State of the North American Pulp & Paper Industry
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State of the North American Pulp & Paper Industry – An Update p & Outlook – May y 2004 Center for Paper Business and Industry Studies (CPBIS) – Jim McNutt Value Resolution Group – Dan Cenatempo J Jacobs b Engineering E i i Group G – Bob B b Kinstrey Ki t Overview North America P&P Industry – An Update & Outlook – Where Are We? Industry Performance Capacity p y Issues Industry Outlook Grades’ Grades Outlook -- Grade Grade--By By--Grade Major Industry Issues S Summary &W Wrap-up Wrap2 Where Are We? 3 What Are North America’s? America s? – Stakeholders’ Perspectives Has Persistent Flaws in the Eyes of Many Capital p Intensive,, fragmented, fragmented g , technology gy 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 p investors’ values and returns Where Historically – The North American industry y peak. Excess has expanded after each cyclical capacity was pushed into International Markets 5 What Is North America America’s 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; 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 OverOver-capacity, Globalization of Markets -- Which Undermined & Sustained Susta ed Weak ea Balance a a ce S Sheets, eets, Debt ebt Levels, e e s, 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 America s – Current Realities? N th America’s North A i ’ Paper P Industry I d t Pressures P Continue C ti CEOs remain under the microscope Performance continues to 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 Return & Cost of Capiital 20% ROTC averages 7% vs. ROTC Averages 7 % vs. 11% cost of capital 11% Cost of Capital 15% 10% 5% 0% 1975 1978 1981 1984 1987 1990 Return On Total Capital 1993 1996 1999 Cost of Capital 11 2002 Returns Average 4 Points Below Target -Rational Investors Will Not Allocate Capital To The Poorly Performing Sector & Firms Monthly To otal Sharehold der Return (TS SR) Index Industry Performance -- Total Shareholder Returns Still Trail S&P 500 400 P&FP Shareholder Returns Have Trailed S&P 500 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 & Avg. g TSR S = 7.5% 5% Per e Year ea P&FP L.T. Government Bond = 6.2% Per Year 350 300 Yet -- Stocks Rebounding With Overall Market 250 200 150 100 50 0 '92 '93 '94 S&P Return Index '95 '96 '97 '98 '99 P&FP Company Avg. '00 '01 '02 '03 P&FP Company W. Avg. 12 Investment Services Don’t Don t Expect Full P&P Earnings Rebound U til 2004 Until I d t Performance Industry P f – Debt D bt Levels L l 70% Debt To Capital Ratio 60% 50% 40% 30% 20% 1975 1978 1981 1984 1987 1990 1993 1996 Debt % of Invested Capital 13 1999 2002 US Companies Are Maintaining Debt Levels Near 50% Which Will Likely Limit Future Investments Industry Performance – Capital Spending Level – Real USD Total U.S. Rea al Capital Exp penditures ($ $2002 Millio ons) 15,000 12,500 10,000 7,500 5,000 2,500 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 Total 14 US S Pulp & Paper Capital E Expenditures dit Will Continue T Languish To L i h Until The Cyclical Recovery Circa 2004 Industry Performance – Less Capital Being Invested In Primary Industry Assets Sh hare of Pulp & Paper Capita al Spending 100% Facility Related Spending Accounts For Declining Share of P&P 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1980 1982 1984 IT & Communic. 1986 1988 1990 1992 Facilities, Machinery & Infra. 1994 1996 1998 2000 Office Buildings & Furnish. 15 CAPEX for IT = More I d t Performance Industry P f – Profitability P fit bilit Net Operatting Profit M Margin 12% 10% 8% 6% 4% 2% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 16 US Pulp & Paper Profitability Continues Its Declining Path In Real Terms Since 1970s Industry Performance – Capital Turnover Sales / Tota al Invested C Capital 200% US Pulp & Paper ape Capital Turnover To Continue Its Downward Trend 180% 160% 140% 120% 100% 80% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 17 Industry y Performance – Capital p Spending/Depreciation US CAPEX Likely To Remain Significantly Below Depreciation p Levels Capita al Expenditures % of Dep preciation 275% 250% 225% 200% 175% 150% 125% 100% 75% 50% 25% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 18 And Are Now Below Maintenance L Levels l Capacity Issues 19 C Capacity it IIssues – Major M j Trend T d Change Ch U.S. To otal Paper & Paperboard d (ST 000s) U.S. Shipments Off 14% In 2003 From 1999 Peak 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 150,000 100 000 100,000 50,000 - 21 Capacity Issues – Growth Outside NA Capacity Change 1995 to 2001 120.0% 100 0% 100.0% 80.0% Total Paper & Paperboard 60 0% 60.0% Printing & Writing 40.0% Wrapping & Packaging 20 0% 20.0% 0.0% World North America Europe Asia + Latin Japan America 22 Capacity Issues – NA PM Changes Shuts 1980--89 1980 New 1980--89 1980 Shuts 1990--03 1990 New 1990--03 1990 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 2 306 114 358 114 G d Grade Total 23 C Capacity it IIssues – PM Age A Distribution Di t ib ti -North America vs. Europe A Di Age Distribution t ib ti off Paper P Machines M hi 450 400 350 300 Economic Obsolescence Proxy 250 200 150 100 50 0 1890- 1900- 1910- 1920- 1930- 1940- 1950- 1960- 1970- 1980- 1990- 20001899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2003 North America (1102) 24 Europe (1861) 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 -Pl Range Plus R off Competitive C titi F Factors t -- Did Result R lt iin 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 2004--2006 US Real GDP Growth 2.2% 3.6% US Inflation (PPI Index) 2.6% 0.7% European Real GDP Growth 1.3% 2.0% European Inflation (GDP Deflator)) 1.0% 0.4% 27 Overall Economic F Forecast t Now N Calls For C ti Continued d Recovery With US Leading Europe Industry Outlook – The Drivers Economic Segment Industry Segment Impacted 200120012002 Real Growth Q2 2003 Real Growth vs. 2002 Demand Growth Food & Beverage Boxboard/Containerboard -2.0% +3.6% Drivers Restaurant / Recreation Boxboard, Tissue -3.0% +1.6% Accelerating – Durable Goods Containerboard -5.1% +8.2% Just Now N -Durable NonNon D bl Goods G d C t i Containerboard b d -4.1% 4 1% +3 3% +3.3% Being Realized Computer & Peripheral Investment P&W Papers -11.5% +31.0% By Advertising P&W & Newsprint -29.5% +6.8% Manufacturing Housing Starts Tissue, Forest Prods +5.7% +11.8% Sector Private Investment All Mfg. Industries incl. P&P -21.7% +8.0% Industrial Production All Mfg. Industries incl. P&P -4.0% 0.0% 28 Industry Outlook – Performance Direction Line Item U.S. Europe 2003 Sales Growth -3.0% -4.5% 2003 Income Growth 2001-2003E 2001ROTC -16.0% -33.0% 4.0% 6.0% 29 European & US Industry Firms’ Performances Are Converging – But Both Regions Now Under Under-performing – Yet Asian & Latin American Share Growth Continues Industry Outlook – Price & Volume -- Improving p g Performance Emerging-Emerging g g-North American Grade Q1 2004 Change In Demand Q1 2004 Change In Price + 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% Newsprint 30 I d t Outlook Industry O tl k – NA C Capacity it 8,000 Change In NA A Pulp & Paperr Capacity (Sho ort Tons 000s)) 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 31 2003 2005 Total US Paper & Board Capacity Will Continue to S Limited See Li it d to No Net Growth For Immediate Future Industry Outlook – Global Capacity Changes Projected Capacity Change, 2001 - 2005 12.0% 10 0% 10.0% 8.0% 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 Grade Segment Change In Capacity (Short Tons 000s) 2001--2003 2001 2004 2004--2006 Containerboard -1,320 1 320 -150 Newsprint -1,390 -490 Printing & Writing -1,820 475 590 380 -435 -250 p Pulp -1,715 , -875 Total Change -6,090 -910 Tissue Packaging & Industrial 33 NA Experienced Pulp & Paper Capacity Decline Through 2003 -With Some Growth Through “Creep” C i Th Coming Through h 2006. Yet -Several Scenarios P Possible ibl Where Wh Net Capacity Reductions Do Continue Industry Outlook – Offshore Capacity 2003--2005 Change In China's Capacity 2003 (Short Tons 000s) Containerboard 2,035 Newsprint 780 The Noted Offshore Capacity Additions Will Printing & Writing 1,480 Tissue 35 Continue to Put Significant Packaging & Industrial 2,390 Pressure on the Pulp 1,515 Global Export Total Change 8,235 34 Markets Industry Outlook – Competitiveness North America Does Not Enjoy Low Cost Producer Status On Most Grades – Which Clouds The Outlook Period Grade Category Low Cost Production Centers Pulp Brazil, Chile, Argentina, Indonesia and Canada (selected) Printing & Writing Papers Brazil, Russia, Indonesia, Thailand, Scandinavia, Western Europe Newsprint Eastern Europe, Europe Brazil, Brazil Chile and Canada Premium Folding g Carton Grades 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 Substitutes Re-usable shipping containers, Reoffshoring of manufacturing P k i Packaging Grades G d Flexible p packaging, g g, offshoring g of manufacturing Printing & Writing Papers Electronic communications, alternative advertising mediums Newsprint Electronic communications, alternative advertising mediums Tissue No major substitutes 36 Grades’ Outlook Grades 37 North American Grades Grades’ Outlook -- Grade Grade--by 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 LongLong-Term Issue Need for Further Capacity Reductions Will Continue Implications: p 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 ever. 39 Newsprint Volume (Metric Tons 000s) N Grade Outlook – Newsprint 17,500 15,000 12,500 10,000 1990 1992 1994 NA D Demand d 1996 1998 2000 NA C Capacity it 40 2002 2004 T t l Shipments Total Shi t 2006 North American Newsprint’s Decline Has Moderated & M d t Modest Recovery From 2002 Lows Is Expected Grade Outlook – Newsprint 35% 30% 2,000 1,874 1,817 1,727 25% 1,631 1,501 1,069 1,396 1,500 20% 456 1 000 1,000 963 961 610 809 15% 954 12% 11% 928 10% 598 553 500 10% 755 11% 10% 9% 6% 4% 1992 1994 5% 5% 4% 3% 3% 0 1990 6% 6% 6% 6% 5% 1996 1998 E Excess Capacity C it 2000 0% 2002 2004 2006 %E Excess C Capacity it 41 Newsprint - % Excess C Capacity New wsprint - Exce ess Capacity (Metric Tons 000s) 2,500 Excess North American Capacity Persists – But At Lower L Levels l -Supply & Demand May Balance By 2004 Grade Outlook – Newsprint $800 Newsprintt ($ Metric Ton n) $700 $600 $500 $400 $300 1990 1992 1994 1996 1998 2000 Real Price ($2001) 2002 2004 Nominal Price 42 2006 Newsprint p Has Experienced Hi Historic i Low L Prices – With Weak End--User End Demand – But Some Relief In Sight 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 y Interchangeable g / 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 / Di l Displaced d by b Improved I d CGW Grades G d 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 y Average g & Room Does Exists for Continued Merger g & 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 Volume (Short Tons s 000s) 43,500 41,000 38,500 36,000 33,500 31,000 28,500 26,000 1990 1992 1994 NA Demand 1996 1998 2000 NA Capacity 2002 2004 Total Shipments 45 2006 North American P&W Demand &C Capacity i Contracted 2000 - 2002 But A Moderate Recovery Has Begun In 2003 Grade Outlook – P&W Papers 25% 4 387 4,387 4,500 4,187 4,116 20% 4,000 3,500 3,352 2 258 2,258 3,461 3,122 3,800 2,498 3,059 3,000 2,701 2,732 2,004 15% 2,745 3,059 3,150 12% 2,500 11% 11% 10% 10% 2 000 2,000 10% 1 191 1,191 9% 1,500 8% 8% 8% 7% 7% 6% 1,000 8% 8% 7% 5% 5% 500 3% 0 0% 1990 1992 1994 1996 E Excess C Capacity it 1998 2000 2002 2004 %E Excess C Capacity it 46 2006 P&W - % Excess Cap pacity P&W W - Excess C Capacity (Shorrt Tons 000s) 5,000 Significant North American P&W Over Over-capacity May Dissipate By 2004 Grade Outlook – P&W Papers 1,600 Real Prices s ($2003 - Sho ort Ton) 1,500 1,400 1,300 1 200 1,200 1,100 1,000 900 800 700 600 500 400 1990 1992 1994 1996 CFS No. 3 60lb. UCFS N No. 4 X Xerocopy 1998 2000 2002 UCGW Average CGW No. N 4 50lb. 50lb 47 2004 2006 North American P&W Real Pricing Remains At Historically Low Levels With Grade G d Prices Converged Grade Outlook – P&W Papers 1,300 Nominal Priices ($ per Short Ton) 1,200 1,100 1 000 1,000 900 800 700 600 500 400 1990 1992 1994 1996 CFS No. 3 60lb. UCFS No. No 4 Xerocopy 1998 2000 2002 UCGW Average CGW No. No 4 50lb. 50lb 48 2004 2006 North American P&W Nominal Prices Will Improve Some In 2003 & 2004 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 horizon. Expect more capacity adjustments -- productivity and product improvement initiatives -- But grade still faces serious challenges looking out out. 49 Slide 49 DC25 Dan Cenatempo, 9/25/2003 Grade Outlook – Packaging & Industrial Otherr Paper / Paperb board Volume (S Short Tons 000s s) 19,000 18,000 17,000 16,000 15,000 14,000 13 000 13,000 12,000 1990 1992 1994 NA Demand 1996 1998 2000 NA Capacity 2002 Total Shipments 50 2004 2006 North American Demand, Shipments and Capacity Have Fallen Four Years In A Row – Some Recovery Likely – But To Be Slow Grade Outlook – Packaging & Industrial Otherr Paper & Boarrd - Excess Cap pacity (Short To ons 000s) 1,595 1,600 1,434 20.0% 1,388 1,350 1,400 1,301 1 200 1,200 1,305 1,200 1,044 959 1,000 790 850 810 904 770 800 660 9.0% 8.3% 8.5% 10.0% 9.2% 8.1% 600 15.0% 7.5% 410 490 8.0% 400 6.1% 5.1% 5.0% 5.0% 200 3.8% 3.0% 5.6% 5.0% 5 1% 5.1% 4.4% 2.3% 0.0% 0 1990 1992 1994 1996 Excess Capacity 1998 2000 2002 2004 % Excess Capacity 51 2006 Other Paper & Bo oard - % Exces ss Capacity 25.0% 1,800 North American Grade Has S Struggled With Significant Overcapacity Which Seems to Be Moderating Some – But More Is Needed Grade Outlook – Packaging & Industrial Low North American Prices Will p By y Improve 2004 – But Are Still Weak $1,200 $ , SBS 15 pointt Price ($ Sho ort Ton) $1,100 $1,000 $900 $800 $700 $600 $500 $400 1990 1992 1994 1996 R l Price Real P i ($2003) 1998 2000 2002 N i l Price Nominal Pi 52 2004 2006 Grade Outlook – Containerboard This N. Am. Segment has Undergone Significant Restructuring: Restructuring: Concentration of Top Producers Shifted From One of Lowest to Highest in North American Industry – Improved Capacity Utilization and Expansion Discipline Has Followed F th Acquisitions Further A i iti by b Large L Players Pl Will Be B Difficult Diffi lt However, North American Producers Have Lost Export Market to New Overseas Capacity, p y, Especially p y in China and Germany y Profitability and Returns Are Lower Needed & Expected Slack Capacity Absorbed Quickly With Improved Economy Implications: This grade has had great transition – synergies still key. Expect more asset moves & quality initiatives. CAPEX to be minimal minimal. Major issue is surplus converting capacity capacity.. 53 Grade Outlook – Containerboard Con ntainerboard Volume (Sho ort Tons 000s s) 40,000 37,500 35,000 32,500 30,000 27,500 25,000 22 500 22,500 20,000 1990 1992 NA D Demand d 1994 1996 1998 NA C Capacity it 2000 2002 T t l Shipments Total Shi t 54 2004 2006 North American Demand Improvement & Significant Blocks Of C Capacity it Retired Between 1998 and 2003 Have Helped Grade Greatly y Grade Outlook – Containerboard 25% 4,406 , 4 500 4,500 20% 4,000 3,790 3,500 15% 2,615 12% 2,500 1,500 3,196 2,954 , 3,000 2 000 2,000 3,461 3,213 3,279 2,170 2,111 1,212 2,320 , 1,622 1,4011,363 10% 1,469 10% 10% 9% 9% 9% 8% 7% 1,000 583 6% 6% 6% 6% 5% 5% 5% 5% 500 3% 2% 0 1990 1992 1994 0% 1996 Excess Capacity 1998 2000 2002 2004 % Excess Capacity 55 2006 Containerboa C ard - % Exces s Capacity Con ntainerboard - Excess Cap pacity (ST 000 0s) 5,000 North American Container-Container board’s Excess Capacity Is Coming Back In Line Grade Outlook – Containerboard Liinerboard 42 lb. Price ($ Sh hort Ton) 600 500 400 300 200 100 1990 1992 1994 1996 R l Price Real P i ($2003) 1998 2000 2002 N i l Price Nominal Pi 56 2004 2006 North American Capacity Reductions Have Helped p Better Balance The Market & Prices Going Forward Grade Outlook – Market Pulp Market Pulp Is an Intermediate Good in the Production of the Other Paper and Paperboard Grades Pulp Investment Returns -- Among the Poorest in the Industry Environmental Restrictions -- New Capacity Additions Difficult International Producers -- Import Pulp Competitively to US Inventory Management – Remains Major Issue Going Forward Implications: This grade remains in serious difficulty due to commodity nature & global low cost producers. Further North American capacity reductions needed & expected. Pricing g will remain strained and low. 57 Market + Integrated Pu ulp Volume (M Metric Tons 00 00s) Grade Outlook – Market Pulp 95,000 North American Market Pulp Tends to Follow Other Grades 90,000 85,000 80 000 80,000 75,000 70,000 65,000 60,000 55,000 50,000 1990 1992 1994 NA D Demand d 1996 1998 NA C Capacity it 2000 2002 T t l Shipments Total Shi t 58 2004 2006 Grade Outlook – Market Pulp 25% 10,575 , 10 834 10,834 9,711 10,000 20% 8,917 8,824 7,954 7,727 7,603 8,000 , 7 170 7,170 6,432 7,333 7 208 7,208 6,695 15% 12% 6,000 5,455 6,154 9% 4,000 12% 10% 11% % 10% 10% 9% 9% 5,293 4,344 8% 8% 8% 7% 6% 2,000 8% 7% 5% 6% 5% 0 0% 1990 1992 1994 1996 E Excess C Capacity it 1998 2000 2002 2004 %E Excess C Capacity it 59 2006 Pulp - % Excess Cap pacity Mark ket + Integ. Pu ulp - Excess C Capacity (Mettric Tons 000s) T 12,000 North American Pulp Excess Capacity May Be Moderated By Rebound In Demand & Capacity Closures Grade Outlook – Market Pulp 1,100 , NBSKP Deliv v. To U.S. ($ Metric) 1,000 900 800 700 600 500 400 300 200 1990 1992 1994 1996 Real Price ($2003) 1998 2000 2002 Nominal Price 60 2004 2006 Market Pulp p Prices Should Rise As Excess Capacity Is R Resolved l d -Fundamentals Still Not Strong Going Forward Grade Outlook – Tissue Tissue Remains Strongest Overall Segment in North America End Endd-p product oduct Demand e a d Is s Mature atu e ((Americans e ca s Highest g est PerPer ecapita Consumers in World & Incremental Demand Is Slow) Demand Is steady -- yet Excess Capacity Could Build However, H O Overall ll Fi Firm Financial Fi i l Returns R t L Less Sensitive S iti to t Supply/Demand Dynamics at Mill Level Than Other Grades Regulatory g y Considerations Will Limit Large g M&A Activity y 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, but TAD-like commoditization could be issue. issue 61 Grade Outlook – Tissue Tissue Volu ume (Short T ons 000s) 10,000 9,000 8,000 7,000 ,000 6,000 5,000 1990 1992 1994 US Demand 1996 1998 2000 US Capacity 2002 2004 Total Shipments 62 2006 North American Tissue Demand D d Is I Steady & Still Generally Evolves with GDP & Household Formations Grade Outlook – Tissue 25% 776 800 750 685 676 700 565 565 600 20% 657 666 663 592 546 15% 495 550 500 301 433 11% 400 384 288 10% 300 10% 8% 200 100 9% 8% 7% 7% 8% 7% 8% 7% 7% 6% 6% 5% 4% 5% 4% 0 0% 1990 1992 1994 1996 Excess Capacity 1998 2000 2002 2004 % Excess Capacity 63 2006 Tissue - % Excess Ca apacity Tis ssue - Excess Capacity (Short Tons 000s s) 900 Excess North American Tissue Capacity Built Up To 2001 Is Returning to More Normal Levels Major Industry Issues 64 Major Issues Facing the Industry – Despite the difficult situation – The US industry is positioned for some performance improvements during 2004 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 2. International competitors and nonnon-fiber based products, p y–g globally y as well as domestic 3. Continued over capacity 4. Failure to maintain capacity management discipline, & g to seek innovation & new ways y of 5. Not continuing operating 65 Major Issues Facing the Industry – Even with this rebound at hand – The North American P&P industry’s y Future remains a p point of extensive debate Some Believe The North American Industry Has Begun A Long--term, Long 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. N Am. Am demand returns, returns & N. N Am 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 & WrapWrap-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 cream, toothpaste, and . . . . 68 A d – There And Th Are A Three Th Important I t t Points about North America . . . Winds of Change Have Buffeted the Paper Industry -- Causing g a Shift From one Paradigm g to Another -An as Yet Unfinished Task . . . Paper Industry Executives Are Not Unmindful of These Issues & Need for Change . . . O Undeniable One U d i bl Truth T th – All Stakeholders St k h ld I id Inside and Outside the Firms -- Are All in the Same Boat – And Pulling Their Oars Together is Crucial 69 A d Think And Thi k About Ab t This Thi . . . . Vladimir Lenin Once Noted – II’m m going to hang all the capitalists, and they’re going to sell me the rope I need to do it. it There is a lesson here for all of us in the paper industry – Let’s not be our own worst enemy – let let’s 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
