Transcript No Slide Title

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)
9%
Potential GDP Growth
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
2
We Assume Oil Prices Are Near a Peak
(WTI Oil Price per Barrel in Current and 2004 Dollars*)
$70
$60
$50
In 2004 Dollars
$40
$30
$20
$10
Nominal
*Deflated by U.S. PPI for Finished Goods
$0
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
3
High U.S. Home Prices Beget Risky Loans
(Type of Mortgage Loan for Purchase, % of Total)
50%
40%
Negative
amortization
Interest only
30%
20%
10%
0%
2000
2001
2002
2003
2004
2005
4
U.S. Economy Near-Term Outlook
2004
2005
2006
2007
2008
Real GDP
% Ch.
4.2
3.5
3.3
2.8
4.2
Consumer
Prices-% Ch.
2.7
3.4
3.3
2.8
3.1
Fed. Funds
Int. Rate-%
1.3
3.2
4.8
5.0
5.3
5
Canadian Dollar Not Tracking With Euro Any
More Against U.S. Dollar, but Has Become an Oil
Currency
1.45
US$/Euro
US$/CN$
1.35
0.9
0.85
Euro (left scale)
1.25
0.8
1.15
0.75
1.05
0.7
0.95
0.65
CN$ (right scale)
0.85
0.6
99
0
1
2
3
4
5
6
7
8
6
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
7
U.S. Catalog Circulation Backtracks due to Higher
Cost of Paper and Postage in 2006-07
Billions of Catalogs Mailed/quarter
5.2
5.0
4.8
4.6
4.4
4.2
4.0
3.8
3.6
Data: RISI
97
98
99
0
1
2
3
4
5
6
7
8
8
U.S. Magazine Ad Pages Will Gain Only 1%-2%
Per year in 2006-2008
(seasonally adjusted quarterly ad pages)
1.45
Index 1982=1
1.40
1.35
1.30
1.25
1.20
1.15
1.10
98
99
0
1
2
3
4
5
6
7
8
Source: RISI Index created from PIB data
9
North American P&W Demand by Grade
Million Tons, % Change
2005
2006
2007
2008
Ctd. Woodfree
%ch
6.8
-3%
7.0
3%
7.0
0%
7.3
3%
Ctd. Mechanical
%ch
6.5
-1%
6.5
1%
6.6
1%
6.8
3%
Unc. Woodfree
%ch
14.5
-4%
14.6
1%
14.4
-1%
14.5
0%
6.8
2%
6.9
2%
7.1
2%
7.4
4%
34.6
-2%
3.5%
35.1
1%
3.4%
35.1
0%
2.8%
35.9
2%
4.2%
Unc. Mechanical
%ch
Total
%ch
GDP %ch
10
Paper Purchased for Usage in U.S. Books by
Grade (000 tons)
700
600
500
400
300
200
100
0
Coated
Mechanical
Coated
Freesheet
2003
Uncoated
Mechanical
2004
Uncoated
Freesheet
2005
11
Paper Purchased for Use in U.S. Books in Tons
and as a % of U.S. Printing & Writing Demand
2,000 000 tons
% of P&W Demand 7.0%
1,900
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
Paper Used in Books
3
4
5
6
7
8
9
10
Share of U.S. Demand (% )
12
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
13
Asia Now Exports $1.3 Billion in Books to the U.S.
Market Compared With $0.6 Bill. in 1995
Other
Canada
China
Hong K.
Sing.
Other Asia
2005
1995
$0
$500 $1,000 $1,500 $2,000 $2,500 $3,000
Value of Books Imported into the U.S., Million $
14
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
1995
UK Mexico Sing.
S.
Korea
2005
15
U.S. Imports of Printed Products from China
$800
$700
$600
$500
$400
$300
$200
$100
$0
Million Real 2005 Dollars
90 91 92 93 94 95 96 97 98 99 0
Books including Children's
1
Greeting Cards
2
3
4
5
all other
16
Implications for Paper Market of Asian Imports

Most of the Growth in Paper Usage in Books is Coming
From Books Printed in Asia
– Quality Paper Now Produced Domestically in China, both
Coated and Uncoated, so They do Not Need to Import Paper to
Print Books

The Growth in Paper Demand in U.S. Printed Books is
Going Primarily to Blended Uncoated Mechanical
“Superbright” Offset Papers
– Despite Issue With Brightness Reversion
17
Development of Superbright Uncoated
Mechanical Offset Papers is Expanding the Use of
Uncoated Mechanical Papers in Books
500
% of P&W Demand in Books
000 tons
28.0%
480
27.0%
460
26.0%
440
25.0%
420
24.0%
400
23.0%
380
22.0%
360
21.0%
340
20.0%
0
1
2
3
4
5
MF Uncoated Mechanical Used in Books
Share of Paper Used in Books
18
30% of The Canadian Fine Paper Industry
Scheduled for Permanent Closure Between
December 2005, and June of 2006

In Addition to Temporary Closure at Miramichi

Canadian Dollar

Wood Shortage and High Cost of Pulpwood
– In East Only

Surge in Energy Costs
– Losing Advantage of Low Power Rates

Inflexible Labor Rules
19
Recent Canadian Paper Mill/Machine Closures
Coated
Cascades
Thunder Bay
180,000 tons
St. Jerome
Domtar
Weyco
Totals
Uncoated Free.
10,000 tons
Ottawa
30,000 tons
35,000 tons
Cornwall
126,000 tons 138,000 tons
New West.
134,000 tons
Prince Albert
280,000 tons
Dryden
155,000 tons
470,000 tons 618,000 tons
20
Cash Manufacturing Costs for Softwood Pulp
($/tonne)
$475
$450
E. Canada
$425
$400
$375
U.S. South
$350
$325
$300
$275
$250
0
1
2
3
4
5
6
21
Can Offshore Imports Fill
the Supply Gap?
22
N.A. Offshore Imports Have Captured Up to 25%
of the Market for Some Grades
Percentage of N.A. Demand
30%
25%
20%
15%
10%
5%
0%
1980
News
1990
UFS
2000
UMEC
CMEC
2005
CFS
23
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
24
Recent European Paper Mill/Machine Closures
for Late 2005 and 2006
Coated Mech.
UPM
Jamsankoski, FN 121,000 tons
Voikka, FN
StoraEnso
Klippan
Totals
Coated Free.
440,000 tons
Kymi, FN
165,000 tons
Varkaus, FN
110,000 tons
Corbehem, FR
275,000 tons
Molndal, SW
45,000 tons
881,000 tons
275,000 tons
25
European Supply of Coated Paper to N.A. Will
Decline in 2006/2007 Due to Mill Closures
U.S. Imports from Europe, 000 tons
1000
800
600
400
200
0
2000
2001
2002
2003
Freesheet
2004
2005
2006
2007
Mechanical
26
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
27
Major Capacity Changes in Asia, 2005–2008
Thousand Tonnes
Coated Woodfree
APP (Gold East) China
UPM, Jiangsu China
April, Guangdong China
Nine Dragons China
Oji/Nantong, Jinangsu China
Coated Mechanical
Jiangxi Chenming, China*
Shandong Huatai, China*
Daio Paper, Japan
Jilin Chenming, China
Shandong Huatai, China*
Korindo, Kalimantan Indonesia
770
165 (e)
247 (e)
220
440
Q2:2005
Q2:2005
2006/2007
2007
2008
220
220
318
100
220
143
Q2:2005
Q1:2006
Q3 2007
Q3 2006
Q1:2007
Q3 2008
* Also can produce newsprint. Assumes 50/50 split.
28
Major Capacity Changes in Asia, 2005–2008
Thousand Tons
Uncoated Woodfree
April Kerinci, Indonesia
457
UPM, Jiangsu China
Hankuk, S. Korea
Packages, Pakistan
Ballapur, India
Phoenix Thailand
330 net Q2:2005
220
Q1:2006
132
Q1 2007
275
Q4 07
176
Q4 07
Uncoated Mechanical
Q1:2007
none
29
Asian Supply of Coated and Uncoated Freesheet
Paper to N.A. Will Continue to Rise
U.S. Imports from Asia, 000 tons
1000
800
600
400
200
0
2000
2001
2002
Ctd. Free.
2003
2004
Ctd. Mech
2005
2006
2007
Unc. Free.
30
CGW Operating Rates Stay High Through 2008
Due to Capacity Closures
100%
Operating Rates Adjusted for Strikes/Lockouts
95%
90%
85%
80%
Europe
N. Amer.
75%
0
1
2
3
4
5
6
7
8
31
CFS Operating Rates Finally Getting Back to
Normal Levels in Europe, and are Now High in
North America
100%
Operating Rates Adjusted for Strikes
95%
90%
85%
80%
Europe
N. Amer.
75%
0
1
2
3
4
5
6
7
8
32
Unc. Mech. Operating Rates Ease After Strikes
End Due to New European Capacity
Operating Rates Adjusted for Strikes/Lockouts
100%
Europe
N. Amer.
97%
94%
91%
88%
85%
0
1
2
3
4
5
6
7
8
33
UFS Markets are Tight in N.A. Due to Cap
Closures, but Europe Still Has Oversupply
Operating Rates Adjusted for Strikes/Lockouts
96%
94%
92%
90%
88%
86%
84%
Europe
N. Amer.
82%
80%
0
1
2
3
4
5
6
7
8
34
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
Profitability defined as (price-cost)/cost. Costs are total costs
including depreciation, interest, SG&A, and delivery.
35