Transcript No Slide Title

World Outlook for Book Publishing
Papers
John Maine
Vice President
April 2007
U.S. Economy in the Middle of a 5 Quarter
Slowdown that Began in Q2 2006

U.S. Economy Responding to
– Rise in Interest Rates
– Energy Price Shock
– Weak Housing and a Decline in Mortgage Cash-Outs

So Far, No Recession in Sight
– GDP Growth Below Average, but Remaining Around 2%-2.5%
– Business Investment Strong

Economic Growth to Remain Below Trend Through Mid-2007
2
The U.S. Economy Holding Up Well to Negative
Influences so Far in 2007
Real GDP Growth, Annualized Percent Change
9%
Potential GDP Growth
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
96
97
98
99
00
01
02
03
04
05
06
07
08
3
Potential Recession?…Risk Assessment

Inverted Yield Curve Persists

Housing/Mortgage Collapse?

Fixing Global Imbalances May Require Much Weaker Dollar

Chinese Hard Landing?
4
U.S. Interest Rates
9%
8%
10-Year Bond Yield
Inverted Yield Curve
7%
6%
5%
`
4%
3%
2%
Federal Funds Rate
1%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
5
Overvalued U.S. Home Prices Beget Risky Loans
Type of Mortgage Loan for Purchase, % of Total
50%
40%
Negative amortization
Interest only
30%
20%
10%
0%
2000
2001
2002
2003
2004
2005
6
U.S. Foreclosures Have Spiked in Recent Months
Foreclosures Started During the Quarter – Mortgage Bankers Assn.
0.60%
0.55%
0.50%
0.45%
0.40%
0.35%
0.30%
0.25%
0.20%
90 91 92 93 94 95 96 97 98 99 0
1
2
3
4
5
6
7
Overinvestment Makes China Vulnerable
50%
Investment as Percent of GDP
40%
30%
20%
China
Thailand
India
Malaysia
S. Korea
10%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
8
Euro Will Remain Strong
$1.40
US$ per Euro
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
95
96
97
98
99
0
1
2
3
4
5
6
7
8
9
9
Falling Energy Prices Hold Canadian Dollar Below 90 Cents
(WTI Oil Price per Barrel and $U.S./$CN Exchange Rate)
$80
$0.95
$70
$0.90
WTI Oil Price (L)
$60
$0.85
$50
$0.80
$40
$0.75
$30
$0.70
$20
US$ per CN$ (R)
$10
$0.65
$0
$0.60
95
96
97
98
99
0
1
2
3
4
5
6
7
8
9
10
World Printing & Writing Paper Demand
Took Off Without North America in 2006
15%
% Change in Apparent Consumption
10%
5%
0%
N. America
Europe
L. America
Asia
Other
-5%
-10%
2000
2001
2002
2003
2004
2005
2006
11
World Demand Growth from 2000 to 2006 Shows
Decreasing Importance of North America
12
Million Tonnes
10
8
6
4
2
0
N Amer.
Europe
L Amer.
Asia
Other
World
-2
P&W Demand Growth From 2000 to 2006
12
World P&W Demand Growth Stuck in Low Gear by
Stagnant North American Market
10%
% Change in World Demand for P&W Paper
8%
6%
4%
2%
0%
-2%
-4%
-6%
90
92
94
96
98
0
2
4
6
8
13
World P&W Demand by Grade
Million Tonnes, % Change
2005
2006
2007
2008
Ctd. Woodfree
%ch
28.7
3%
29.7
4%
30.5
2%
31.8
4%
Ctd. Mechanical
%ch
17.2
0%
17.8
3%
18.0
1%
18.6
4%
Unc. Woodfree
%ch
51.5
1%
52.5
2%
53.1
1%
54.5
3%
Unc. Mechanical
%ch
14.3
-1%
14.6
2%
14.9
2%
15.5
4%
111.8
0.8%
4.7%
114.6
2.5%
5.7%
116.4
1.6%
4.6%
120.4
3.4%
5.1%
Total
%ch
World GDP %ch
14
North American Market

Demand in Third Year of Stagnation or Decline
– Started in 2005
– Despite strong economy
– Will Remain Weak in 2007

High Cost Domestic Capacity Shutting Down

Modest Demand Growth May Return in 2008
– Stronger economy
15
Printer Inventories of Paper
(Days of Supply, seasonally adjusted)
47
Days
45
43
41
39
37
35
2003
2004
2005
Data Source: Calculated by RISI from
IDEAlliance data
2006
2007
16
North America Grade Trends

Uncoated Freesheet Declining Since 1999
– Further reductions expected

Coated Paper
– Growth trend is close to 2% per year
– But not in 2007 where demand will be down 1%-2%

Uncoated Mechanical Demand Is Robust
– Competition with independent Telco directories
– Switch to cheaper papers
– Success of offset substitutes
17
North American P&W Demand by Grade
Million Tonnes, % Change
2005
2006
2007
2008
Ctd. Woodfree *
%ch
6.1
-2%
6.3
3%
6.3
0%
6.6
4%
Ctd. Mechanical
%ch
5.8
-3%
6.0
3%
5.9
-2%
6.1
4%
Unc. Woodfree *
%ch
13.0
-5%
12.8
-1%
12.6
-1%
12.7
1%
Unc. Mechanical
%ch
6.2
2%
6.1
-1%
6.3
2%
6.6
5%
31.1
-3%
3.2%
31.2
0%
3.3%
31.1
-1%
2.5%
32.0
3%
3.1%
Total
%ch
U.S. GDP %ch
*Includes bristols and cotton
18
Paper Purchased for Use in U.S. Books in Tons
and as a % of U.S. Printing & Writing Demand
1,900 000 tons
% of P&W Demand 7.0%
6.0%
1,800
5.0%
1,700
4.0%
1,600
3.0%
1,500
2.0%
1,400
1.0%
1,300
0.0%
95 96 97 98 99
0
1
2
3
Paper Used in Books
4
5
6
7
8
9
10 11
Share of U.S. Demand (% )
19
Paper Purchased for Usage in U.S. Books by
Grade (000 tons)
600
500
400
300
200
100
0
Coated
Mechanical
Coated
Freesheet
2004
Uncoated
Mechanical
2005
Uncoated
Freesheet
2006
20
Update on U.S. Imports of Books Printed in
Asia

China Sales of Books to the US jumped another 11% in 2006
– 550 Million Books per Year Now Imported From China
– Dominated by Children’s Books

Asia Exported $1.4 billion in Books to the U.S. in 2006
– Equal to Nearly 5% of U.S. Publisher Net Sales of Books
21
Asia Now Exports $1.4 Billion in Books to the U.S.
Market Compared With $0.6 Bill. in 1996
Other
Canada
China
Hong K.
Sing.
Other Asia
2006
1996
$0
$500 $1,000 $1,500 $2,000 $2,500 $3,000
Value of Books Imported into the U.S., Million $
22
China Becomes Dominant Exporter of Printed
Books to the U.S.
600
U.S. imports of printed books, millions of books
500
400
300
200
100
0
Canada China Hong
Kong
1996
UK Mexico Sing.
S.
Korea
2006
23
U.S. Imports of Printed Products from China
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Million Real 2006 Dollars
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6
Books including Children's
Greeting Cards
all other
24
CVD Duty Announced on Asian CFS Paper at the
End of March

CVD (Countervailing Duty)
– Due to Asian Governments Subsidizing Paper mills
• Principal subsidy is income tax abatement for investment in new
mills, free from income tax for 2 Years, followed by 3 Years of 50%
abatement
– Resulted in Duties of 10%-20% on Chinese and Indonesia CFS
•
•
•
•
•
But less than 2% of Korean CFS
APP hit hard with some of the top duties
All producers affected
Applies to both sheets and rolls of CFS, but not coated board
Importer of record now has to put up bond that will be escrowed
until the fall when a final determination on the duty is made
• At that time, funds could be distributed to New Page and other
affected parties
25
Antidumping Duty (ADD) Ruling Due at The End
of May

Could Result In Additional Tariffs
– Must prove the mills are selling below costs or below prices in
their home market
– Prices are cheap in China,so this is not an issue, but the US
has declared China prices irrelevant because China is not a
market economy
– DOC has chosen India as a substitute home market and prices
in India are higher than in China
– Korea could get hit with ADD if DOC considers freight and mill
net prices
26
Implications of CVD on Asian CFS Paper

Affects About 350,000 tons of Coated Freesheet (mostly
sheets) Coming from China (300,000 tons) and Indonesia
(50,000 tons)
– Korea Basically Wiggled off the Hook (450,000 tons)
– Up to 90% of Some Western CFS Sheet Markets are Supplied
by Asia, so the Impact Will be Very Regional
– When ADD is Announced in Late May, Korea Could Come
Back into the Picture

What Will Change
– Prices Will Likely go up Again by About 5%
– Korean and European Suppliers Will Fill in for Lost Chinese
and Indonesian Tonnage
– U.S. Producers to Increase Sheeter Utilization
27
Coated Freesheet + Coated Bristol Imports Into
the U.S. by Month (tonnes)
90,000
80,000
70,000
60,000
Asia
Europe
50,000
40,000
30,000
20,000
2003
2004
2005
2006
2007
28
Coated Freesheet + Coated Bristol Imports Into
the U.S. by Month (tonnes)
45,000
40,000
35,000
30,000
china
korea
Japan
25,000
20,000
15,000
10,000
5,000
0
2003
2004
2005
2006
2007
29
Coated Freesheet + Coated Bristol Imports Into
the U.S. by Month (tonnes)
110,000
100,000
90,000
80,000
70,000
sheets
rolls
60,000
50,000
40,000
30,000
20,000
2002
2003
2004
2005
2006
2007
30
N.A. Paper Mill/Machine Closures (tonnes)
2006
Cascades
Thunder Bay
CFS
CGW
28,000
135,000
St. Jerome
Domtar
Ottawa
9,000
27,000
31,000
Cornwall
114,000
124,000
New West.
120,000
Glatfelter
Neenah
112,000
Weyco
Prince Alb.
250,000
Bowater
Dryden
140,000
Benton Harbor
2007
UFS
77,000
IP
Pensacola
NewPage
Luke
GP
Wauna
100,000
Boise
Wallula
220,000
Totals
318,000
90,000
379,000
212,000
1,304,000
31
European Paper Mill/Machine Closures (tonnes)
CFS
2006
Burgo
Marzabotto
UPM
Voikka
Kymi
Stora Enso
2007
400,000
150,000
250,000
100,000
Scheufelen Scheufelen
15,000
Klippan
Molndal
45,000
UPM
Jamsankoski
M-Real
Sittingbourne
210,000
Gohrsmuhle
100,000
Myllykoski
Dachau
Stora Enso
Reizholz
Totals
SC
70,000
Corbeham
Varkaus
CGW
110,000
230,000
215,000
620,000 1,060,000
215,000
32
European Paper Mill/Machine Closures (tonnes)
UFS
2006
2007
SAPPI
Nash
35,000
Cran
Cran-Gervrier
35,000
Paperalia
Legorreta
90,000
IP
Maresquel
70,000
M-Real
Wifsta
175,000
Stora Enso
Berghuizer
235,000
Totals
640,000
33
Major Capacity Changes in Asia, 2006–2009
Thousand Tonnes
Woodfree Paper
Hankuk, Ohsan S. Korea
Gold Huasheng, China
Tjiwi Kimia, Indonesia
Siam Paper, Thailand
Henan Xinxiang, China
Shandong Tralin (#22) China
Shandong Tralin (#23) China
Shandong Tralin (#24) China
April, Kerinci, Indonesia
Packages, Pakistan
Sun Paper, Shandong China
Hubei Maxleaf Xiangfan China
Nippon, Japan
Abhishek, India
200
120
120
100
100
100
100
100
415
120
250
100
-340
100
Q1 2006
Q1 2006
Q1 2006
2006
Q4 2006
Q1 2007
Q2 2007
Q4 2007
Q1 2007
Q1 2007
Q1 2007
Q2 2007
Q4 2007
2007
UWF
UWF, CWF
UWF, CWF
UWF, CWF
UWF
CWF
CWF
CWF
UWF
UWF
UWF, CWF
CWF
CWF, UWF
UWF
34
Major Capacity Changes in Asia, 2006–2009
Thousand Tonnes
Woodfree Paper (continued)
Siam Paper, Thailand
200
Ballapur Bhigwan PM 2, India 140
ITC, India
200
Hokuetsu, Niigata, Japan
350
ITC, India
100
West Coast Paper, India
100
Whitefield Paper, India
200
Shandong Chenming, China
150
Ballapur Bhigwan PM 3, India 160
Tamil Nadu, Kagithapuram India 150
Oji/Nantong Jiangsu China
400
Tatau Pulp, Bintulu Malaysia
750
Q1 2008
Q2 2008
Q4 2008
End 2008
Q2 2008
Q4 2008
Q4 2008
Q3 2008
08/09
Q1 2009
End 2009
Q3 2009
UWF
CWF
CWF
CWF
UWF
UWF
CWF, UWF
CWF
CWF
CWF/UWF
CWF
CWF/UWF
35
Major Capacity Changes in Asia, 2006–2009
Thousand Tonnes
Coated Mechanical
Henan Xinxiang, China
Daio Paper, Japan
Nippon, Ishinomaki, Japan
Puyang Longfeng, China
Oji Tomioka, Japan
200
290
350
275
350
Q1 2007
Q3 2007
Q4 2007
H1 2008
End 2008
LWC
LWC
LWC
LWC
LWC
Q4 2007
2008
SC
SC
Uncoated Mechanical
Stora Enso/Huatai, China
200
Yueyang Paper, Hunan China 400
36
Asian Net Export Growth Shifting Back to
Emphasis on UWF in 2007–2008
800
Net Imports (exports) 000 Tonnes
400
0
-400
-800
CWF - Asia
UWF - Asia
Cme - Asia
Ume - Asia
-1,200
-1,600
95
96
97
98
99
0
1
2
3
4
5
6
7
8
37
CWF Operating Rates Finally Move Above 90% in
Europe Due to Closures in 2007
100%
Operating Rates
95%
90%
85%
80%
Europe
N. Amer.
75%
0
1
2
3
4
5
6
7
8
38
Ctd. Mechanical Markets Very Weak in Early 2007,
But Will Get Tighter as Europe Closes Capacity
Operating Rates (adjusted in 2005 for
lockouts in Finland and Miramichi)
98%
94%
90%
86%
82%
Europe
N. Amer.
78%
0
1
2
3
4
5
6
7
8
39
Capacity Closures Keep Uncoated Freesheet
Operating Rates Above 90%
94%
Operating Rates
92%
90%
88%
86%
84%
82%
Europe
N. Amer.
80%
0
1
2
3
4
5
6
7
8
40
U.S. Publishing Paper Pricing by Quarter
($/short ton)
$950
$900
$850
$800
$750
$700
$650
$600
$550
0
1
2
Ctd. No. 3 60 lb.
SC-35 lb
3
4
Ctd. No. 4 50 lb.
50 Lb UFS Offset
5
6
7
Ctd. No. 5 40 lb.
41
Average Profitability for U.S. Printing and Writing
Paper Producers by Grade
35%
30%
25%
20%
15%
10%
5%
0%
-5% 0
-10%
LWC
Uncoated
Freesheet
Coated
Freesheet
1
2
3
4
5
6
7
8
9
Profitability defined as (price-cost)/cost. Costs are total costs
including depreciation, interest, SG&A, and delivery.
42