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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