risi paper market outlook: a possible recession and its impact on book paper markets john maine vice...

RISI Paper Market Outlook: A Possible

Recession and Its Impact on Book

Paper Markets

John MaineVice PresidentMay 2008

2

The U.S. Economy… Headed into Recession? (Real GDP Growth, Annualized Percent Change)

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Potential GDP Growth

3

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)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

0 1 2 3 4 5 6 7 8 9

Industrial Production

Real Consumer Spending

4

The Recession Will be a Consumer-Led Recession

Impact of Housing, Labor Markets, Stocks and the Wealth-Effect

– 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

5

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)

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9

Recession Years

6

Catalog Circulation Will Fall Again in 08 In addition to Exhibiting Less Pagination

(RISI Catalog Circulation Index, Year-over-year Percent Change)

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9

Recession Years

7

North American P&W Demand by GradeMillion Tonnes, % Change

2006 2007 2008 2009

Ctd. Woodfree * 6.6 6.0 5.7 5.9

%ch 8% -10% -5% 2%

Ctd. Mechanical 5.9 6.0 5.8 5.8 %ch 1% 3% -4% 1%

Unc. Woodfree * 13.0 12.4 11.9 11.7 %ch 0% -5% -4% -2%

Unc. Mechanical 6.1 6.2 6.1 6.1 %ch -1% 1% -1% 1%

Total 31.6 30.5 29.5 29.5

%ch 2% -3% -3% 0%

US GDP %ch 2.9% 2.2% 0.9%2.2%

*Includes bristols and cotton

8

North American Five-Year Growth Trends for 2008 to 2012 by Grade (000 tonnes)

-1200

-1000

-800

-600

-400

-200

0

200

Total P&W Coated Unc. Free Unc. Mech

-2.8% -8.2%

0.5% 1.8%

9

Paper Purchased for Use in U.S. Books in Tonnes and as a % of U.S. Printing & Writing Demand

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

1,650

1,700

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Paper Used in Books Share of U.S. Demand (%)

000 tonnes (metric) % of P&W Demand

10

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

050

100150200250300350400450500

CoatedMechanical

CoatedFreesheet

UncoatedMechanical

UncoatedFreesheet

2005 2006 2007

11

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

12

Asia Now Exports $1.5 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1996

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

1996

2006

2007Other

Canada

China

Hong K.

Sing.

Other Asia

Value of Books Imported into the U.S., Million $

13

U.S. Imports of Printed Products from China

$0

$200

$400

$600

$800

$1,000

$1,200

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

Million Real 2007 Dollars

14

Euro Area Growing Modestly, But no RecessionEuro Area Real GDP Growth, Annualized Percent Change

0%

1%

2%

3%

4%

5%

6%

96 97 98 99 00 01 02 03 04 05 06 07 08 09

Potential GDP Growth

15

European Demand for Printing and Writing Paper Supported by Growth in the East

16.0

20.0

24.0

28.0

32.0

36.0

96 97 98 99 0 1 2 3 4 5 6 7 8 9

West East Central SouthEast

Million Tonnes

16

European P&W Demand by GradeMillion Tonnes, % Change

2006 2007 2008 2009

Ctd. Woodfree 9.0 9.2 9.3 9.6

%ch 3% 2% 1% 2%

Ctd. Mechanical 7.7 8.0 8.1 8.3 %ch 2% 4% 1% 2%

Unc. Woodfree 11.6 11.8 11.7 11.9 %ch 1% 1% 0% 1%

Unc. Mechanical 5.6 5.8 5.8 5.9 %ch 7% 3% 1% 2%

Total 34.0 34.8 35.0 35.7

%ch 3% 2% 1% 2%

Euro Area GDP %ch 2.9% 2.6% 1.5%2.1%

Includes Eastern Europe

17

European Five-Year Growth Trends for 2008 to 2012 by Grade (000 tonnes)

0

200

400

600

800

1000

1200

1400

1600

Total P&W Ctd Free Ctd Mech Unc. Free Unc. Mech

4.6%

1.1%

6.8%

6.0%

6.1%

18

Asian P&W Demand by GradeMillion Tonnes, % Change

2006 2007 2008 2009

Ctd. Woodfree 11.3 12.0 12.8 13.4 %ch 4% 6% 6% 5%

Ctd. Mechanical 2.8 2.9 3.1 3.3 %ch 7% 3% 6% 5%

Unc. Woodfree 21.6 22.5 23.1 23.6 %ch 4% 4% 3% 2%

Unc. Mechanical 1.7 1.7 1.9 2.0 %ch -8% 3% 8% 5%

Total 37.5 39.2 40.8 42.2

%ch 4% 5% 4% 3%

GDP %ch 8.0% 8.0% 7.1%6.6%

19

Asian P&W Paper Demand Growth by Country, 2006-2009 (Thousand Tonnes)

-1000 0 1000 2000 3000 4000 5000

Other

Taiwan

India

South Korea

Japan

China/HK

2006 Total: 1320

2007 Total: 1688

2008 Total: 1645

2009 Total: 1414

20

Asian Five-Year Growth Trends for 2008 to 2012 by Grade (000 tonnes)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Total P&W Ctd Free Ctd Mech Unc. Free Unc. Mech

21%

15%29%

25%28%

21

World Demand Summary for Uncoated Woodfree

Million Tonnes

2006 2007 2008 2009

North America 13.0 12.4 11.9 11.7 %ch 0% -5% -3% -2%Europe (1) 11.6 11.8 11.7 11.9 %ch 1% 1% 0% 1%Asia 21.6 22.5 23.1 23.6 %ch 4% 4% 3% 2%Latin America 3.3 3.4 3.5 3.6 %ch 9% 2% 2% 3%Middle East, Africa, 3.5 3.7 3.8 4.0 and Oceania 7% 6% 4% 5%

Total World 53.1 53.7 54.054.8

%ch 3% 1% 1% 1%

(1) Includes Western, Central, South Eastern and Eastern Europe

22

World Demand Summary for Coated WoodfreeMillion Tonnes

2006 2007 2008 2009

North America 6.6 6.0 5.8 5.9 %ch 8% -10% -2% 1%Europe (1) 9.0 9.2 9.3 9.6 %ch 3% 2% 1% 2%Asia 11.3 12.0 12.9 13.4 %ch 4% 6% 6% 5%Latin America 1.3 1.3 1.4 1.4 %ch 12% 5% 3% 4%Middle East, Africa, 1.8 1.9 2.0 2.1 and Oceania 5% 5% 3% 5%

Total World 30.0 30.5 31.332.3

%ch 5% 1% 3% 3%

(1) Includes Western, Central, South Eastern and Eastern Europe

23

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

24

Mergers Lead to Dominant Player in Each Sector

25

North American Market Share in the Peak of the Last Cycle Vs. Now for the Top Three Producers

in each Segment

0%

10%

20%

30%

40%

50%

60%

70%

Newsprint Unc.Mech.

Ctd.Mech.

Unc. Free. Ctd. Free

2000

2007

26

European vs. N. Amer. Combined Market Share of Top Three Producers in 2007 Indicates Further

Consolidation to Come in Europe

0%

10%

20%

30%

40%

50%

60%

70%

Newsprint Unc. Mech. Ctd. Mech. Unc. Free. Ctd. Free

Europe N. Amer. Asia

27

N.A. Paper Mill/Machine Closures (000 Tonnes)

UGW CFS CGW UFS

IP Pensacola 318

NewPage Luke 90

GP Wauna 100

Boise Wallula 220

UPM Miramachi 450

Tembec St. Francisville 280

Domtar Gatineau 90 23

Dirigo Gilman, Vt 64

Fraser Madawaska 82 64

Domtar Port Edwards 31

Domtar Baileyville 113

AbitibiBow Fort William 150

AbitibiBow Dolbeau 88

Kruger Three Rivers 135

2007 Totals 2007 388 460 532 933

28

N.A. Paper Mill/Machine Closures (000 Tonnes)

UGW 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 62 50

New Page Niagara, WI 230

Kruger Three Rivers 68

AbitibiBow Donnacona 160

AbitibiBow Dalhousie 40

AbitibiBow Belgo 260

AbitibiBow Gatineau 45

2008 Totals 2008 573 62 280 649

29

North American Capacity Closures Announced for 2007 and 2008 (000 tonnes)

0

200

400

600

800

1000

1200

1400

1600

1800

Unc. Mech Ctd. Mech Ctd. Free Unc. Free

9% of Demand

13% of Demand

16% of Demand 14% of

Demand

30

European Paper Mill/Machine Closures (Tonnes)CFS CGW SC

2006 Burgo Marzabotto 70,000

UPM Voikka 400,000

Kymi 150,000

Stora Enso Corbeham 250,000

Varkaus 100,000

Scheufelen Scheufelen 15,000

Klippan Molndal 45,000

2007 UPM Jamsankoski 110,000

M-Real Sittingbourne 210,000

Gohrsmuhle 100,000

Myllykoski Dachau 230,000

Andapak Belgium 80,000

Stora Enso Reizholz 215,000

Totals 700,000 1,060,000 215,000

31

European Paper Mill/Machine Closures (Tonnes)

CFS CGW SC

2008 Stora Enso Summa/Anjala 80

M-Real Kangas 100

Stora Enso Anjala 155

Totals 255 80

European Paper Mill/Machine Expansions (Tonnes)

CFS CGW SC

2008 Myllykoski Plattling, GY 380

Totals 380

32

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 65,000

2008 Mondi Szolnok, Hu 140,000

2009 M-Real New Thames, Uk 230,000

Totals 845,000

European Expansions UFS

Dec 07

Q3 09

Stora Enso Varkas, FN 95,000

Portucel Setubal, PT 500,000

33

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

US$ per CN$ (R)

US$ per Euro (L)

Euro and Canadian Dollar Will Remain Strong Against Key Paper Supply Regions, Limiting

Supply from Those Regions in 2008

34

European Supply of Printing and Writing Papers to U.S. Market is Declining due to the Strong Euro

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Ctd. Free. Ctd. Mech. Unc. Mech. Unc. Free.

U.S. Imports From Europe (000 Tonnes)

35

US Coated Freesheet Offshore Imports by Source

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Europe Asia

(000 Tonnes)

36

US Coated Mechanical Offshore Imports by Source

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Europe Asia

(000 Tonnes)

37

US Total Coated Paper Offshore Imports by Source

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Europe Asia

(000 Tonnes)

38

U.S. Coated Paper Imports From China by Month

0

5

10

15

20

25

30

35

40

45

J2006

F M A M J J A S O N D J2007

F M A M J J A S O N D J2008

Ctd Free Ctd. Mech

000 tonnes per month

39

U.S. Coated Mechanical Paper Imports From China by Month – Sheets vs Rolls

0

5

10

15

20

25

30

35

40

45

J2006

F M A M J J A S O N D J2007

F M A M J J A S O N D J2008

Rolls Sheets

000 tonnes per month

40

Operating Rates Get Extraordinarily High in 2008 Despite Possibility of a Recession, Especially for

Coated and Uncoated Mechanical Grades

80%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Unc. Free.

Unc. Mech.

Ctd. Mech.

Ctd. Free.

Operating rates, North America

41

Printer Inventories of Paper (Days of Supply, seasonally adjusted)

3537394143454749515355

2003 2004 2005 2006 2007 2008

Data Source: Calculated by RISI from IDEAlliance data

Days

Coated Mech.

Total Paper

42

U.S. Publishing Paper Pricing by Quarter ($/short ton)

$550$600$650$700$750$800$850$900$950

$1,000$1,050

0 1 2 3 4 5 6 7 8

Ctd. No. 3 60 lb. Ctd. No. 4 50 lb. Ctd. No. 5 40 lb.

SC-35 lb 50 Lb UFS Offset

43

Average Profitability for Coated Freesheet Paper Producers in Europe and U.S.

-10%

-5%

0%

5%

10%

15%

20%

25%

0 1 2 3 4 5 6 7 8 9 10

Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery.

West Europe

U.S.