2006 20-F - Sappi

) Movement in market prices for our products;
c) Sensitivity to currency movements;
d) Movement in market prices for raw materials and other input costs of manufacturing; and
e) Other significant factors impacting costs, including new acquisitions, restructuring and cost
reduction initiatives.
f) Our ability to maintain and continuously improve operational efficiencies and performance.
Because many of the factors are beyond our control and certain of these factors have historically been
volatile, past performance will not necessarily be indicative of future performance and it is difficult to
predict future performance with any degree of certainty.
Markets
The markets for our pulp and paper products are cyclical, with prices significantly affected by factors
such as changes in industry capacity and output levels, customer inventory levels and cyclical changes in the
world economy. The pulp and paper industry has often been characterised by periods of imbalances
between supply and demand, causing prices to be volatile. Prices also vary significantly by geographic
region and product. Coated fine paper, our core product used for many types of publications, is susceptible
to the highly cyclical advertising market, a major driver in our business.
Coated Fine Paper
Paper demand from fiscal 2004 to fiscal 2006 remained positive as the upswing in world economic
growth and resultant increase in advertising activities resulted in a significant increase in demand for
coated fine papers. The increase in demand was particularly pronounced in Europe where coated fine
paper demand remained buoyant with a growth rate of 7.3% during fiscal 2004 and 4.3% in fiscal 2005,
despite a temporary retreating rate of economic growth during 2005. The temporary slump is evident as
demand for coated fine paper during fiscal 2006 increased by only 1.4% compared to previous years. North
American demand growth, which lagged that of Europe during 2005 (1.1%), improved during fiscal 2006
and reached 4.3%.
Increases in industry capacity in Europe and North America were limited during this period, with
companies reluctant to undertake major new capital projects in these regions due to the large amount of
excess capacity already present. Despite global overcapacity, high Asian demand growth rates and freely
available funding led to significant coated fine paper capacity additions between fiscal 2000 and fiscal 2006
in Asia, particularly in China. This wave of expansion finished by the end of calendar 2005 and as of early
December 2006, to the best of our knowledge, no new coated fine paper machines were under construction
or in the final stages of planning anywhere in the world.
Despite increased demand, operating rates were low in fiscal 2002 through the first half of fiscal 2004
due to excess capacity, causing price erosion in both Europe and North America. Despite the weakening
US$ during this period, net imports into the United States continued to grow, putting further pressure on
prices. Prices in North America, however, did start to improve in the latter half of fiscal 2004 due to a
sharp increase in seasonal demand. These tight supply/demand conditions in North America continued
into fiscal 2005, and more so in fiscal 2006 as inventory throughout the supply chain dropped, giving rise to
further price increases. In total, North American apparent consumption grew by 4.3% in fiscal 2006,
largely due to increased advertising pages and printer consumption of coated fine papers.
In Europe, demand for coated fine paper grew by 1.4% in fiscal 2006, a significant decline on the
previous years’ growth of 4.3%. Despite demand growth and sharp increases in input costs, our attempt to
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