State of the North American Pulp & Paper Industry - The Center for ...

State of the North American
Pulp & Paper Industry
– An Update & Outlook –
May 2004
Center for Paper Business and Industry Studies (CPBIS) – Jim McNutt
Value Resolution Group – Dan Cenatempo
Jacobs Engineering i Group – Bob Kinstrey

Overview
North America P&P Industry
– An Update & Outlook –
• Where Are We?
• Industry Performance
• Capacity Issues
• Industry Outlook
• Grades’ Outlook -- Grade-By
By-Grade
• Major Industry Issues
• Summary & Wrap-up
2

Where Are We?
3

What Are North America’s? –
Stakeholders’ Perspectives
• Has Persistent Flaws in the Eyes of Many
Capital Intensive, fragmented, , technology
based – monolithic & slow to adapt
Focus is more on what it does instead of
figuring out what it should be doing
Key into lower costs, economies of scale,
market share, marginal returns
Very open information flows
Highly insular
4

What Is North America’s –
Market Perspective?
• The North American Pulp and Paper Industry Is Mature
Web of Businesses Generally Characterized of Late By:
Highest per capita consumption in world across all grades
Slower growth than GDP & slowing overall GDP growth
High capital intensity
Intense Cost and price based competition
Cyclical and declining pricing and profitability
Below cost of capital returns
Depressed investors’ values and returns
Where Historically – The North American industry
has expanded after each cyclical peak. Excess
capacity was pushed into International Markets
5

What Is North America’s –
Market Perspective?
• However – Looking Back – Combination Of –
A strong US dollar;
Maturing North American Demand;
Unifying European markets;
Aggressive industry growth in developing regions
-- Asia & Latin America; ; and
The European & Developing Regions ‘new’
producers increased imports into North America -
- Interrupted This Growth Pattern
6

What Is North America’s –
Market Perspective?
• However
-- The North American Industry Did Not
Recognize This Competitive Landscape Change
Until Mid 1990s and --
Continued to behave as it did in the past – investing
available cash in new capacity in 1980’s & early
1990s
• This New Capacity Relied on Increasingly
Competitive Export Markets to Maintain Volume
• Yet – Simultaneously -- Developing Regions &
Europe Began Aggressive Imports into North
America.
7

What Is North America’s –
Market Perspective?
The Result Was Persistent Over-capacity,
Globalization of Markets -- Which Undermined &
Sustained Weak Balance a Sheets, Debt Levels,
e Pricing, Profitability & Shareholder Returns
In response – The North American Industry has now
begun to restructure to better compete in this changed
global market environment – but the challenges and
stakes are great and the progress moderate.
8

What Are North America’s –
Current Realities?
• North America’s Paper Industry Pressures Continue
CEOs remain under the microscope
Performance continues to lag
lag – but seeming to stabilize some
Excess Capacity & older/inefficient technology being addressed
Substitution (imports & alternative products to meet consumers
needs) = persistent issue
Balance sheets still out of balance – with moves to improve
Reinvestment in revenue generation steps continues to lag
Competitive landscape remains Intense – some order emerging
Let’s Now Look at some of the Situational Aspects of
the US/NA Industry & Discuss Their Importance . . . .
9

Industry Performance
10

Industry Performance
–
ROTC Vs. Cost of Capital
Cost of Capi ital
Return &
20%
15%
10%
5%
ROTC averages 7% vs.
ROTC Averages 7 % vs.
11% cost of capital
11% Cost of Capital
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
Return On Total Capital
Cost of Capital
Returns
Average 4
Points Below
Target --
Rational
Investors Will
Not Allocate
Capital To The
Poorly
Performing
Sector & Firms
11

Monthly To otal Sharehold der Return (TS SR) Index
Industry Performance -- Total
Shareholder Returns Still Trail S&P 500
400
350
300
250
200
150
100
50
P&FP Shareholder
Risk of P&FP Stocks = Market (Beta = 1.0)
S&P 500 TSR = 10.3% Per Year
Returns Have
P&FP W. Avg TSR = 8.5% Per Year
P&FP Avg. TSR = 7.5% Per Year Trailed S&P 500
L.T. Government Bond = 6.2% Per Year
0
'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03
S&P Return Index P&FP Company Avg. P&FP Company W. Avg.
Yet -- Stocks
Rebounding With
Overall Market
Investment
Services Don’t
Expect Full P&P
Earnings Rebound
Until 2004
12

Industry Performance – Debt Levels
Debt To Capital Ratio
70%
60%
50%
40%
30%
20%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
Debt % of Invested Capital
US Companies
Are
Maintaining
Debt Levels
Near 50% -
Which Will
Likely Limit
Future
Investments
13

Industry Performance – Capital
Spending Level – Real USD
U.S. Rea al Capital Exp penditures ($ $2002 -
Millio ons)
15,000
12,500
10,000
7,500
5,000
2,500
-
Total
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
US Pulp &
Paper Capital
Expenditures
Will Continue
To Languish
Until The
Cyclical
Recovery
Total
Circa 2004
14

Industry Performance – Less Capital Being
Invested In Primary Industry Assets
Sh hare of Pulp & Paper Capita al Spending
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
IT & Communic. Facilities, Machinery & Infra. Office Buildings & Furnish.
Facility
Related
Spending
Accounts For
Declining
Share of P&P
CAPEX for
IT = More
15

Industry Performance – Profitability
Net Operat ting Profit Margin
12%
10%
8%
6%
4%
2%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
US Pulp &
Paper
Profitability
Continues Its
Declining
Path In Real
Terms Since
1970s
16

Industry Performance – Capital Turnover
Sales / Tota al Invested Capital
200%
180%
160%
140%
120%
100%
80%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
US Pulp &
Paper
Capital
Turnover To
Continue Its
Downward
Trend
17

es % of Dep preciation
Capita al Expenditu
275%
250%
225%
200%
175%
150%
125%
100%
75%
Industry Performance – Capital
Spending/Depreciation
50%
25%
0%
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
US CAPEX
Likely To
Remain
Significantly
Below
Depreciation
Levels
And Are Now
Below
Maintenance
Levels
18

Capacity Issues
19

Capacity Issues – Major Trend Change
U.S. Shipments Off 14% In 2003 From 1999 Peak
Paperboard
(ST 000s)
U.S. To otal Paper &
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
Capacity
20
Shipments

Capacity Issues – Declining NA Share
Paper and Paperboard Capacity
(1,000 short tons)
450,000
400,000
350,000
300,000
250,000 Worldwide
200,000
North America
150,000
100,000000
50,000
-
21

Capacity Issues – Growth Outside NA
Capacity Change 1995 to 2001
120.0%
100.0% 0%
80.0%
60.0% 0%
40.0%
Total Paper & Paperboard
Printing & Writing
Wrapping & Packaging
20.0% 0%
0.0%
World North Europe Asia + Latin
America Japan America
22

Capacity Issues – NA PM Changes
Grade
Shuts
New
Shuts
New
1980-8989 1980-8989 1990-0303 1990-0303
News 5 19 7 8
P & W 73 44 137 24
Packaging &
Converting
44 2 56 10
Tissue 46 30 70 39
Paperboard 44 17 77 34
Construction
Paper & Board
94 2 11 2
Total 306 114 358 114
23

Capacity Issues – PM Age Distribution ib ti --
North America vs. Europe
450
400
Age Distribution ib ti of Paper Machines
Economic
350 Obsolescence
Proxy
300
250
200
150
100
50
0
1890-
1899
1900-
1909
1910-
1919
1920-
1929
1930-
1939
1940-
1949
1950-
1959
1960-
1969
1970-
1979
1980-
1989
1990-
1999
2000-
2003
North America (1102) Europe (1861)
24

Industry Outlook
25

Industry Outlook – Market Overview
• Weakness in the Economy & Demand Drivers -- Is
Improving – Which Is Significant for Pulp & Paper Industry
• However, Weak Downstream Demand Past Two Years --
Plus Range of Competitive Factors -- Did Result in
Significant Excess Capacity & Inventories
• This Excess Capacity [& Inventories] In Turn Undermined
Pulp & Paper Prices & Returns – Which Although Improving
-- Still Need More Correction
The net result is persistent poor, but now
improving performance, in the North American pulp
& paper industry during the outlook period.
26

Industry Outlook – The Economy
Line Item 2003 2004-20062006
US Real GDP
Growth
US Inflation
(PPI Index)
European Real
GDP Growth
European
Inflation (GDP
Deflator)
2.2% 3.6%
2.6% 0.7%
1.3% 2.0%
1.0% 0.4%
Overall
Economic
Forecast Now
Calls For
Continued
Recovery With
US Leading
Europe
27

Industry Outlook
– The Drivers
Economic Segment
Food & Beverage
Restaurant / Recreation
Durable Goods
Industry Segment
Impacted
2001-
2002 Real
Growth
Q2
2003
Real
Growth
vs. 2002
Boxboard/Containerboard -2.0%
+3.6%
Boxboard, Tissue -3.0%
+1.6%
Containerboard -5.1%
+8.2%
Non-Durable Goods
Containerboard -4.1%
41% +3.3% 3%
Computer & Peripheral
Investment
Advertising
Housing Starts
Private Investment
P&W Papers -11.5%
+31.0%
P&W & Newsprint -29.5%
+6.8%
Tissue, Forest Prods +5.7% +11.8%
All Mfg. Industries incl. P&P -21.7%
+8.0%
Demand
Growth
Drivers
Accelerating –
Just Now
+3 3% Being Realized
By
Manufacturing
Sector
Industrial Production
All Mfg. Industries incl. P&P -4.0%
0.0%
28

Industry Outlook – Performance Direction
Line Item
2003 Sales
Growth
2003 Income
Growth
2001-2003E 2003E
ROTC
U.S.
Europe
-3.0%
-4.5%
-16.0%
-33.0%
4.0% 6.0%
European & US
Industry Firms’
Performances Are
Converging –
But Both Regions
Now Under-
performing –
Yet Asian & Latin
American Share
Growth Continues
29

Industry Outlook – Price & Volume
-- Improving Performance Emerging--
g
North American
Grade
Q1 2004 Change In
Demand
Q1 2004 Change In
Price
Newsprint + 1.9% +14.0%
Printing & Writing +2.2% to +4.7% Mixed -5% to +1.5%
Chemical Market
Pulp
1% to +7.7% 0% to +12%
Containerboard +3.3% +14% to 28%
30

Industry Outlook – NA Capacity
Change In NA
Pulp & Paper
Capacity
(Sho ort Tons 000s)
8,000 Total US
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
1991 1993 1995 1997 1999 2001 2003 2005
Paper &
Board
Capacity Will
Continue to
See Limited
it to No Net
Growth For
Immediate
Future
31

Industry Outlook – Global Capacity Changes
12.0%
10.0% 0%
8.0%
Projected Capacity Change, 2001 - 2005
6.0%
Total Paper and Paperboard
4.0% Printing & Writing
2.0%
Wrapping & Packaging
0.0%
-2.0%
World
North
Europe Asia +
Latin
America
Japan
America
32

Industry Outlook – The NA Grades
Change In Capacity
Grade Segment (Short Tons 000s)
2001-20032003 2004-20062006
Containerboard -1,320
-150
Newsprint -1,390
-490
Printing &
Writing -1,820
475
Tissue 590 380
Packaging &
Industrial -435
-250
Pulp -1,715
-875
Total Change -6,090
-910
33
NA Experienced
Pulp & Paper
Capacity Decline
150
Through 2003 --
With Some Growth
Through “Creep”
Coming Through
h
475
2006. Yet --
Several Scenarios
Possible Where
250
Net Capacity
875
Reductions Do
Continue

Industry Outlook – Offshore Capacity
2003-20052005 Change In China's Capacity
(Short Tons 000s)
Containerboard 2,035
Newsprint 780
Printing & Writing 1,480
Tissue 35
Packaging & Industrial 2,390
Pulp 1,515
Total Change 8,235
The Noted
Offshore
Capacity
Additions Will
Continue to Put
Significant
Pressure on the
Global Export
Markets
34

Industry Outlook
– Competitiveness
North America Does Not Enjoy Low Cost Producer Status
On Most Grades – Which Clouds The Outlook Period
Grade Category
Pulp
Printing & Writing
Papers
Newsprint
Premium Folding
Carton Grades
Low Cost Production Centers
Brazil, Chile, Argentina, Indonesia
and Canada (selected)
Brazil, Russia, Indonesia, Thailand,
Scandinavia, Western Europe
Eastern Europe, Brazil, Chile and
Canada
Brazil, Russia, Sweden, Chile and
Finland
35

Industry Outlook
– Competitiveness
High Volume NA Grades
Have Significant Substitution Threats
-- Which Clouds The Outlook Period --
Grade Category
Containerboard
Packaging Grades
Printing & Writing
Papers
Newsprint
Tissue
Substitutes
Re-usable shipping containers,
offshoring of manufacturing
Flexible packaging, g, offshoring of
manufacturing
Electronic communications,
alternative advertising mediums
Electronic communications,
alternative advertising mediums
No major substitutes
36

Grades’ Outlook
37

North American Grades’ Outlook
-- Grade-by-Grade
--
• Newsprint
• Printing & Writing Papers
• Packaging & Industrial
• Containerboard
• Market Pulp
• Tissue
38

Grade Outlook – Newsprint
Newsprint Remains a Weak North American Industry
Segment
• Substitution to Alternative Media Remain an Issue
• Reduced Page Size Also Remains an Issue
• Newsprint Decline is Moderating, But is Long-Term Issue
• Need for Further Capacity Reductions Will Continue
Implications: This Grade suffered severe end user
demand decline & excess capacity. Rational players
have spent minimum capital. No new Newsprint mills
likely to be built in North America soon -- or ever.
39

Grade Outlook – Newsprint
lume (Metric Tons 000s)
Newsprint Vo
17,500
15,000
12,500
10,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
NA Demand NA Capacity Total Shipments
North
American
Newsprint’s
Decline Has
Moderated &
Modest
Recovery
From 2002
Lows Is
Expected
40

Grade Outlook – Newsprint
(Metric Tons
ess Capacity
000s)
New wsprint - Exce
2,500 35%
2,000
1,500
1,000
500
0
1,817
610 961
809
11%
598
553
4%
6%
5%
4% 3%
1,396
9%
755
5%
1,631
10%
1,069
6%
456
1,727
11%
1,874
12%
10%
1,501
963
954
928
6% 6% 6%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Excess Capacity
%E Excess Capacity
3%
30%
25%
20%
15%
10%
5%
0%
- % Excess Capacity
Newsprint
Excess North
American
Capacity
Persists – But
At Lower
Levels --
Supply &
Demand May
Balance By
2004
41

Grade Outlook – Newsprint
Newsprint
($ Metric Ton n)
$800
$700
$600
$500
$400
$300
1990 1992 1994 1996 1998 2000 2002 2004 2006
Real Price ($2001)
Nominal Price
Newsprint
Has
Experienced
Historic i Low
Prices –
With Weak
End-User
Demand –
But Some
Relief In
Sight
42

Grade Outlook – P&W Papers
Recent Economic Slowdown & Alternative Media Substitution
Have & Will Continue to Impact P&W Demand
• Uncompetitive Capacity Being Closed & Modest Demand
Increases Will Tend to Reign in Excess Capacity
• CF, CGW, UCF & GW Grades Have Collapsed Into One
Relatively Interchangeable / Flexible Grade Structure From
Consumers’ Perspectives
• These Changes Brought on by Collapsing Price Structures
of Grades on Top of Each Other Is a Major Sea Change
• In This Context -- CF Has Become Commoditized /
Displaced by Improved CGW Grades
43

Grade Outlook
– P&W Papers
In Addition -- High End Uses -- Auto Brochures/annual Reports
Are Still Being Replaced/Substituted for by Electronic Versions
• High Volume UCF Remains Under Pressure From Overseas
Competitors, and Newsprint Producers Are Converting
Capacity to UC and CGW Grades
• Financial Returns & Growth Prospects Are Similar to
Industry Average & Room Does Exists for Continued Merger
& Acquisition (M&A) Activity
Implications: Grade grouping has had major changes with
grades collapsing onto one another leading to assets
repositioning & redeployment, continued M&A & financial
constraints. Certain segments will continue to suffer net
capacity reductions & others will benefit by grade encroachment
44

Grade Outlook – P&W Papers
P&W Volum e (Short Tons
000s)
43,500
41,000
38,500
36,000
33,500
31,000
28,500
26,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
NA Demand NA Capacity Total Shipments
North
American
P&W Demand
&C
Capacity
Contracted
2000 - 2002
But A
Moderate
Recovery
Has Begun In
2003
45

Grade Outlook – P&W Papers
5,000 25%
P&W
- Excess Capacity (Shor rt Tons 000s)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
4387 4,387
4,187
4,116
3,352
3,800 3,461
2,498
3,122
2258 2,258
3,059
2,701 2,732 2,004
2,745
3,059 3,150
12%
11%
11%
10%
10%
1191 1,191
9%
8%
8% 8% 8%
7%
7%
8%
6% 7%
5%
3%
1990 1992 1994 1996 1998 2000 2002 2004 2006
20%
15%
10%
5%
0%
P&W - % Excess Cap pacity
Significant
North
American
P&W Over-
capacity
May
Dissipate
By 2004
Excess Capacity
%E Excess Capacity
46

Grade Outlook – P&W Papers
Real Prices
($2003 - Sho ort Ton)
1,600
1,500
1,400
1,300
1200 1,200
1,100
1,000
900
800
700
600
500
400
1990 1992 1994 1996 1998 2000 2002 2004 2006
CFS No. 3 60lb.
UCGW Average
UCFS No. 4 Xerocopy
CGW No. 4 50lb.
North
American
P&W Real
Pricing
Remains At
Historically
Low Levels
With Grade
Prices
Converged
47

Grade Outlook – P&W Papers
ort Ton)
ices ($ per Sh
Nominal Pri
1,300
1,200
1,100
1,000
900
800
700
600
500
400
1990 1992 1994 1996 1998 2000 2002 2004 2006
CFS No. 3 60lb.
UCGW Average
UCFS No. 4 Xerocopy
CGW No. 4 50lb.
North
American
P&W
Nominal
Prices Will
Improve
Some In
2003 &
2004
48

DC25
Grade Outlook – Packaging & Industrial
Grade Grouping Remains A Weak North American Segment
• Slow Growth in Industries That Consume These Grades,
Increased Competition From Overseas Producers &
Widespread Substitution by Plastics and Alternative
Packaging Materials Has Hurt Producers
• Profitability/returns Better Than Industry Average Despite
Poor Fundamentals Due to Relatively Concentrated Supply
Base –& Over Capacity Seems to Be Moderating Some
Implications: No substantive expansions on horizon.
Expect more capacity adjustments -- productivity and
product improvement initiatives -- But grade still faces
serious challenges looking out.
49

Slide 49
DC25 Dan Cenatempo, 9/25/2003

Grade Outlook – Packaging & Industrial
Other
Paper / Paperb board Volume (S Short Tons 000s s)
19,000
18,000
17,000
16,000
15,000
14,000
13,000
12,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
NA Demand NA Capacity Total Shipments
North
American
Demand,
Shipments
and
Capacity
Have Fallen
Four Years
In A Row –
Some
Recovery
Likely – But
To Be Slow
50

Grade Outlook – Packaging & Industrial
Other
Paper & Boar rd - Excess Cap pacity (Short
To ons 000s)
1,800
25.0%
1,600
1,400
1,200
1,000
800
600
400
200
0
1,200
1,350
1,301
1,434
8.3% 9.0% 8.5%
790
810
5.1% 5.0%
3.0%
850
660
770
904
490 410
8.1%
5.0% 51%
3.8% 4.4% 5.1%
2.3%
1,305
7.5%
1,595
9.2%
8.0%
1,388
1,044
959
6.1% 5.6%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Excess Capacity
% Excess Capacity
20.0%
15.0%
10.0%
5.0%
0.0%
er Paper & Bo oard - % Exces ss Capacity
Oth
North American
Grade Has
Struggled With
Significant
Overcapacity
Which Seems to
Be Moderating
Some – But
More Is Needed
51

SBS 15 point
Price ($ Sho ort Ton)
Grade Outlook – Packaging & Industrial
$1,200 Low North
$1,100
American
$1,000
Prices
$900
Will
$800
Improve By
$700
$600
$500
$400
1990 1992 1994 1996 1998 2000 2002 2004 2006
Real Price ($2003)
Nominal Price
2004 – But
Are Still
Weak
52

Grade Outlook
– Containerboard
This N. Am. Segment has Undergone Significant Restructuring:
• Concentration of Top Producers Shifted From One of Lowest
to Highest in North American Industry – Improved Capacity
Utilization and Expansion Discipline Has Followed
• Further Acquisitions iti by Large Players Will Be Difficult
• However, North American Producers Have Lost Export Market
to New Overseas Capacity, Especially in China and Germany
• Profitability and Returns Are Lower Needed & Expected
• Slack Capacity Absorbed Quickly With Improved Economy
Implications: This grade has had great transition – synergies
still key. Expect more asset moves & quality initiatives. CAPEX
to be minimal. Major issue is surplus converting capacity.
53

Grade Outlook – Containerboard
Volume (Sho ort Tons 000s s)
Con ntainerboard
40,000
37,500
35,000
32,500
30,000
27,500
25,000
22,500
20,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
NA Demand NA Capacity Total Shipments
North American
Demand
Improvement &
Significant
Blocks Of
Capacity
Retired Between
1998 and 2003
Have Helped
Grade Greatly
54

Grade Outlook – Containerboard
- Excess Cap pacity (ST 000 0s)
Con ntainerboard
5,000
4500 4,500
4,000
3,500
3,000
2,500
2000 2,000
1,500
1,000
500
0
1,622
1,4011,363
6%
5% 5% 5%
1,469
583
2%
2,111
6%
2,615
7%
2,320
6%
3,279
9%
3,790
1,212
3%
4,406
3,213
10%
12%
9%
3,461
3,196
2,954
2,170
10%
9%
8%
6%
25%
20%
15%
10%
5%
0%
s Capacity
Containerboa
ard - % Exces
North
American
Container-
board’s
Excess
Capacity Is
Coming
Back In
1990 1992 1994 1996 1998 2000 2002 2004 2006
Excess Capacity
% Excess Capacity
Line
55

Grade Outlook – Containerboard
lb. Price ($ Sh hort Ton)
Li inerboard 42
600 North
American
500
400
300
200
100
1990 1992 1994 1996 1998 2000 2002 2004 2006
Real Price ($2003)
Nominal Price
Capacity
Reductions
Have Helped
Better Balance
The Market &
Prices Going
Forward
56

Grade Outlook – Market Pulp
Market Pulp Is an Intermediate Good in the Production of the
Other Paper and Paperboard Grades
• Pulp Investment Returns -- Among the Poorest in the Industry
• Environmental Restrictions -- New Capacity Additions Difficult
• International Producers -- Import Pulp Competitively to US
• Inventory Management – Remains Major Issue Going Forward
Implications: This grade remains in serious difficulty
due to commodity nature & global low cost producers.
Further North American capacity reductions needed &
expected. Pricing will remain strained and low.
57

Grade Outlook – Market Pulp
Market + Integrated Pu ulp Volume (M Metric Tons 00 00s)
95,000
90,000
85,000
80,000000
75,000
70,000
65,000
60,000
55,000
50,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
NA Demand NA Capacity Total Shipments
North
American
Market Pulp
Tends to
Follow
Other
Grades
58

Grade Outlook – Market Pulp
Mark ket + Integ. Pu ulp - Excess Capacity (Met tric
Tons 000s)
12,000
10,000
8,000
6,000
4,000
2,000
0
10,575
10,834
9,711
8,824
8,917
7,954
7,727 7,603 7,333
7170 7,170
7208 7,208
6,432
6,695
9%
9%
8%
12%
5,455
6,154 5,293
4,344
12% 11%
10%
9%
10%
8% 8%
8%
7%
7%
6%
6%
5%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Excess Capacity
%E Excess Capacity
25%
20%
15%
10%
5%
0%
Pulp - % Excess Cap pacity
North
American
Pulp Excess
Capacity
May Be
Moderated
By Rebound
In Demand
& Capacity
Closures
59

Grade Outlook – Market Pulp
Metric)
NBSKP Deliv v. To U.S. ($
1,100 Market Pulp
1,000
900
800
700
600
500
400
300
200
1990 1992 1994 1996 1998 2000 2002 2004 2006
Real Price ($2003)
Nominal Price
Prices Should
Rise As
Excess
Capacity Is
Resolved --
Fundamentals
Still Not
Strong Going
Forward
60

Grade Outlook
– Tissue
Tissue Remains Strongest Overall Segment in North America
• End-product
Demand Is Mature (Americans Highest Per-
capita Consumers in World & Incremental Demand Is Slow)
• Demand Is steady -- yet Excess Capacity Could Build
• However, Overall Firm Financial i Returns Less Sensitive to
Supply/Demand Dynamics at Mill Level Than Other Grades
• Regulatory Considerations Will Limit Large M&A Activity
• Technology Changes and New Entrepreneurial Entrants Will
Drive Spending & TAD Proliferation = Potential Problem
Implications: This segment has performed best – a solid
success story & expansion & upgrades will continue to lead
the industry – but, TAD-like commoditization could be issue.
61

Grade Outlook – Tissue
Tissue Volu ume (Short T ons 000s)
10,000
9,000
8,000
7,000
6,000
5,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
US Demand US Capacity Total Shipments
North
American
Tissue
Demand Is
Steady & Still
Generally
Evolves with
GDP &
Household
Formations
62

Grade Outlook – Tissue
Capacity (Sh ort Tons 000s s)
Tis ssue - Excess
900
800
700
600
500
400
300
200
100
0
4%
776
676
11%
288
10%
565 565
8% 8%
592
495
550
433
301
384
7% 7%
6%
5%
4%
750
9%
7%
685
663
666 657
546
8% 8% 7% 7%
6%
25%
20%
15%
10%
5%
0%
Tissue - % Excess Ca apacity
Excess North
American
Tissue
Capacity
Built Up To
2001
Is Returning to
More Normal
1990 1992 1994 1996 1998 2000 2002 2004 2006
Excess Capacity % Excess Capacity
Levels
63

Major Industry Issues
64

Major Issues Facing the Industry –
Despite the difficult situation – The US industry is positioned
for some performance improvements during 2004.
• But There Remain Significant Risks To A Sustained
Profitable Industry Sector
--
1. Resumed economic downturn – globally & domestic
2. Expanded Substitution of US produced P&P by
International competitors and non-fiber based products,
3. Continued over capacity – globally as well as domestic
4. Failure to maintain capacity management discipline, &
5. Not continuing to seek innovation & new ways of
operating
65

Major Issues Facing the Industry –
Even with this rebound at hand – The North American P&P
industry’s Future remains a point of extensive debate
• Some Believe The North American Industry Has Begun A
Long-term term, Irreversible Decline And As Such
--
Will follow in the path of US steel and textiles –
Others believe it will restructure and reassert itself – like
some parts of textiles & steel have begun to . . .
• In Truth – The Real N. Am. Industry Path Is Not Clear –
The degree to which N. Am. demand returns, & N. Am.
capacity fulfills the demand & the way firms operate . . .
Plus – the way the global industry extends & exerts itself
will collectively have major impacts on this Path . . .
66

Summary & Wrap-up
67

We Must Understand –
Paper Is Still Essential To Society
• Paper Is an Essential Building Block of Society –
Permeating Modern Civilization’s Social Fabric
• Meets a Cornucopia of Mankind’s Needs
From Books and photocopies . . .
Tissue and sanitary products . . .
And newspapers, magazines . . .
To packaging products and on and on . . .
Even in surgical gowns, gas mask filters, ice
cream, toothpaste, and . . . .
68

And – There Are Three Important
t
Points about North America . . .
• Winds of Change Have Buffeted the Paper Industry
-- Causing a Shift From one Paradigm to Another --
An as Yet Unfinished Task . . .
• Paper Industry Executives Are Not Unmindful of
These Issues & Need for Change . . .
• One Undeniable Truth – All Stakeholders Inside
and Outside the Firms -- Are All in the Same Boat –
And Pulling Their Oars Together is Crucial
69

And Think About This . . . .
Vladimir Lenin Once Noted – Im I’m going
to hang all the capitalists, and they’re
going to sell me the rope I need to do it.
There is a lesson here for all of us in
the paper industry – Let’s not be our
own worst enemy – let’s stop
providing rope for our own demise!
70

Thank You
E-mail contacts:
Jim McNutt – Jim.McNutt@CPBIS.gatech.edu
Dan Cenatempo – dan@valueresolution.com
Bob Kinstrey – bob.kinstrey@jacobs.com