressive monetary and fiscal policies. Most likely should produce a modest expansion, but similar to other advanced economies
Source: IMF, RISI

4. Emerging Economies Continue to Support Global Growth Global Real GDP
Emerging Economies Continue to Support Global Growth Global Real GDP* Growth
Going forward, even with SLOWER growth than in the past, it is the EMERGING ECONOMIES
China is still growing robustly
Certainly slower than we have seen over the last decade and Risks have built up
Emerging Asian and Latin America very dependent on China – exporting raw goods, commodities.
So as long as China continues to grow, those economies should benefit
Growth was 3.1% last year, and we see 3.2% this year, and 4.2% in 2014
*Measured at purchasing power parity exchange rates
Source: IMF, RISI 4

5. US Household Net Worth Almost Back to Pre-Recession Level
Index, Starting Quarter = 100
The SECOND headwind, and maybe one that has been MORE IMPORTANT than employment is the wealth loss suffered by consumers
This chart
All other recessions, recoveries
What occurred in was THE GREATEST WEALTH DESTRUCTION since Great Depression
Lower asset prices primarily in housing made people feel poorer, and actually be poorer
Primary reason why recovery has been different from others
Latest data point that the Fed released last month showed that household net worth is, after 21 quarters, finally almost back up to where we started in 2007.
This has been due primarily to rising prices of housing, as well as the stock market.
And as prices of housing continue to rise, this should improve household balance sheets, and help drive an increase in spen
Source: Federal Reserve

6. Housing Momentum Building Existing Home Sales and Housing Starts, Thousands of Units
Housing was the major contributor to the wealth loss, but at this point the market is recovering and it seems the recovery is gaining momentum.
Housing added to total GDP in 2012, the first time that it has been a positive since 2005, and will add probably about half a percentage point in And the monthly data remains fairly positive.
Housing starts are highest since mid-2008,
Sales of existing homes have risen to the highest level since 2010, when they were helped by the federal home-buying tax credit
Sentiment among home builders, as measured by the NAHB, has improved dramatically
Housing prices have been rising again, with some of the markets that were hit the hardest showing the most significant gains
Housing is a very small part of GDP – just 2.6% right now, down from around 6% at its height, but has a very high multiplier
For example, estimates are that every new house built generates 3 new jobs
Source: NAR, BEA

7. Consumption Growth Accelerating Real Consumption Expenditure, Annualized Percentage Change; Unemployment Rate
In the near-term, the elevated unemployment rate WILL keep consumption growth lower than it had been in the past
60 years prior to recession 3.6%; Since recession ended 2.2%, even with the recent strength in 1Q13
Expect it to remain around 2.5%, through the end of this year, but pick up to above 3% next year.
Restrained by poor income growth and continued deleveraging
Source: BLS, RISI

8. Consumer Spending on Food and Beverages (Billion 2005 Dollars) Was Weak in 2011-20128

9. Manufacturing Growth Supporting Economy Index of Industrial Production, Jan 2000 = 1.00; PMI
Besides housing, the other thing that has been supporting the economy has been industrial production.
Manufacturing has been one of the bright spots of the recovery
Just 15% of GDP and 10% of employment, but over the last few years accounted for MORE THAN HALF of GDP growth
Large part of that was in automobiles, as Americans have been replacing their aging cars
The average age of the US car is close to 11 years now
But manufacturing has been showing some slowing recently.
April Industrial production fell by 0.5%, the most since August of last year.
PMI has been down for two months, still above 50
But regional Federal Reserve surveys of manufacturing have been showing contraction
So in the near term, think there will be some further slowing in manufacturing

10. Durable Goods Drives Manufacturing Index of Industrial Production – Durable, Non-Durable Goods, Jan 2000 = 100
And it has been durable goods that have been driving industrial production, both on the upside and on the downside.
Automobiles, as I mentioned is one part of it.
But also, the recovery and acceleration in the housing market should help durable goods, as people replace their white goods – appliances – when they buy a house.
Non-durable goods production has been fairly flat, and still way below where it was before the recession.

11. Low Natural Gas Prices Helping US Manufacturers Henry Hub Natural Gas, West Texas Intermediate Crude Oil, $/MMBtu
One of the things that has been helping manufacturing is the low price of natural gas
Much lower than Europe or China, where they are paying around 3 -4 times what we pay here in the US
Clearly this gives US manufacturers a competitive advantage.
This is crude oil and NG on an energy equivalent basis
And while for a very long time oil and gas were fairly close in price, we have seen a huge divergence over the past few years due to the shale revolution
We do expect that over the longer-term this spread will narrow somewhat
But in the short to medium-term it could add about half a percentage point per year to GDP growth, adding hundreds of thousands of jobs 11

12. The Declining Merchandise Trade Deficit Should Allow Manufacturing to Grow Faster Than Consumer Spending 12

13. Growth in Industrial Production (Percent) Is Expected to Exceed GDP Growth from 2013 to 2015

14. Today’s Agenda Economic Overview North American Domestic Demand
Global Trade Issues
Asia
Europe
Latin America
Rest of World
Other Factors Affecting Prices
RISI’s North American Price Projections

15. US Box Market Should Be Poised to Rally
Shipments Fell 13% Between 2007 and 2009
Steepest Decline for the Market Since the 1970s
Shipments in 2012 were just 4% higher than in 2009
Far more subdued than the overall growth in manufacturing
But fairly well in line with the performance of nondurable goods
Uneven US economy held shipments flat in the first half of 2013
But market should accelerate by second half of the year
Shipments should increase 1.6% in 2013 and 3.7% in 2014
Long-term growth in box shipments will average 1.8%
Containerboard demand should grow at a more moderate 1.2% pace
Shift to lightweight liner will take hold in North America

16. Corrugated Box Shipments Have Been Volatile Since Mid-2012, But the Trend is Relatively Flat
Billion Square Feet
Thousand Short Tons 16

17. Containerboard Cutup Has Exceeded Box Shipments in 2005, Implying Strong Growth in Non-Box Uses of Corrugated Sheets 17

18. US Box Shipments Tracked Closely with Nondurable Goods Production for Most of Decline in Early 2013 Indicates an Inventory Drawdown
BSF per Index Unit 18

19. RISI’s Forecast: Box Shipments Should Recover Strongly Following Soft Patch of Early 2013
Annualized Growth Rate (%) 19

20. Growth in US Containerboard Apparent Consumption Is Expected to Remain Quite Slow
Growth, Million Tons 20

21. Today’s Agenda Economic Overview North American Domestic Demand
Global Trade Issues
Asia
Europe
Latin America
Rest of World
Other Factors Affecting Prices
RISI’s North American Price Projections

22. Asian Demand for Containerboard Far Surpasses Other Regions (2012)

23. Asian Demand Growth Should Bottom Out in 2012, But the Recovery Will Be Modest Relative to Trend of the Last 10 Years
Annual Change in Million Tonnes 23 23

24. Chinese Demand Growth Is Expected to Average 2
Chinese Demand Growth Is Expected to Average 2.1 Million Tonnes per Year in 24

25. Asian Containerboard Market Remains Oversupplied in 2013, But the Situation Might Start to Improve in 2014
Growth, Million Tonnes 25 25

26. Asia Is Expected to Be a Small Net Exporter of Recycled from 2013 Onward
Million Tonnes 26 26 26

27. The Western European Containerboard Market Has Suffered from Economic Distress since 2008 with Recycled Share Increasing Further 27

28. Euro Area Production Trending Lower Industrial Production Indices, 2010=1
Industrial Production has been falling all over Europe, and in the peripheral economies it is close to a collapse.
In none of these economies did industrial production ever get back to where it was prior to the recession, and at this point,
Italian production is back to the lows during the global recession in 2009; Greek and Italian production is at 20 year lows.
And forward looking indicators of production are not very encouraging. The Purchasing Managers Indexes for the eurozone and for individual economies remain well below 50 – the cutoff between expansion and contraction.
Recently there has been some stabilization here, indicating a slower contraction in manufacturing, but it does not seem that this sector will be able to lead a European recovery.
Source: Eurostat 28

29. Growth in Western European Containerboard Demand Is Not Expected to Resume Until Once Industrial Production Begins to Drive Box Demand
Annual Change in Million Tonnes 29

30. Eastern European Containerboard Market: Much Smaller than the Western European Market (9.1 Million Tonnes in 2012) But Growing Rapidly 30

31. Eastern European Demand Will Grow Almost 750,000 Tonnes in 2013-2014
Annual Change in Million Tonnes 31

32. Western European Net Exports, Thousand Tonnes
The Western European Recycled Containerboard Industry Is Still Relying on Exports to Maintain Market Balance
Western European Net Exports, Thousand Tonnes 32

33. Poor Profit Margins (Prices/Variable Costs in Euros per Tonne) Should Lead to Permanent Closures in the European Recycled Containerboard Market 33

34. Assumed Capacity Closures in the Western European Recycled Containerboard Market Will Help Lift Operating Rates by 2% 34

35. Latin American Containerboard Demand Should Expand Faster Than Supply in 2014, Leading to Increased Regional Net Imports
Growth, Thousand Tonnes 35 35

36. Brazil Is the Only Net Exporter in Latin America and Sells Throughout the World Kraftliner Exports, Thousand Tonnes

37. African Containerboard Demand Will Continue to Outpace Supply, Allowing Some Further Increase in Imports
Growth, Thousand Tonnes 37 37

38. Capacity Expansion Will Exceed Demand Growth in the Middle East Through 2014, Leading to Declining Net Imports
Growth, Thousand Tonnes 38 38

39. Capacity Removals in Oceania in 2012 Helped Tighten the Market, But Another Expansion Round is Possible in
Growth, Thousand Tonnes 39 39

40. Net Imports into Latin America and Africa Will Grow in , But Conditions Remain Challenging in the Middle East
Million Tonnes 40

41. Latin America and Canada Are the Dominant Destinations for US Kraftliner Exports
Million Tonnes, Annual Rates 41

42. Although Challenges Will Remain Through 2013, US Producers Are Well Positioned to Meet Future Growth in Global Kraftliner Demand
Million Tons
Share of Production 42

43. Today’s Agenda Economic Overview North American Domestic Demand
Global Trade Issues
Asia
Europe
Latin America
Rest of World
Other Factors Affecting Prices
RISI’s North American Price Projections 43

44. North American Brown Linerboard Mills Have Some of the Lowest Costs in the World Cash Costs, First Quarter of 2013

45. Several Recycled Mills Were Quite Competitive with Kraftliner in Early Cash Costs, First Quarter of 2013

46. Old Corrugated Container (OCC) Costs Should Trend Upward Again Once Global Containerboard Demand Accelerated
Dollars per Short Ton

47. Driving Factor Behind OCC Price Increases: The Developing Markets Will Continue to Provide All Growth in Global Containerboard Demand Through 2014 47

48. Recycled Production Costs Are Expected to Rise Faster that Kraftliner Costs Through 2014 Average Total Cost, US Dollars per Short Ton 48

49. N. American Industry Has Learned to Remove Capacity as Demand Falters, But Conversions from Graphic Paper Provide a New Dynamic
Thousand Short Tons 49 49 49

50. Capacity from New Entrants Will Eventually Drive Containerboard Operating Rates Down50

51. The North American Containerboard Industry Is Very Highly Concentrated

52. The Herfindahl-Hirschman Index (HHI) Tracks Industry Concentration Levels and Indicates Competitive Behavior

53. The North American Containerboard Industry No Longer Owns Much Timberland Net Timberland Transactions, Thousand Acres

54. Today’s Agenda Economic Overview North American Domestic Demand
Global Trade Issues
Asia
Europe
Latin America
Rest of World
Other Factors Affecting Prices
RISI’s North American Price Projections 54

55. Containerboard Pushed Through a $50/ton Price Increase in Late 2012
And followed this with another $50/ton increase in April 2013
Market-related downtime trumped several negative factors
Relatively weak domestic demand
Steady decline in old corrugated container costs
Enduring oversupply in corrugated box market
Prices are expected to remain flat for the remainder of 2013
As new capacity enters the market
Before accelerating in 55

56. Containerboard Inventories Were Below the Balanced Level in Late 2012 and Early 201356

57. Containerboard Prices Are Expected to Remain Flat for the Remainder of 2013 Before Rising in 2014 US Dollars per Short Ton 57

58. High Industry Profitability Is Expected to Attract New Tonnage to the Market
Price/Total Cost 58

59. North American Containerboard Summary
Market has been moving sideways since 2010
Lackluster domestic demand
Export demand quite positive
Capacity creeping upward
Inventories remain well under control
The downside risks to the market are substantial
Will the manufacturing renaissance play out?
Has Europe stabilized?
How much new capacity will enter the market?
The upside risks are harder to envision
Given that our base forecast includes a US manufacturing revival
How many increases will the industry attempt in 2014?
How high do prices need to go to force some market changes? 59

60. Thank-you for your attention!
For more information:
Latin American Pulp & Paper 5-year
Forecast
Paper Packaging Monitor
World Recovered Paper Monitor
Thank-you for your attention. The data from this presentation is taken from our Latin American Pulp & Paper 5-year Forecast and our monthly Paper Packaging Monitor and World Recovered Paper Monitor.
If you would like further information please pick up a prospectus from the RISI stand or speak with your RISI Account Manager.