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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. The U.S. Economy Reacts to Higher Interest Rates, Energy Costs, and Debt (Real GDP Growth, Annualized Percent Change). - PowerPoint PPT Presentation
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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
2
The U.S. Economy Reacts to Higher Interest Rates, Energy Costs, and Debt(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
Potential GDP Growth
3
$0
$10
$20
$30
$40
$50
$60
$70
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
We Assume Oil Prices Are Near a Peak(WTI Oil Price per Barrel in Current and 2004 Dollars*)
In 2004 Dollars
Nominal*Deflated by U.S. PPI for Finished Goods
4
High U.S. Home Prices Beget Risky Loans(Type of Mortgage Loan for Purchase, % of Total)
0%
10%
20%
30%
40%
50%
2000 2001 2002 2003 2004 2005
Negativeamortization
Interest only
5
U.S. Economy Near-Term Outlook
2004 2005 2006 2007 2008
Real GDP% Ch. 4.2 3.5 3.3 2.8 4.2
ConsumerPrices-% Ch. 2.7 3.4 3.3 2.8 3.1
Fed. FundsInt. Rate-% 1.3 3.2 4.8 5.0 5.3
6
Canadian Dollar Not Tracking With Euro Any More Against U.S. Dollar, but Has Become an Oil Currency
0.85
0.95
1.05
1.15
1.25
1.35
1.45
99 0 1 2 3 4 5 6 7 8
0.6
0.65
0.7
0.75
0.8
0.85
0.9US$/Euro US$/CN$
CN$ (right scale)
Euro (left scale)
7
North American Demand for Publishing PapersRemains 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
U.S. Catalog Circulation Backtracks due to Higher Cost of Paper and Postage in 2006-07
3.6
3.8
4.0
4.2
4.4
4.6
4.8
5.0
5.2
97 98 99 0 1 2 3 4 5 6 7 8
Billions of Catalogs Mailed/quarter
Data: RISI
9
U.S. Magazine Ad Pages Will Gain Only 1%-2% Per year in 2006-2008
(seasonally adjusted quarterly ad pages)
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
98 99 0 1 2 3 4 5 6 7 8
Index 1982=1
Source: RISI Index created from PIB data
10
North American P&W Demand by GradeMillion Tons, % Change
2005 2006 2007 2008
Ctd. Woodfree 6.8 7.0 7.0 7.3 %ch -3% 3% 0% 3%
Ctd. Mechanical 6.5 6.5 6.6 6.8 %ch -1% 1% 1% 3%
Unc. Woodfree 14.5 14.6 14.4 14.5 %ch -4% 1% -1% 0%
Unc. Mechanical 6.8 6.9 7.1 7.4 %ch 2% 2% 2% 4%
Total 34.6 35.135.1 35.9 %ch-2% 1%0% 2%
GDP %ch 3.5%3.4% 2.8% 4.2%
11
Paper Purchased for Usage in U.S. Books by Grade (000 tons)
0
100
200
300
400
500
600
700
CoatedMechanical
CoatedFreesheet
UncoatedMechanical
UncoatedFreesheet
2003 2004 2005
12
Paper Purchased for Use in U.S. Books in Tons and as a % of U.S. Printing & Writing Demand
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Paper Used in Books Share of U.S. Demand (% )
000 tons % of P&W Demand
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
Asia Now Exports $1.3 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1995
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
1995
2005 Other
Canada
China
Hong K.
Sing.
Other Asia
Value of Books Imported into the U.S., Million $
15
China Becomes Dominant Exporter of Printed Books to the U.S.
0
100
200
300
400
500
600
Canada China HongKong
UK Mexico Sing. S.Korea
1995 2005
U.S. imports of printed books, millions of books
16
U.S. Imports of Printed Products from China
$0
$100
$200
$300
$400
$500
$600
$700
$800
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5
Books including Children's Greeting Cards all other
Million Real 2005 Dollars
17
Implications for Paper Market of Asian Imports
Most of the Growth in Paper Usage in Books is Coming From Books Printed in Asia
– Quality Paper Now Produced Domestically in China, both Coated and Uncoated, so They do Not Need to Import Paper to Print Books
The Growth in Paper Demand in U.S. Printed Books is Going Primarily to Blended Uncoated Mechanical “Superbright” Offset Papers
– Despite Issue With Brightness Reversion
18
Development of Superbright Uncoated Mechanical Offset Papers is Expanding the Use of
Uncoated Mechanical Papers in Books
340
360
380
400
420
440
460
480
500
0 1 2 3 4 5
20.0%
21.0%
22.0%
23.0%
24.0%
25.0%
26.0%
27.0%
28.0%
MF Uncoated Mechanical Used in Books
Share of Paper Used in Books
000 tons % of P&W Demand in Books
19
30% of The Canadian Fine Paper Industry Scheduled for Permanent Closure Between December 2005, and June of 2006
In Addition to Temporary Closure at Miramichi
Canadian Dollar
Wood Shortage and High Cost of Pulpwood– In East Only
Surge in Energy Costs– Losing Advantage of Low Power Rates
Inflexible Labor Rules
20
Recent Canadian Paper Mill/Machine Closures
Coated Uncoated Free.
Cascades Thunder Bay 180,000 tons
St. Jerome 10,000 tons
Domtar Ottawa 30,000 tons 35,000 tons
Cornwall 126,000 tons 138,000 tons
New West. 134,000 tons
Weyco Prince Albert 280,000 tons
Dryden 155,000 tons
Totals 470,000 tons 618,000 tons
21
Cash Manufacturing Costs for Softwood Pulp ($/tonne)
$250
$275
$300
$325
$350
$375
$400
$425
$450
$475
0 1 2 3 4 5 6
E. Canada
U.S. South
22
Can Offshore Imports Fill the Supply Gap?
23
N.A. Offshore Imports Have Captured Up to 25% of the Market for Some Grades
0%
5%
10%
15%
20%
25%
30%
1980 1990 2000 2005
News UFS UMEC CMEC CFS
Percentage of N.A. Demand
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
Recent European Paper Mill/Machine Closuresfor Late 2005 and 2006
Coated Mech. Coated Free.
UPM Jamsankoski, FN
121,000 tons
Voikka, FN 440,000 tons
Kymi, FN 165,000 tons
StoraEnso Varkaus, FN 110,000 tons
Corbehem, FR 275,000 tons
Klippan Molndal, SW 45,000 tons
Totals 881,000 tons 275,000 tons
26
European Supply of Coated Paper to N.A. Will Decline in 2006/2007 Due to Mill Closures
0
200
400
600
800
1000
2000 2001 2002 2003 2004 2005 2006 2007
Freesheet Mechanical
U.S. Imports from Europe, 000 tons
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
Major Capacity Changes in Asia, 2005–2008 Thousand Tonnes
Coated Woodfree
APP (Gold East) China 770 Q2:2005UPM, Jiangsu China 165 (e) Q2:2005April, Guangdong China 247 (e) 2006/2007 Nine Dragons China 220 2007Oji/Nantong, Jinangsu China 440 2008
Coated MechanicalJiangxi Chenming, China* 220 Q2:2005Shandong Huatai, China* 220 Q1:2006Daio Paper, Japan 318 Q3 2007Jilin Chenming, China 100 Q3 2006Shandong Huatai, China* 220 Q1:2007Korindo, Kalimantan Indonesia 143 Q3 2008
* Also can produce newsprint. Assumes 50/50 split.
29
Major Capacity Changes in Asia, 2005–2008 Thousand Tons
Uncoated Woodfree
April Kerinci, Indonesia 457 Q1:2007
UPM, Jiangsu China 330 net Q2:2005Hankuk, S. Korea 220 Q1:2006Packages, Pakistan 132 Q1 2007Ballapur, India 275 Q4 07Phoenix Thailand 176 Q4 07
Uncoated Mechanical none
30
Asian Supply of Coated and Uncoated Freesheet Paper to N.A. Will Continue to Rise
0
200
400
600
800
1000
2000 2001 2002 2003 2004 2005 2006 2007
Ctd. Free. Ctd. Mech Unc. Free.
U.S. Imports from Asia, 000 tons
31
75%
80%
85%
90%
95%
100%
0 1 2 3 4 5 6 7 8
Europe
N. Amer.
CGW Operating Rates Stay High Through 2008 Due to Capacity Closures
Operating Rates Adjusted for Strikes/Lockouts
32
75%
80%
85%
90%
95%
100%
0 1 2 3 4 5 6 7 8
Europe
N. Amer.
CFS Operating Rates Finally Getting Back to Normal Levels in Europe, and are Now High in
North America
Operating Rates Adjusted for Strikes
33
85%
88%
91%
94%
97%
100%
0 1 2 3 4 5 6 7 8
Europe
N. Amer.
Unc. Mech. Operating Rates Ease After Strikes End Due to New European Capacity
Operating Rates Adjusted for Strikes/Lockouts
34
80%
82%
84%
86%
88%
90%
92%
94%
96%
0 1 2 3 4 5 6 7 8
Europe
N. Amer.
UFS Markets are Tight in N.A. Due to Cap Closures, but Europe Still Has Oversupply
Operating Rates Adjusted for Strikes/Lockouts
35
Average Profitability for U.S. Printing and Writing Paper Producers by Grade
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0 1 2 3 4 5 6 7 8
Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery.
LWC
Uncoated Freesheet
Coated Freesheet