State of the North American 

Pulp & Paper Industry 

– An Update & Outlook 

–

Ma

y 200

4

Center for Paper Business and Industry Studies (CPBIS) Center for Paper Business and Industry Studies (CPBIS) – J

J

Value Resolution Group Value Resolution Group – Dan Cenatempo Dan Cenatempo

J bE i i G Jaco

bs 

Eng

ineering 

Group – B b Ki t B

o

b Kins

trey
Overview

North America P&P Industry

– An Update & Outlook n Update & Outlook –

 Where Are We? Industry Performance Cap y acit Issues  Industry Outlook Grades’ Outlook Outlook -- Grade-By-Gra Major Industry Issues

S &W

2

 Summary & Wrap-up
Where Are We? Where Are We?

3
What Are North America What Are North America 

America 

’

Stakeholders’ Perspecti

 Has Persistent Flaws in the Eyes of Ma

 Ca

p ,g ital Intensive ital Intensive, fra

gmented

, 

 techno

based – monolithic & monolithic & slow to adapt

 Focus is more on what it does instead 

figuring out what it should be doing 

 Key into lower costs, economies of sc

market share, marginal returns

 Very open information flows 

4

 Highly insular
What Is North America’s What Is North America’s 

 The North American Pulp and Paper Industry Is 

Market Perspective?

Web of Businesses Generally Characterized of 

 Highest per capita consumption in world acro Slower growth Slower growth than GDP & than GDP

& slowing overall slowing overall GD

GD

 High capital intensity

 Intense Cost and price based competition 

 Cyclical and declining pricing and profitability Below cost of capital returns  De

pressed investors’ values and returns

Where Historically – The North American in

has expanded after each c

yclical peak. Ex

5

capacity was pushed into International Ma
What Is North America What Is North America 

America 

’

Market Perspective?

 However However – Looking Back Looking Back – Combination 

Combination 

 A strong US dollar; Maturing North American Demand;

 Unifying European markets;

 Aggressive industry growth in developin

-- Asia & Latin America; and

 The European & Developing Regions ‘ne

producers increased imports into North 

6

- Interrupted This Growth Pattern
What Is North America’s What Is North America’s 

 However -- The North American Industry D

Market Perspective?

 However The North American American Industry Industry D

Recognize This Competitive Landscape CUntil Mid 1990s and Until Mid 1990s and --

Continued to behave as it did in the past Continued to behave as it did in the past – 

available cash in new capacity in 1980’s & 

1990s

 This New Capacity Relied on Increasingly 

Competitive Export Markets Export Markets to Maintain V

to Maintain V

 Yet – Simultaneously Simultaneously -- Developing Regio

Developing Regio

Europe Began Aggressive Imports into No

7

Europe Began Aggressive Aggressive Imports Imports into NoAmerica.
What Is North America’s 

The Result Was Persistent Over

-capac

Market Perspective?

The Result Was Persistent Persistent Over capac

Globalization of Markets Globalization of Markets -- Which Underm

Susta ed ea ined Wea

k

B

a a ce S eets, ebt e 

la

nce

S

heets, Debt L

e

Pricing, Profitability & Shareholder Retu

In response – The North American Industry ha

begun to restructure to better compete in this c

global market environment – but the challeng

stakes are great and the progress modera

8
What Are North America What Are North America 

America 

’

Current Realities?

 N th A i ’ P I d t P C ti North

America’s 

Paper In

dus

try 

Pressures ressures 

Conti

 CEOs remain under the microscope Performance Performance continues to continues to lag

– but seeming to stab

but seeming seeming to stab

stab

 Excess Capacity

& older/inefficient technology bein

 Substitution (imports & alternative products to mee

needs)

= persistent issue persistent issue

 Balance sheets still out of balance

– with moves to 

with moves to 

 Reinvestment in revenue generation steps continue Competitive landscape remains Intense 

– some ord

some ord

Let’s Now Look at some of the Situational A

9

the US/NA Industry & Discuss Their Importa
Industry Performance Industry Performance

10
Industry Performance Industry Performance

–

ROTC Vs. Cost of Capital

20% R

Av

Poin

15%20%

ital

ROTC averages 7% vs. 11% cost of capital ROTC Averages 7 % vs. 11% Cost of Capital

Ta

R

Inve

10%

Cost of Capi Inve

Not 

Capi

5%

Return & 

P

Per

Secto

0%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Return On Total Capital Cost of Capital

11
Industry Performance Industry Performance -- Tota

Shareholder Returns Still Trail S&

P&FP S

Retu

Traile

350400

SR) Index Risk of P&FP Stocks = Market (Beta = 1.0) S&P 500 TSR = 10.3% Per Year P&FP W. Avg TSR = 8.5% Per Year

P

&FP Avg. TSR = 7.5% P

er Yea

r Traile

Yet -

Rebou

200250300

der Return (TS& g S 5% e ea L.T. Government Bond = 6.2% Per Year Overa

Inve

Servi

100150200

otal Sharehold Servi

Expec

Earning

U 

0

50

Monthly T '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03o

12

S&P Return Index P&FP Company Avg. P&FP Company W. Avg.

Un
Id t P f Industry Performance ormance – D bt L 

Debt Le

US C

60%70%

Ma

Deb

Ne

50%

Capital Ratio Ne

Wh

Lik

30%40%

Debt To 

Lik

F

Inve

20%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Debt % of Invested Capital

13

Debt % of Invested Capital
Industry Performance

– Capi

S

Industry Performance Capi

Spending Level Spending Level – Real USD Real USD

Total

US 

Pape

E 

Total

12,50015,000

$2002 - 

Expe

Will C

T L 

7,500

10,000

penditures ($

ons)

To 

L

Un

Cy

2,5005,000

al Capital Exp

Millio

Cy

Rec

Circ

-

U.S. Re 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002a

Total

14

Circ

Total
Industry Performance Less Capita

100%

Industry Performance

– Less Capita

Capita

Invested In Primary Industry As

70%80%90%

100%

al Spending F

R

40%50%60%70%

& Paper Capita Sp

Acco

10%20%30%40%

hare of Pulp & De

Sha

0%

10%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Sh

IT & Communic. Facilities, Machinery & Infra. Office Buildings & Furnish.

CA

IT

15
Id t P f Industry Performance ormance – P fit 

Profita

U

10%12%

Margin Pr

6% Co8%

ting Profit M

D

Pa

2%4%

Net Operat

Te

0%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

16
Industry Performance 

– Capital Tu

U

180%200%

Capital 

Tu

140%160%

al Invested C

Co

D

100%120%

Sales / Tota

80% 

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

17
Industr

y Performance 

– Capit

US 

y

p

Spending/Depreciation

275%

L

R

200% Sig225%250%275%

preciation Sig

De

p

125% 150%175%200%

res % of Dep

p

And

50% 75%

100%

125%

al Expenditu

Mai

0%

25%

50%

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Capita

18

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002
Capacity Issues Capacity Issues

19
C it I apacity Issues – M j T d Ch Major Trend Ch

U.S. Shipments Off 14% In 2003 From 19

90,000

100,000

110,000

d (ST 000s)

60,00070,00080,000

,

Paperboard

30,00040,00050,000

otal Paper & 

-

10,000

20,000

U.S. To

20

1975 1978 1981 1984 1987 1990 1993 1996 1999 20

Capacity Shipments
Capacity Issues – Declining NA S

Paper and Paperboard Capacity Paper and Paperboard Capacity

(1,000 short tons)

300,000350,000400,000450,000100 000150,000200,000250,000 

-

50,000

100,000

21
Capacity Issues – Growth Outsid

Capacity Change 1995 to 2001

100 0%120.0%

60 0%80.0%

100.0%

Total Paper 

20 0%40.0%60.0% Total Paper 

Printing & W

Wrapping & 

0.0%

20.0%

World North Europe Asia + Latin

22

America Japan America
Capacity Issues Capacity Issues – NA PM Chan

G d Shuts New Shuts Gra

d

e 1980-89 1980-89 1990-03 1

News

5 19

7

P & W 73 44 137 Packaging & Converting 44

2 56 

ConvertingTissue 46 30 70 Paperboard Paperboard 44 17 77 Construction Paper & Board 94

2 11

23

Total 306 114 358 
C it I apacity Issues – PM A Di t ib 

PM Age Distrib

North America vs. Europe

A Di t ib ti f P M hi

350400450

Age Distribution of Paper Machines

Economic 

Obsolescence

250300350

Proxy

100150200

0

50

1890-

1899

1900-

1909

1910-

1919

1920-

1929

1930-

1939

1940-

1949

1950-

1959

1960-

1969

1970-

1979

1980-

1989

1990-

1999

24

North America (1102) Europe (1861)
Industry Outlook Industry Outlook

25
Industry Outlook Market Over

 Weakness in the Economy & Demand Drivers Weakness in the Economy & Demand Drivers -- I

Industry Outlook

– Market Over

Improving 

– Which Is Significant for Pulp & Pape

 However, Weak Downstream Demand Past Two Y

However, Weak Downstream Demand Past Two YPl R f C titi F t Plus 

Range o

f

Competitive 

Fac

tors -- Did R lt 

esult 

Significant Excess Capacity & Inventories

 This Excess Capacity [& Inventories] Excess Capacity Capacity [& Inventories] Inventories] In Turn Und

In Turn Und

Und

Pulp & Paper Prices & Returns Pulp & Paper Prices & Returns – Which Although -- Still Need More Correction Still Need More Correction

The net result is persistent poor, but now

improving performance, in the North American 

26

& paper industry during the outloo

k period
Industry Outlook Industry Outlook

– The Econo

The Econo

Ov

Line Item Line Item 2003 2004-2006 Ov

Eco

F 

US Real GDP Growth 2.2% 3.6%

Forec

Cal

C 

US Inflation (PPI Index) 2.6% 0.7%

Con

Recov

European Real GDP Growth 1.3% 2.0%

US L

Eu

European Inflation (GDP Deflator

)

1.0% 0.4%

27

)
Industry Outlook Industry Outlook

– The Drive

The Drive

Economic Segment 

Industry Segment 2001- 2002 Real

Q2 

2003 

Real 

Economic Segment Impacted 2002 Real Growth Real Growth 

vs. 2002

Food & Beverage Food & Beverage Boxboard/Containerboard Boxboard/Containerboard -2.0% +3.6%Restaurant / Recreation Restaurant / Recreation Boxboard, Tissue Boxboard, Tissue -3.0% +1.6%Durable Goods Durable Goods Containerboard Containerboard -5.1% +8.2%N D bl G d C ti b d 4 1% +3 3% NonDurable 

Goo

d

s

Container

boar

d -4.1% +3.3%

Computer & Peripheral Investment P&W Papers -11.5% +31.0%Advertising Advertising P&W & Newsprint P&W & Newsprint -29.5% +6.8%Housing Starts Housing Starts Tissue, Forest Prods Tissue, Forest Prods +5.7% +11.8%Private Investment Private Investment All Mfg. Industries incl. P&P All Mfg. Industries incl. P&P -21.7% +8.0%

28

Industrial Production Industrial Production All Mfg. Industries incl. P&P All Mfg. Industries incl. P&P -4.0% 0.0%
Industry Outlook Industry Outlook – Performance Dir

Line Item Line Item U.S. Europe

Europea

Industry 

Performa

2003 Sales Growth

-3.0% -4.5%

Performa

Conver

But Both 

2003 Income Growth

-16.0% -33.0%

But Both 

Now UNow U

performperform

2001-2003E 

ROTC 4.0% 6.0%

Yet Asian 

America

Growth C

29

Growth C
Industry Outlook 

– Price & Volu

-- Im

provin

g Performance Emer Performance Emer

gin

g--

North American 

Grade

Q1 2004 Change In 

Demand

Q1 2004 C

Pric

p g gg

Newsprint + 1.9% +14.Printing & Writing +2.2% to +4.7% +2.2% to +4.7% Mixed -5% 

5% 

Chemical Market Chemical Market

Pulp 1% to +7.7% 1% to +7.7% 0% to 

0% to 

Containerboard +3.3% +14% to 

+14% to 

30
I d t O tl k I

n

dus

try 

O

utloo

k

– NA C 

NA

Capac

8,000 T5,0006,0007,000

r Capacity

)

P

2,0003,0004,000

A Pulp & Paper

ort Tons 000s) Cap

Co

S 

-1,000

0

1,000

Change In NA

 (Sho

Se

to 

Gr

-3,000-2,000

1991 1993 1995 1997 1999 2001 2003 2005

Gr

Im

31
Industry Outlook Industry Outlook – Global Capacity C

10 0%12.0%

Projected Capacity Change, 2001 - 2005

6.0%8.0%

10.0%

Total Paper 

0.0%2.0%4.0% Printing & Wr

Wrapping & 

-2.0%

%

World North

America

Europe Asia +

Japan

Latin

America

32
Industry Outlook The NA Gra

NA Ex

Industry Outlook

– The NA Gra

Grade Segment

Change In Capacity 

(Short Tons 000s) NA Ex

Pulp 

Capac

Throu

Grade Segment (Short Tons 000s)

2001-2003 2004-2006

Containerboard 1 320 150 Throu

With S

Throu

C i 

Containerboard

-

1,320

-150

Newsprint Newsprint -1,390 -490Printing &

Com

in

200

Severa

P 

Printing

&

Writing Writing -1,820 475

Tissue 590 380

Poss

Net 

Redu

Packaging & 

Industrial Industrial -435 -250

Pul

p

-1,715 -875

33

Co

p ,

Total Change Total Change -6,090 -910
Industry Outlook Industry Outlook

– Offshore Cap

Offshore Cap

2003-2005 Change In China's Capacity 2005 Change In China's Capacity 

(Short Tons 000s) The N

Containerboard Containerboard 2,035

The N

Offs

Cap

Newsprint Newsprint 780Printing & Writing Printing & Writing 1,480

Cap

Additio

Continu

Tissue 35Packaging & Industrial 2,390

Continu

Signi

Packaging

& Industrial 2,390 Pressur

Pulp 1,515

PressurPressur

Global 

Mar

34

Total Change Total Change 8,235 Mar
Industry Outlook Industry Outlook – Competitiven

Competitiven

North America Does Not Enjoy Low Cost Produc

On Most Grades On Most Grades – Which Clouds The Outlook 

Grade Category Grade Category Low Cost Production Cente

Low Cost Production Cente

Pulp Brazil, Chile, Argentina, Indon

and Canada (selected)

Printing & Writing 

Papers

Brazil, Russia, Indonesia, ThaScandinavia, Western Europe

Eastern Europe Brazil Chile a

Newsprint Eastern Eastern Europe, Brazil, Chile a

Canada

Premium Folding Brazil, Russia, Sweden, Chile 

Chile 

35

g

Carton Grades

,, ,

Finland
Industry Outlook Industry Outlook

– Competitiven

Competitiven

High Volume NA Grades 

Have Significant Substitution Threats

-

- Which Clouds The Outlook Period Which Clouds The Outlook Outlook Period --

Grade Category Grade Category Substitutes Substitutes

Containerboard Re-usable shipping containers

usable shipping containers

offshoring of manufacturing

P k i Gd Flexible Flexible 

packa

ging, offshorin offshorin

g 

Pac

kaging 

Gra

des p g g, g manufacturing

Printing & Writing 

Papers

Electronic communications, alternative advertising mediumalternative advertising medium

Newsprint Electronic communications, alternative advertising medium

36

Tissue No major substitutes No major substitutes
Grades’ Outlook

37
North American Grades North American American Grades

’ Outl

OutlOutl

-- Grade-by-Grade --

 Newsprint Printing Printing & Writing Papers Printing

& Writing Writing Papers

 Packaging & Industrial Containerboard Market Pulp Market Pulp Tissue

38
Grade Outlook Newsprint

Newsprint Remains a Weak North American Indu

Segment

Grade Outlook – Newsprint

Segment

 Substitution to Alternative Media Remain an Is Reduced Page Size Also Remains an Issue Newsprint Decline is Moderating, But is Long is Moderating, But is Long-T

T

 Need for Further Capacity Reductions Will Con

Implications: This Grade suffered severe en

demand decline & excess capacity. Rational 

have spent minimum capital. No new Newspr

likely to be built in North America soon -- o

p

demand decline & excess capacity. Rational 

have spent minimum capital. No new Newspr

likely to be built in North America soon -- o

39

likely to be built in North America America soon -- o
Grade Outlook Newsprint

Grade Outlook – Newsprint

A

Ne

17,500

Tons 000s)

De

Mo

M

15,000

lume (Metric M

R

Fr

12,500

Newsprint Vo Fr

L

E

10,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

N

NA D d NA C it T t l Shi t

40

NA Demand NA Capacity Total Shipments E
Grade Outlook Newsprint

Exc

Grade Outlook – Newsprint

2,500 35%

A

C

1,817 1,631 1,874 1,727 2,000

(Metric Tons 25% 30%

Capacity Pers

Pers

A

L 

1,396

610 961

1,501

954

963

1,069

456

1 000 8091,500

ess Capacity 

000s)

15%20%

- % Excess C

L

S

Dem

928

553

598

755

809

6% 6% 6% 6%

10%

9%

11%

12%

6%

10%

11%

500

1,000

wsprint - Exce

5%10%

Newsprint 

Dem

Ba

4%

6%

5%

4% 3%

5%

6% 6% 6% 6%

3% 0

1990 1992 1994 1996 1998 2000 2002 2004 2006

New

0%5%

E C it % E C it

41

Excess Capacity % Excess Capacity
Grade Outlook Newsprint

Ne

Grade Outlook – Newsprint

Exp

Hi 

$700$800

n)

His

P

W

$600

t ($ Metric Ton

W

E

$400 De$500

Newsprint

B

R

$300

1990 1992 1994 1996 1998 2000 2002 2004 2006

Real Price ($2001) Nominal Price

42

Real Price ($2001) Nominal Price 
Grade Outlook P&W Paper

Recent Economic Slowdown & Alternative Media SuHave & Will Continue to Impact P&W Demand

Grade Outlook – P&W Paper

Have & Will Continue Continue to Impact P&W Demand

 Uncompetitive Capacity Being Closed & Modest D

Increases Will Tend to Increases Increases Will Tend to Reign in Excess Capacity Reign in Excess Capacity Capacity

 CF, CGW, UCF & GW Grades Have Collapsed Into 

Relatively Interchangeable / Flexible Grade StrucConsumers’ Perspectives

 These Changes Brought on by Collapsing Price S

of Grades on Top of Each Other Is a Major Sea Ch

 In This Context In This Context -- CF Has Become CF Has Become Commoditized 

Di l d b I d CGW G d

43

Displaced by Improved CGW Grades
Grade Outlook – P&W Pape

In Addition In Addition -- High End Uses High End Uses -- Auto Brochures/annua

Auto Brochures/annua

Are Still Being Replaced/Substituted for by Electronic 

Grade Outlook P&W Pape

 High Volume UCF Remains Under Pressure From 

Competitors, and Newsprint Producers Are ConveCapacity to UC and CGW Grades Capacity Capacity to UC and CGW Grades

 Financial Returns & Growth Prospects Are Simila

Industry g Avera e & Room Does Exists for Contin& Acquisition (M&A) Activity

Implications: Grade grouping has had major chan

grades collapsing onto one another leading to agrades collapsing onto one another leading to a

repositioning & redeployment, continued M&A & f

constraints. Certain segments will continue to su

capacity reductions & others will benefit by grade en

grades collapsing onto one another leading to a

repositioning & redeployment, continued M&A & f

constraints. Certain segments will continue to su

capacity reductions & others will benefit by grade en

44

capacity capacity reductions reductions & others will benefit benefit by grade en

en
Grade Outlook P&W Paper

Grade Outlook – P&W Paper

A

P&W 

&

41,00043,500

s 000s) & 

Co

20

36,00038,500

e (Short Tons

20

M

31,00033,500

P&W Volum

R

Has 

26,00028,500

1990 1992 1994 1996 1998 2000 2002 2004 2006

45

NA Demand NA Capacity Total Shipments
Grade Outlook Grade Outlook – P&W Paper

P&W Paper

4 387

5,000 25%

Si

4,116

3,352 3,461

4,387

3,800

4,187

2 258 3,500 2,498 3,122

4,0004,500

rt Tons 000s) 20% pacity A

P&

c

3,150

3,059

2,732

2,258

3,059

1 191

2,004 2,745 2,701

11%

10% 10%

12%

11%

2 0002,5003,000

Capacity (Shor

10%15%

% Excess Cap

c

D

1,191

7%

5%

6%

9%

8% 8% 8%

7%

8%

8%

7% 1,000

1,5002,000

W - Excess C

5%10%

P&W - %

D

3%

0

500

1990 1992 1994 1996 1998 2000 2002 2004 2006

P&W

0%

E C it % E C it

46

Excess Capacity % Excess Capacity
Grade Outlook P&W Paper

Grade Outlook – P&W Paper

1,600 

A

P&

1 200 1,3001,4001,500

ort Ton)

P

Re

900 1,000

1,100

1,200

s ($2003 - Sho

HisLo

Wi

600700800

Real Prices

Wi

Co

400500

1990 1992 1994 1996 1998 2000 2002 2004 2006

CFS No. 3 60lb. UCGW Average UCFS N 4 X CGW N 4 50lb

47

UCFS No. 4 Xerocopy CGW No. 4 50lb. Co
Grade Outlook Grade Outlook – P&W Paper

P&W Paper

1,300

A

1 000 1,1001,200

ort Ton)

N

Pr

800900

1,000

ices ($ per Sh Pr

I

S

500600700

Nominal Pri

400500

1990 1992 1994 1996 1998 2000 2002 2004 2006

CFS No. 3 60lb. UCGW AverageUCFS No 4 Xerocopy CGW No 4 50lb

48

UCFS No. 4 Xerocopy CGW No. 4 50lb.
Grade Outlook Packaging & Ind

Grade Grouping Remains A Weak North American Se

Grade Outlook – Packaging Packaging & Ind

Ind

 Slow Growth in Industries That Consume These G

Increased Competition From Overseas Producers Widespread Substitution by Plastics and AlternativPackaging Materials Has Hurt Producers

 Profitability/returns Better Than Industry Average 

Poor Fundamentals Due to Relatively ConcentratePoor Fundamentals Fundamentals Due to Relatively Relatively Concentrate

Concentrate

Base – & Over Capacity Seems to Be Moderating S

Implications: No substantive expansions on ho

No substantive expansions on ho

Expect more capacity adjustments -- productivi

product improvement initiatives -- But grade stil

serious challenges looking out

Implications: No substantive expansions on ho

Expect more capacity adjustments -- productivi

product improvement initiatives -- But grade stil

serious challenges looking out

49

serious serious challenges challenges looking looking out.

DC25
Slide 49

DC25 Dan Cenatempo, 9/25/2003
Grade Outlook Packaging & Ind

Grade Outlook – Packaging & Ind

19,000

s)

A

D

17,000 S18,000

Short Tons 000s

C

15,000 Ha16,000

board Volume (S

F

In 

13 00014,000

r Paper / Paperb

R

Li

To 

12,00013,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Other

NA Demand NA Capacity Total Shipments

50

NA Demand NA Capacity Total Shipments
Grade Outlook Grade Outlook – Packaging & Ind

Packaging & Ind

1,800 25.0%

Nort

G

S 1 200

1,350

1,301

1,434

1,595

1,388 1,400

1,6001,800

pacity (Short 20.0%

25.0%

ss Capacity Stru

Si

Ove

1,200

810

850

770

959

1,305 1,044

904 790

800

1,0001,200

rd - Excess Cap

ons 000s)15.0% oard - % Exce

s

Ove

Whic

Be M

660

490 8.3% 410

9.0% 8.5%

5.1% 5.0%

6.1% 5.6%

5.0%

8.0%

9.2%

7.5% 8.1%

5 1%

400600

r Paper & Boar

To

5.0%10.0%

er Paper & Bo

Be M

So

More 

5.0%

3.0%

3.8%

4.4%

2.3%

5.0% 5.1%

0

200

1990 1992 1994 1996 1998 2000 2002 2004 2006

Other

0.0%

Oth

Excess Capacity % Excess Capacity

51

Excess Capacity % Excess Capacity
Grade Outlook Packaging & Ind

Lo

Grade Outlook – Packaging & Ind

$1,200 Lo

A

$1,000$1,100$ ,

ort Ton)

Im

$800$900

t Price ($ Sho

20

A

$600$700

SBS 15 point

A

$400 $500

1990 1992 1994 1996 1998 2000 2002 2004 2006

R l P i ($2003) N i lPi

52

Real Price ($2003) Nominal Price
Grade Outlook – Containerbo

This N. Am. Segment has Undergone Significant Rest Concentration of Top Producers Shifted From One 

Grade Outlook Containerbo

 Concentration Concentration of Top Producers Producers Shifted Shifted From One 

to Highest in North American Industry to Highest in North American Industry – Improved C

Utilization and Expansion Discipline Has Followed

 F th A i iti b L Pl Further Acquisitions by Large Players Will B Diffi 

Will Be Diffic

 However, North American Producers Have Lost Exp

to New Overseas Ca to New Overseas Cap y, p y 

acity, Especially in China and 

 in China and 

 Profitability and Returns Are Lower Needed & Expe Slack Capacity Absorbed Quickly With Improved Ec

Implications: This grade has had great transition – s

still key. Expect more asset moves & quality initiative

to be minimal Major issue is surplus converting c

Implications: This grade has had great transition – s

still key. Expect more asset moves & quality initiative

to be minimal Major issue is surplus converting c

53

to be minimal minimal. Major issue is surplus surplus converting converting c

c
Grade Outlook Containerboa

North 

Grade Outlook – Containerboa

40,000

s)

D

Impr

35,00037,500

ort Tons 000s

Sig

Bl

C 

30,00032,500

Volume (Sho

C

Retire

22 500 1998 25,00027,500

ntainerboard 1998 

Hav

Grad

20,00022,500

1990 1992 1994 1996 1998 2000 2002 2004 2006

Con

NA D d NA C it T t l Shi t

54

NA Demand NA Capacity Total Shipments
Grade Outlook Containerboa

Grade Outlook – Containerboa

4,406 4 500

5,000

0s)

25%

A

CoCo

3,279 3,461 3,213 2,954 3,196 3,790

,

3,5004,0004,500

pacity (ST 000

20%

s Capacity

b

E

2,111

2,615

2,170

,

2,320

1,212

12%

2 0002,5003,000

- Excess Cap

10%15%

ard - % Exces E

Ca

C

1,622

1,4011,363

583

,

1,469

6%

5% 5% 5%

7%

6%

9%

10%

9%

8%

6%

9%

10%

1,000 6%1,5002,000

ntainerboard 5%10% Containerboa C

B

5% 5% 5%

2%

3%

0

500

1990 1992 1994 1996 1998 2000 2002 2004 2006

Con

0%

C

55

Excess Capacity % Excess Capacity 
Grade Outlook Containerboa

Grade Outlook – Containerboa

600 

Am

Ca

500

hort Ton)

Red

Hav

400

lb. Price ($ Sh

Bette

The 

200300

inerboard 42 

Pric

Fo

100

1990 1992 1994 1996 1998 2000 2002 2004 2006

Li

R l P i ($2003) N i lPi

56

Real Price ($2003) Nominal Price
Grade Outlook Market Pulp

Market Pulp Is an Intermediate Good in the Productio

Grade Outlook – Market Pulp

Other Paper and Paperboard Grades

 Pulp Investment Returns Pulp Investment Returns -- Among the Poorest in t Environmental Restrictions Environmental Restrictions -- New Capacity Additi International Producers International Producers -- Import Pulp Competitive Inventory Management Inventory Management – Remains Major Issue Goi

Implications: This grade remains in serious dif

due to commodity nature & global low cost prod

Further North American capacity reductions nee

expected. Pricing will remain strained and lo

due to commodity nature & global low cost prod

Further North American capacity reductions nee

expected. Pricing will remain strained and lo

57

g
Grade Outlook Grade Outlook – Market Pulp Market Pulp

95,000

00s)

A

80 00085,00090,000

Metric Tons 00

Ma

T

70,00075,00080,000

ulp Volume (M

F

60,00065,000

+ Integrated Pu

G

50,00055,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Market +

NA D d NA C it T t l Shi t

58

NA Demand NA Capacity Total Shipments
Grade Outlook Market Pulp

Grade Outlook – Market Pulp

10,575 10 834

12,000

tric 

25%

Am

Pul

7,7277,603

7 208

9,711

7,954

8,917

7,333

7 170

8,824

, 10,834

8,000

10,000

Capacity (Met

20%

pacity C

M

Mo

7,208

5,293

6,695

6,154

5,455

6,432

4,344

7,170

12% 11% 9%

12%

6,000

,

ulp - Excess C

Tons 000s) 10% 15% % Excess Ca

p

Mo

By 

In 

8%

9%

6%

5%

7%

7%

%

10%

8% 8%

6%

10%

9%

9%

8%

2,0004,000

ket + Integ. PuT

5%10%

Pulp - %

In 

& C

C

0

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mark

0%

E C it % E C it

59

Excess Capacity % Excess Capacity
Grade Outlook Market Pulp

Mar

Grade Outlook – Market Pulp

1,100 

Pric

R

900

1,000

,

Metric)

E

Ca

R 

600700800

v. To U.S. ($ Res

Fund

S

400500

NBSKP Deliv

S

Stro

F

200300

1990 1992 1994 1996 1998 2000 2002 2004 2006

Real Price ($2003) Nominal Price

60

Real Price ($2003) Nominal Price
Grade Outlook – Tissue

Tissue Remains Strongest Overall Segment in North  End-product Demand Is Mature (Americans Highes

Grade Outlook Tissue d p oduct e a d s atu e ( e ca s g es

capita Consumers in World & Incremental Demand 

 Demand Is steady -- yet Excess Capacity Could Bu

yet Excess Capacity Could Bu

 H O ll Fi Fi i l R t However, owever, Overall Firm Financial Returns L S 

Less Sen

Supply/Demand Dynamics at Mill Level Than Othe

 Reg y ulatory Considerations Will Limit Larg 

e M&A A

 Technology Changes and New Entrepreneurial En

Drive Spending & TAD Proliferation = Potential Pr

Implications: This segment has performed best – 

success story & expansion & upgrades will continu

the industry – but TAD-like commoditization could 

Implications: This segment has performed best – 

success story & expansion & upgrades will continu

the industry – but TAD-like commoditization could 

61

the industry industry – but, TAD-like commoditization commoditization could 
Grade Outlook Tissue

Grade Outlook – Tissue

10,000

Am

T

D 

9,000

ons 000s) De

Stea

7,000 Ge8,000

ume (Short T Ge

Evo

G

6,000

,000

Tissue Volu

Ho

For

5,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

62

US Demand US Capacity Total Shipments
Grade Outlook Tissue

Exc

Grade Outlook – Tissue

900

s)

25%

A

676

776

663

546

565 565 592

666

657

685

750

600700800

ort Tons 000s

20%

apacity

C

Bu

546

301

550

288

433

495

11% 384 400

500

 Capacity (Sh 10% 15% - % Excess Ca

Is Re

4%

8% 8%

6%

7% 7%

4%

8% 8% 7% 7%

6%

7%

9%

5%

10%

100200300

ssue - Excess 5%

Tissue -

Mo

4%

0

100

1990 1992 1994 1996 1998 2000 2002 2004 2006

Tis

0%

Excess Capacity % Excess Capacity

63
Major Industry Issues Major Industry Issues

64
Major Issues Facing the Indus

Major Issues Facing the Indus

Indus

Despite the difficult situation – The US industry is p

for some performance improvements during 2

 But There Remain Significant Risks To A Sust

Profitable Industry Sector --

for some performance performance improvements improvements during 2

Profitable Profitable Industry Industry Sector

1. Resumed economic downturn Resumed economic downturn – globally & dom2. Expanded Expanded Substitution Substitution of US produced P&P b

of US produced produced P&P b

International competitors and non International competitors and non-fiber based 

fiber based 

3. Continued over cap y acit –

g y loball

y as well as d

4. Failure to maintain capacity management disc

5. Not continuin

g to seek innovation & new wa

y

s 

65

g

y

operating
Major Issues Facing the Indus

Major Issues Facing the Indus

Indus

Even with this rebound at hand – The North Ameri

industr

y’s Future remains a 

point of extensive d

Even with this rebound at hand – The North Ameri

industr

y’s Future remains a 

point of extensive d

 Some Believe The North American Industry Has 

Long

-term Irreversible Decline And As Such --

y

p

Long term, Irreversible Decline And As Such

 Will follow in the path of US steel and textiles

–

 Others believe it will restructure and reassert its

restructure and reassert its

some parts of textiles & steel have begun to . . .

 In Truth In Truth – The Real N. Am. Industry Path The Real N. Am. Industry Path Is Not 

 The degree to which N Am demand returns & The degree to which

N. Am. demand returns returns, 

& N 

capacity fulfills the demand & the way firms ope

 Plus – the way the global industry extends & ex

66

will collectively have major impacts on this Path 
Summary & Wrap Summary

& Wrap

-up

67
We Must Understand We Must Understand Understand

–

Paper Is Still Essential To Soc

 Paper Is an Essential Building Block of S

of S

Permeating Modern Civilization’s Social 

 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 filter

cream toothpaste and

68

cream, toothpaste toothpaste, and . . . . . . . . 
A dn – Th A Th I 

There Are Three Impor

Points about North America 

 Winds of Change Have Buffeted the Paper 

-- Causing g a Shift From one Paradigm to A

m to A

An as Yet Unfinished Task . . .

 Paper Industry Executives Paper Industry Industry Executives Executives Are Not Unmin

Are Not Unmin

These Issues & Need for Change . . .

 O U d i bl T th One Undeniable Truth – All St k h ld All Stakeholders I 

and Outside the Firms the Firms -- Are All in the Sam

in the Sam

And Pulling Their Oars Together is Crucia

69

And Pulling Pulling Their Oars Together Together is Crucia

Crucia
A d Thi k Ab t Thi A

n

d Thi

n

k Abou

t This . . . . s . . . . 

Vladimir Lenin Once Noted Vladimir Vladimir Lenin Once Noted

–

I m’ g

to hang all the capitalists, and they

going to sell me the rope I need to going to sell me the rope

I need to 

There is a lesson here for all 

the paper industry the paper industry – Let’s no

own worst enemy own worst enemy

– let s’ 

providing rope for our own d

70
Thank You

E-mail contacts: mail contacts:

Jim McNutt Jim McNutt – Jim.McNutt@CPBIS.gatech

Dan Cenatempo Dan Cenatempo – dan@valueresolution

Bob Kinstrey Bob Kinstrey – bob.kinstrey@jacobs.c