RISI Paper Market Outlook: A Possible
Recession and Its Impact on Book
Paper Markets
John Maine
Vice President
May 2008
The U.S. Economy… Headed into Recession?
(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 09
2
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)
8.0%
6.0%
Real Consumer Spending
4.0%
2.0%
0.0%
-2.0%
Industrial Production
-4.0%
-6.0%
0 1 2 3 4 5 6 7 8 9
3
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
4
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)
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0% Recession Years
-10.0%
-12.0%
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9
5
Catalog Circulation Will Fall Again in 08 In addition to
Exhibiting Less Pagination
(RISI Catalog Circulation Index, Year-over-year Percent Change)
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
Recession Years
-6.0%
-8.0%
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9
6
North American P&W Demand by Grade
Million 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
7
North American Five-Year Growth Trends for 2008
to 2012 by Grade (000 tonnes)
200 -8.2%
-2.8%
0
0.5% 1.8%
-200
-400
-600
-800
-1000
-1200
Total P&W Coated Unc. Free Unc. Mech
8
Paper Purchased for Use in U.S. Books in Tonnes
and as a % of U.S. Printing & Writing Demand
1,700 000 tonnes (metric) % of P&W Demand 8.0%
1,650
7.0%
1,600
6.0%
1,550
5.0%
1,500
1,450 4.0%
1,400
3.0%
1,350
2.0%
1,300
1.0%
1,250
1,200 0.0%
95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12
Paper Used in Books Share of U.S. Demand (% )
9
Paper Purchased for Usage in U.S. Books by
Grade (000 tons)
500
450
400
350
300
250
200
150
100
50
0
Coated Coated Uncoated Uncoated
Mechanical Freesheet Mechanical Freesheet
2005 2006 2007
10
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
11
Asia Now Exports $1.5 Billion in Books to the U.S.
Market Compared With $0.6 Bill. in 1996
2007
Other
Canada
China
2006
Hong K.
Sing.
Other Asia
1996
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
Value of Books Imported into the U.S., Million $
12
U.S. Imports of Printed Products from China
Million Real 2007 Dollars
$1,200
$1,000
$800
$600
$400
$200
$0
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
13
Euro Area Growing Modestly, But no Recession
Euro Area Real GDP Growth, Annualized Percent Change
6%
5%
Potential GDP Growth
4%
3%
2%
1%
0%
96 97 98 99 00 01 02 03 04 05 06 07 08 09
14
European Demand for Printing and Writing Paper
Supported by Growth in the East
Million Tonnes
36.0
32.0
28.0
24.0
20.0
16.0
96 97 98 99 0 1 2 3 4 5 6 7 8 9
West East Central SouthEast
15
European P&W Demand by Grade
Million 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
16
European Five-Year Growth Trends for 2008 to
2012 by Grade (000 tonnes)
4.6%
1600
1400
1200
1000
800
6.8% 6.1%
600
6.0%
400
1.1%
200
0
Total P&W Ctd Free Ctd Mech Unc. Free Unc. Mech
17
Asian P&W Demand by Grade
Million 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%
18
Asian P&W Paper Demand Growth
by Country, 2006-2009 (Thousand Tonnes)
China/HK
Japan
South Korea
India
2006 Total: 1320
Taiwan 2007 Total: 1688
2008 Total: 1645
Other 2009 Total: 1414
-1000 0 1000 2000 3000 4000 5000
19
Asian Five-Year Growth Trends for 2008 to 2012
by Grade (000 tonnes)
9000
21%
8000
7000
6000
5000 29% 15%
4000
3000
2000 28% 25%
1000
0
Total P&W Ctd Free Ctd Mech Unc. Free Unc. Mech
20
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 54.0 54.8
%ch 3% 1% 1% 1%
(1) Includes Western, Central, South Eastern and Eastern Europe 21
World Demand Summary for Coated Woodfree
Million 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 31.3 32.3
%ch 5% 1% 3% 3%
(1) Includes Western, Central, South Eastern and Eastern Europe 22
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
23
Mergers Lead to Dominant Player in Each Sector
24
North American Market Share in the Peak of the
Last Cycle Vs. Now for the Top Three Producers
in each Segment
70%
60%
50%
40%
2000
30%
2007
20%
10%
0%
Newsprint Unc. Ctd. Unc. Free. Ctd. Free
Mech. Mech.
25
European vs. N. Amer. Combined Market Share of
Top Three Producers in 2007 Indicates Further
Consolidation to Come in Europe
70%
60%
50%
40%
30%
20%
10%
0%
Newsprint Unc. Mech. Ctd. Mech. Unc. Free. Ctd. Free
Europe N. Amer. Asia
26
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
27
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
28
North American Capacity Closures Announced
for 2007 and 2008 (000 tonnes)
1800 13% of
Demand
1600
1400
1200 16% of
Demand 14% of
1000
Demand
800 9% of
600 Demand
400
200
0
Unc. Mech Ctd. Mech Ctd. Free Unc. Free
29
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
30
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
31
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 Stora Enso Varkas, FN 95,000
Portucel Setubal, PT 500,000
Q3 09
32
Euro and Canadian Dollar Will Remain Strong
Against Key Paper Supply Regions, Limiting
Supply from Those Regions in 2008
$1.50 $1.30
US$ per Euro (L)
$1.40 $1.20
$1.30 $1.10
$1.20 $1.00
$1.10 $0.90
$1.00 $0.80
$0.90 $0.70
US$ per CN$ (R)
$0.80 $0.60
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
33
European Supply of Printing and Writing Papers
to U.S. Market is Declining due to the Strong Euro
U.S. Imports From Europe (000 Tonnes)
2,500
2,000
1,500
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ctd. Free. Ctd. Mech. Unc. Mech. Unc. Free.
34
US Coated Freesheet Offshore Imports by Source
(000 Tonnes)
1,600
1,400
1,200
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Europe Asia
35
US Coated Mechanical Offshore Imports by
Source
(000 Tonnes)
1,200
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Europe Asia
36
US Total Coated Paper Offshore
Imports by Source
(000 Tonnes)
1,600
1,400
1,200
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Europe Asia
37
U.S. Coated Paper Imports From China by Month
000 tonnes per month
45
40
35
30
25
20
15
10
5
0
J F M A M J J A S O N D J F M A M J J A S O N D J
2006 2007 2008
Ctd Free Ctd. Mech
38
U.S. Coated Mechanical Paper Imports From
China by Month – Sheets vs Rolls
000 tonnes per month
45
40
35
30
25
20
15
10
5
0
J F M A M J J A S O N D J F M A M J J A S O N D J
2006 2007 2008
Rolls Sheets
39
Operating Rates Get Extraordinarily High in 2008
Despite Possibility of a Recession, Especially for
Coated and Uncoated Mechanical Grades
Operating rates, North America
100%
98%
96%
94%
Unc. Free.
92%
Unc. Mech.
90%
Ctd. Mech.
88%
Ctd. Free.
86%
84%
82%
80%
00
01
02
03
04
05
06
07
08
09
20
20
20
20
20
20
20
20
20
20
40
Printer Inventories of Paper
(Days of Supply, seasonally adjusted)
Days
55
Coated Mech.
53
51
49
47
45
43
41
39
Total Paper
37
35
2003 2004 2005 2006 2007 2008
Data Source: Calculated by RISI from IDEAlliance data
41
U.S. Publishing Paper Pricing by Quarter
($/short ton)
$1,050
$1,000
$950
$900
$850
$800
$750
$700
$650
$600
$550
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
42
Average Profitability for Coated Freesheet Paper
Producers in Europe and U.S.
25%
20%
West Europe
15%
10%
5%
0%
0 1 2 3 4 5 6 7 8 9 10
-5%
U.S.
-10%
Profitability defined as (price-cost)/cost. Costs are total costs
including depreciation, interest, SG&A, and delivery.
43