Transcript No Slide Title

Outlook for Book
Publishing Papers
BMI Management Conference
May 3, 2005
Presented by:
John Maine, Vice President
RISI Growth Projections for 2004 Presented to
BMI in May of 2004
U.S. GDP
Last Yr’s Fcst.
4.7%
’04 Actual
4.4%
Euro GDP
1.9%
1.9%
U.S.Inflation – CPI
1.7%
2.7%
Euro Inflation- CPI
U.S./Euro Exchange
1.7%
1.33
2.1%
1.24
N.A. P&W Demand
3%
4%
Euro P&W Demand
5%
5%
2
Economic Outlook
3
GDP Outlook: U.S. Policy-Induced Growth
Phase Nearing End
 Low Interest Rates, Massive Federal Spending, Tax Cuts, and
Weak $ Have Fueled the Economy, But are Now Reversing
 Tighter Policy and High Energy Prices Threaten Expansion
 Consumer Sector Is Vulnerable
– Job Growth Disappointing; Debt Loads High
 Declining Profits Will Dampen Investment
 Expect Below-Trend Growth in 2nd Half of 2005
4
Are Households Prepared for Rising Interest
Rates?
15%
14%
Household Debt Service as % of Disposable Income
12%
14%
10%
13%
8%
6%
12%
4%
11%
2%
Personal Savings Rate (right)
10%
0%
80 81 82 83 84
85 86 87 88 89
90 91 92 93 94
95 96 97 98 99
0
1
2
3
4
5
The U.S. Recovery Will Fade in 2005
Real GDP Growth, Annualized Percent Change
9%
8%
Potential GDP Growth
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
95
96
97
98
99
0
1
2
3
4
5
6
7
6
Canadian Dollar and Euro Rising to a Peak in
2005
US$ per CN$
US$ per Euro
0.9
0.85
1.5
1.4
CN$
Euro
0.8
1.3
0.75
1.2
0.7
1.1
0.65
1
0.6
0.9
0.55
0.8
90 91 92 93 94 95 96 97 98 99
0
1
2
3
4
5
6
7
7
U.S. Economy Near-Term Outlook
2003
2004
2005
2006
2007
Real GDP
% Ch.
3.0
4.4
3.6
3.3
3.7
Consumer
Prices-% Ch.
2.3
2.7
2.8
2.4
2.5
Fed. Funds
Int. Rate-%
1.1
1.3
3.1
3.9
4.2
8
End-Use Recovery In Magazines and
Catalogs is Slowing, But Book
Publishers Remain Strong
9
U.S. Magazine Ad Pages Peaked in 2004 and
Will Show Little Growth in 2005/2006
1.50
seasonally adjusted monthly ad pages Index 1982=1
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
Feb, 2005
1.05
1.00
98
99
0
1
2
3
4
Source: RISI Index created from PIB data
5
6
7
10
U.S. Catalog Circulation Drops in Response to
Cost of Paper & Postage in 2006
5.0
Billions of Catalogs Mailed/quarter
4.8
4.6
4.4
4.2
4.0
3.8
3.6
97
98
99
0
Data: RISI
1
2
3
4
5
6
7
11
U.S. Shipments of Printing and Writing Paper
to Book Publishers Remains High (000 tons
per month, seasonally adjusted)
110
105
100
95
90
85
80
75
70
65
98
99
0
1
2
3
4
5
Source: AF&PA
12
U.S. Book Publishers Starting to See More
Books Printed in Asia, Leading to Less
Growth in Demand for Book Paper from U.S.
Paper Mills
13
Asia Now Exports $1.2 Billion in Books to the
U.S. Market Compared With $0.6 Bill. in 1995
Other
Canada
China
Hong K.
Sing.
Other Asia
2004
1995
$0
$500
$1,000
$1,500
$2,000
$2,500
Value of Books Imported into the U.S., Million $
14
China Becomes Dominant Exporter of Printed
Books to the U.S.
450
400
350
300
250
200
150
100
50
0
U.S. imports of printed books, millions of books
Canada China Hong
Kong
1995
UK
Mexico Sing.
S.
Korea
2004
15
U.S. Imports of Printed Products from China
$700
Million Real 2004 Dollars
$600
$500
$400
$300
$200
$100
$0
90 91 92 93 94 95 96 97 98 99 0
Books including Children's
1
Greeting Cards
2
3
4
all other
16
Outlook for Paper Demand Shows
Decelerating Trend from Robust 2004
17
Demand Growth Waning in 2005/2006
 Slowing economy
 Rising costs for paper
 Postal rate hikes
 Loss of market share to Internet
18
N.A. Demand for Printing and Writing Papers
(million short tons)
35
35
34
34
33
33
32
32
31
99
0
1
2
3
4
5
6
7
19
Grade Trends
 Uncoated Freesheet
– Declining Trend Since 1999
 Coated Freesheet
– Competition from Hi-Bright Mechanical and Asian Imported
Sheets
 Coated Mechanical
– Good Demand Growth, Supply Shortage
 Uncoated Mechanical
– High Growth, SC Substituting for LWC and MF Hi-Bright
Substituting for Uncoated Freesheet Offset
20
N.A. P&W Demand by Grade
(Thousand Tons, % Change)
2004
2005
2006
2007
Ctd. Free.
%ch
5,988
7%
6,095
2%
6,154
1%
6,261
2%
Ctd. Grwd.
%ch
6,561
7%
6,580
0%
6,580
0%
6,616
1%
Unc. Free.
%ch
14,203
1%
14,284
1%
14,288
0%
14,587
2%
Unc. Grwd.
%ch
6,675
7%
6,913
4%
6,959
1%
7,121
2%
33,427
4%
4.4%
33,871
1%
3.6%
33,980
0%
3.3%
34,585
2%
3.7%
Total
%ch
U.S.Gdp %ch
21
Prolonged Miramichi Strike to
Keep Publishing Markets
Incredibly Tight in 2005
22
Impact of Miramichi Strike
 495,000 tons of Capacity Likely to be Idle for 6-9
Months
–
–
–
–
8% of North American Ctd. Mech. Capacity
56% of UPM North American Ctd. Mech. Capacity
12% of UPM Overall Ctd. Mech. Capacity
3% of Combined Capacity for all North American and
European Producers
23
How Will the Supply Shortage be Alleviated

Supply Shortage Measured at 350,000 tons
– Assuming 9-month strike

More Imports From Europe
– Shift supply to Rauma and others

Reduced Demand
– Shift to other grades
– Exacerbated by potentially higher prices

Temporary Supply Boost
– Postpone downtime for maintenance/rebuilds
– Shift swing machines from coated woodfree
24
U.S. Imports of LWC From Europe Surge in
2005 to Fill Supply Gap
(000 short tons)
1,100
U.S. Offshore Imports of Ctd. and Unct. Mechanical Paper
1,000
900
Ctd. Mech.
Unc. Mech.
800
700
600
500
400
99
0
1
2
3
4
5
6
7
25
Major World Coated Mechanical Paper
Capacity Changes in 2004-2007 (tonnes)
Leipa, Germany
300,000
July 2004
Taishan Paper, China
140,000
Q3 2003
Yueyang, Hunan China
Shandong Huatai, China
125,000 est. (1)
175,000 est. (1)
Q4 2003
Q4 2005
Chenming, Jiangxi China 200,000 est. (1)
Q4 2004
(1) These are newsprint machines that will also make LWC. We have assumed 50/50 split
Figures are metric tonnes
26
Coated Mechanical Operating Rates (adjusted
to exclude strike-idled capacity)
97%
95%
93%
91%
N. Amer.
Europe
89%
87%
85%
99
0
1
2
3
4
5
6
7
27
U.S. Imports of CFS From Asia About to
Overtake Europe (000 short tons)
700
650
600
550
500
450
400
350
300
250
200
Asia
99
0
1
Europe
2
3
4
5
6
7
28
Major World Coated Freesheet Paper Capacity
Changes in 2004-2007 (More Than 100,000 tonnes)
Lecta, Condat France
120,000
2003-2005
Stora Enso, Kimberly
186,000
2003-2005
Appleton, C. Locks
113,000
Late 2004
Burgo, Belgium
600,000
On hold
APP (Gold East) China 700,000
UPM, Jiangsu China
150,000 est.
Oji, Jiangsu China
400,000
Early 2005
Q3 2005
2007
April, China Greenfield 225,000 est.
APP, 4 Mills
260,000 est.
2007
Q4 2004
Figures are metric tonnes
29
Coated Freesheet Operating Rates
95%
93%
91%
89%
87%
85%
N. Amer.
Europe
83%
81%
79%
77%
99
0
1
2
3
4
5
6
7
30
Major World UFS Capacity Changes in 20042007 (More Than 100,000 Tonnes)
Sun Paper, Shandong China
April Kerinci, Indonesia
UPM, Jiangsu China
Mondi, S. Africa
Portucel, Portugal
April, Guangdong China
Hankuk, S. Korea
Ballapur, India
160,000
450,000
300,000 net
250,000
500,000
225,000 est.
200,000
250,000
Q3 2004
Q3 2006
Q3 2005
Late 2005
2006
2006/2007
Q4 2005
End 2007
Note: Two large new PMs are under study in Brazil by IP and Ripassa/VCP
Figures are metric tonnes
31
Uncoated Freesheet Operating Rates
95%
N. Amer.
Europe
93%
91%
89%
87%
85%
83%
99
0
1
2
3
4
5
We continue to include 250,000 tons of temporarily idle
capacity at IP in these numbers
6
7
32
Major World UGW Capacity Changes in 20042007 (More Than 90,000 Tonnes)
Abitibi, Alma, QC
Fraser (Katahdin), Maine
Bowater, Calhoun, TN
UPM, Voikkaa, FN
Irving, St. John, NB
StoraEnso, Wolfsheck, GY
StoraEnso, Maxau, GY
StoraEnso, Kvarnsv., SW
Figures are metric tonnes
227,000
163,000
72,000
-100,000
130,000
-155,000
120,000
420,000
May 2004
May 2004
May 2004
April 2004
Jan. 2005
Nov. 2005
Q3 2004
Nov. 2005
33
Uncoated Mechanical Operating Rates
97%
N. Amer.
Europe
95%
93%
91%
89%
99
0
1
2
3
4
5
6
7
34
Average Profitability for U.S. vs. European
Printing and Writing Paper Mills
25%
U.S.
20%
W. Europe
15%
10%
5%
0%
-5%
99
0
1
2
3
4
5
6
7
Profitability defined as (price-cost)/cost. Costs are total costs including
depreciation, interest, SG&A, and delivery
35
Summary
 Paper Demand Growth is Decelerating
– And will stagnate in 2006 due in part to the high cost
of paper and postage
 Supply Shortage of Coated Mechanical in 2005
– Will get worse if strike is prolonged into the heart of
the printing season
– Imports from Europe will surge despite strong Euro
to fill supply gap
36