State of the North American (& Maine) Pulp & Paper
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State of the North American (& Maine) Pulp & Paper Industry -- An Update & Outlook -Maine Pulp & Paper Industry Foundation Orono, Maine – April 3, 2003 1 Overview North America (& Maine) Pulp & Paper I d t – An Industry A U Update d t &O Outlook tl k Where Are We? Industry Performance Industry y Outlook Grades Outlook -- Grade Grade--By By--Grade Major j Industry y Issues Summary, WrapWrap-up and Q&A Acknowledgment Is Made to ValueResolution For Much Of The Data Utilized in This Presentation Package. 2 Where are We? -- Stakeholders Stakeholders’ Perspectives On The Industry . . . . Flawed character in the eyes of many . . . Capital p Intensive,, fragmented, g , technology gy based – monolithic & slow to adapt Focusing more on what it does instead of figuring out what should be doing Key into lower costs, economies of scale, market share share, marginal ret returns rns . . . Very open information flows . . . Highly insular . . . 3 Wh Where Are A We? W ? – The Th Realities R liti Th US (and The ( d Maine’s) M i ’ ) Paper P IIndustry d t Continues C ti to t Struggle St l CEOs are under intense pressure Performance is lagging Capacity excesses and older/inefficient technology still exist Substitution (imports & alternative products to meet consumers needs) is an every present issue Balance sheets are out of balance Reinvestment in revenue generation steps is lagging The competitive landscape is Intense The Global Market Place & Competitive Arena is Upon us Let’s Let s Take A Deeper Look . . . . 4 Wh Where Are A We? W ? -- Market M k tO Overview i The North American (and similarly, similarly Maine’s) Maine s) Pulp and Paper industry is a mature web of businesses generally characterized by: Highest per capita consumption in world across all grades Slower growth than real GDP High capital intensity Cost and price based competition Below cost of capital returns Cyclical y pricing p g and profitability. p y .... And -- Historically – The N. Am. industry has expanded after each cyclical peak. Excess capacity pushed to Int’l Markets 5 Wh Where Are A We? W ? -- Market M k tO Overview i However – the combination of - A strong dollar -- Maturing domestic demand -- Poor returns -- Unifying European markets & Aggressive industry growth in developing regions -- Asia & Latin America – Interrupted this growth pattern The N. Am. Industry did not recognize this competitive landscape change until the mid 1990s and - Continued to behave as it did in the past – investing available cash in new capacity p y in 1980’s & early y 1990s 6 This new capacity relied on increasingly competitive export markets to maintain volume. Simultaneously, developing regions began to aggressively export back to N. Am. Wh Where Are A We? W ? -- Market M k tO Overview i Th result The lt has h been b persistent i t t overover-capacity, it globalization l b li ti of markets and, as a result, undermined and sustained weak balance sheets,, debt levels,, pricing p g and profitability p y In response -- N. Am. Industry – More So Than Maine’s -- Is restructuring to better compete in changing global markets -and is poised – after 2001 2001--02 Recession -- for greater profitability & increased capital spending going into 20032003-04 – But Not Like a Rocket ship. p .. Let’s Look at some of the Situational Aspects of the Industry & Discuss Their Importance . . . . 7 Industry Performance – ROTC Vs. Cost of Capital Return & C Cost of Capiital 20% 15% ROTC averages 7% vs. 11% Cost of Capital 10% 5% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 Return On Total Capital 8 Cost of Capital Returns Have Been 4 Points Below Target -Rational Investors Will N t All Not Allocate t Capital To The Poorly Performing US Pulp & Paper Industry Industry Performance – Debt Levels 70% Debt To o Capital Ratio 60% 50% 40% 30% 20% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005F Debt % of Invested Capital 9 US Companies p Are Making Debt Reduction A Priority – But Debt Levels Are Still S Constraining Needed Business Investments Industry dust y Performance e o a ce – Cap Capital ta Spending Level U.S. R Real Capital Ex xpenditures (($2002 Millions) 15,000 12,500 10,000 7,500 5,000 2,500 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 Total 10 Primary Pulp & Paper Converting Real US Pulp & Paper Capital Expenditures Will Continue To Languish Until The Cyclical Recovery Circa 2003 / 2004 Industry Performance – Production Capacity Expectations 4,500 3,750 Shorrt Tons - 000s s 3,000 2,250 1,500 750 (750) (1,500) (2 250) (2,250) (3,000) 1976 1979 1982 1985 1988 1991 1994 1997 Change In Capacity (Tons) 11 2000 2003F 2006F T t l US Total Paper & Board Capacity Will Resume Growth – But At 1/2 It Its Historical Rate -- Industry Performance – Profitability Net Operatin N ng Profit Ma argin 12% US Pulp & Paper Profitability Has Been On A Declining Path In Real T Terms Since Si 1970s 10% 8% 6% 4% 2% 0% 1975 1978 12 1981 1984 1987 1990 1993 1996 1999 2002 Industry Performance – Capital Turnover Sales / Total IInvested Capital S 200% US Pulp & P Paper Capital Turnover Will Continue Its Downward T Trend d 180% 160% 140% 120% 100% 80% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 13 Industry y Performance – Capital p Spending/Depreciation Capital Expenditure es % of Deprreciation 275% 250% 225% US Capital Expenditures Will Remain Si ifi Significantly tl Below Depreciation Levels 200% 175% 150% 125% 100% 75% 50% 25% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 14 I d t Outlook Industry O tl k -- The Th Economy E Line Item 2002 2003 2003--2006 US Real GDP Growth 1.5%--2.8% 1.5% 2.5%--4.0% 2.5% US Inflation (GDP Deflator) 1.5%--2.0% 1.5% 2.0% 2.0%--3.0% European Real GDP Growth 2.0%--2.5% 2.0% 2.5% 2.5%--3.5% European Inflation (GDP Deflator) 1.5% 1.5%--2.0% 2.0% 2.0%--3.0% 15 The Overall Economic Forecast Calls For A Gradual Recovery -- Risk of a “Double Double Dip Dip” Recession Persists e s sts -- I d t Outlook Industry O tl k -- The Th Drivers Di Economic Segment Industry Segment Impacted 1999-- 2000 1999 Real Growth 2000--02 2000 Real Growth Food & Beverage Mfg. Boxboard +5% +2% Restaurants & Hotels Boxboard, Tissue +6% +5% General Manufacturing Containerboard +10% -5% Office & Computing P&W P Papers, Containerboard +75% 0% Electric Appliances & House Wares Boxboard, Containerboard +11% -5% Business Services P&W Papers +9% +6% Publishing & Printing P&W Papers, Newsprint +4% -13% Construction Tissue, Forest Products +1% -1% Household Formation / Starts Tissue -3% +3% 16 Demand Growth Drivers Have S Stalled In North America I d t Outlook Industry O tl k -- Market Overview Weakness in demand drivers in the US just reviewed is expected to improve 2003 - 2006 However, However weak downstream demand 2001 - 2002 plus a range of competitive factors has already resulted in significant excess capacity This excess capacity has, in turn, undermined pulp & paper prices The net result is persistent poor, but improving performance, in the North American pulp & paper industry during the outlook period. period 17 I d t Outlook Industry O tl k -- The Grades G Pulp & Paper Segment Return To Trajectory Boxboard 2005 / 2006 Containerboard 2004 / 2005 Newsprint N i t P&W Papers Tissue Pulp Forest Products 18 2006 2003/2004 2003 2004 / 2005 2004 It Will Take Several Years For These Economic Segments To Push Pulp & Paper Demand Back To Pre Pre-Recession Trajectories I d t Outlook Industry O tl k -- The Th Grades G d Grade Segment Change In N. N Am. Am Capacit Capacity 2000--2002 2000 Boxboard B b d -220 Containerboard -925 N Newsprint i -1,045 1 04 Printing & Writing -1,010 Tissue Pulp 590 -2,410 T t l Change Total Ch -5,020 5 020 19 Net effect was a 2003 2003--2006 N. Am. pulp & paper capacity p y decline 110 through 2002 -- With growth through 435 “creep” p coming g 0 through 2006. 2006. Several scenarios 1,910 possible where net 410 capacity reductions -885 do continue (Short Tons -- 000s) 1 980 1,980 G d Outlook Grades O tl k -- Grade Grade--by by--Grade NA N Newsprint i t NA Printing g & Writing g Papers p NA Boxboard NA Containerboard NA Market Pulp NA Tissue 20 G d Outlook Grade O tl k – N. Am. Newsprint Newsprint is the weakest overall industry segment Short-term publishing and printing declines have been Shortexacerbated by y substitution to alternative media National and local papers continue to reduce page size Newsprint is in decline in the longlong-term Opportunities for further consolidation exist and significant capacity reductions will continue Implications: This Grade suffers severe end user demand decline & excess capacity. capacity Rational players to spend minimum capital capital. No new Newsprint mills likely to be built in N. Am. soon -- or ever. 21 Ne ewsprint Volum me (Metric Tons 000s) G d Outlook Grade O tl k – N. Am. Newsprint 17,500 15,000 12,500 10,000 1990 1992 1994 NA Demand 22 1996 1998 2000 NA Capacity 2002 2004 Total Shipments 2006 N Am N. Am. Newsprint Is A Declining Segment In Long--Term Long – But A Recovery From 2002 Lows Is Expected G d Outlook Grade O tl k – N. Am. Newsprint 3,500 35% 3,000 30% 2,500 25% 21% 2,000 1,948 1,817 1,631 1,069 961 13% 553 6% 4% 10% 9% 755 4% 1992 8% 400 8% 5% 5% 3% 1994 3% 3% 1996 1998 Excess Capacity 23 10% 6% 5% 0 1990 15% 10% 809 598 500 1,289 1,273 610 11% 1,000 1,626 454 1,396 1,500 20% 2000 2002 2004 0% 2006 % Excess Capacity Newsprint - % Excess Cap pacity New wsprint - Exce ess Capacity (M Metric Tons 000s) 3,164 E Excess N A N. Am. Capacity Persists Despite Significant Facility Closures – Supply & Demand Will Balance By 2004 G d Outlook Grade O tl k – N. Am. Newsprint $800 Newsprint ($ Metric Ton)) $700 $600 $500 $400 $300 1990 1992 1994 1996 Real Price ($2001) 24 1998 2000 2002 Nominal Price 2004 2006 Newsprint Has Been At Historic L Low Prices – Weak End End-User Demand Has Dampened Price I Increases G d Outlook Grade O tl k – N. Am. P&W Papers Recent economic slowdown & alternative media substitution have impacted P&W demand negatively: Uncompetitive capacity being closed & modest demand increases will tend to reign in excess capacity CF, CGW, UCF & GW Grades seemingly collapsing into one relatively inter inter--changeable/somewhat flexible grade structure from consumers’ perspectives These changes g brought g on by y collapsing p g price p structures of the grades on top of each other is a major sea change In this context -- CF quickly becoming commoditized -di l displaced d by b improved i d CGW grades d 25 G d Outlook Grade O tl k – N. Am. P&W Papers In addition -- high end uses -- auto brochures/annual reports -are being replaced by website versions High volume UCF under pressure from overseas competitors and Newsprint producers are converting competitors, capacity to UC and CGW grades Financial returns & growth prospects are similar to industry average & Room does exists for continued M&A activity Implications:: This grade grouping is in major sea change with Implications grades collapsing on one another. another. Significant repositioning and redeployment of assets – continued M&A & financial constraints.. Certain segments will suffer net capacity reductions constraints reductions.. 26 G d Outlook Grade O tl k – N. Am. P&W Papers P& &W Volume (S Short Tons 00 00s) 43,500 41,000 38,500 36,000 33,500 31,000 28,500 26,000 1990 1992 NA Demand 27 1994 1996 NA Capacity 1998 2000 2002 Total Shipments 2004 2006 N. Am. P&W Demand & Capacit Capacity Contracted Between 2000 and 2002 – A Moderate Recovery Has Begun In 2003 G d Outlook Grade O tl k – N. Am. P&W Papers 25% 4,387 4,500 4,187 4,116 4,000 3,500 20% 3,352 2,498 2,258 3,000 2,701 2,732 2,745 3,294 2,709 3,096 11% 11% 2,427 10% 2,000 10% 1,191 8% 1,500 8% 8% 8% 7% 7% 6% 1,000 7% 7% 7% 6% 5% 5% 500 3% 0 0% 1990 1992 1994 1996 Excess Capacity 28 15% 2,004 12% 2,500 2,955 3,059 1998 2000 2002 2004 % Excess Capacity 2006 P&W - % Ex xcess Capacitty P&W - Excess Capa acity (Short To ons 000s) 5,000 Significant N. Am. P&W Over Over-capacity it Should Dissipate By 2004 G d Outlook Grade O tl k – N. Am. P&W Papers 1,600 Real Prices ($2001 - Shortt Ton) 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 1990 1992 1994 1996 CFS No. 3 60lb. UCFS No. No 4 Xerocopy Xerocop 29 1998 2000 2002 UCGW Average CGW No. No 4 50lb. 50lb 2004 2006 N. Am. P&W Real Pricing Is At Historically y Low Levels – Grade Prices Have Converged g G d Outlook Grade O tl k – N. Am. P&W Papers 1 300 1,300 Nominal Pric ces ($ per Sho ort Ton) 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 30 1998 2000 2002 UCGW Average CGW No. N 4 50lb. 50lb 2004 2006 N. Am. P&W Nominal Prices Will Likely Improve In 2003 & 2004 Grade Outlook O tlook – N. N A Am. B Boxboard b d Boxboard is one of weakest overall segments in North America Slow growth in industries that consume boxboard, increased competition from overseas producers and widespread substitution by plastics and alternative packaging materials has hurt producers Profitability/returns are better than industry average despite these poor fundamentals due to a relatively concentrated supply base – But, Facility closures and overover-capacity persist Implications: Don Implications: Don’tt expect significant expansion any time soon. Expect more closures, productivity and product improvement initiatives. Continued net declines in capacity are possible possible. This grade is in serious stress! 31 G d Outlook Grade O tl k – N. Am. Boxboard 19,000 , Boxboard Volu ume (Short Tons s 000s) 18,000 17 000 17,000 16,000 15 000 15,000 14,000 13,000 12,000 1990 1992 1994 NA Demand 32 1996 1998 NA Capacity 2000 2002 Total Shipments 2004 2006 N A N. Am. Boxboard Demand Shipments and Capacity Have Fallen Three Years In A Row – Recovery Likely To Be Slow 3 000 3,000 25 0% 25.0% 2,760 2,500 20.0% 2,010 2,000 15.5% 1,805 15.0% 1,603 1,500 1,350 1,310 11.2% 1 200 1,200 1,311 1,277 1,330 10.2% 10.0% 1,000 9.0% 8.3% 790 8.6% 810 850 810 9.0% 770 660 7.2% 7.3% 7.4% 490 500 5.1% 5.0% 5.0% 5.0% 3.8% 4.4% 4.5% 3.0% 0 0.0% 1990 1992 1994 1996 Excess Capacity 33 1998 2000 2002 2004 % Excess Capacity 2006 Boxboard - % Excess Capacity y Boxboa ard - Excess C apacity (Shortt Tons 000s) G d Outlook Grade O tl k – N. Am. Boxboard N. Am. Boxboard Is Struggling With Significant Overcapacity Which Will Require q Additional Rationalization G d Outlook Grade O tl k – N. Am. Boxboard $1,200 SBS 15 point Price ($ Short T Ton) $1,100 $1 000 $1,000 $900 $800 $700 $600 $500 $400 1990 1992 1994 1996 Real Price ($2001) 34 1998 2000 2002 Nominal Price 2004 2006 N. Am. Boxboard Prices Are Near Historic Lows But Will Improve By 2004 G d Outlook Grade O tl k – N. Am. Containerboard This segment is undergoing significant restructuring: restructuring: Concentration of top producers has gone from one of the lowest to highest in the industry – improved capacity utilization and expansion discipline has followed Further acquisitions by large players will be difficult However, N Am. producers have lost export market to new overseas capacity, it especially i ll in i China Chi and d Germany G Profitability and returns are lower than industry average Slack capacity absorbed quickly with improved economy Implications: This grade is in great transition – synergies will be ke No major e key. expansions. pansions E Expect pect more clos closures res & some asset quality initiatives. Producers spend minimal capital. 35 G d Outlook Grade O tl k – N. Am. Containerboard Conttainerboard Vo olume (Short T Tons 000s) 40,000 37,500 35,000 , 32,500 30,000 27,500 25,000 22,500 20,000 1990 1992 NA Demand 36 1994 1996 1998 NA Capacity 2000 2002 Total Shipments 2004 2006 N. Am. Containerboard D Demand d Improved In 2002 – Significant Blocks Of Capacity Were Retired Between 1998 and 2002 G d Outlook Grade O tl k – N. Am. Containerboard % 25% 4,446 4,500 4,000 20% 3,582 3 777 3,777 3,301 3,500 3,000 2,204 , 1 347 1,347 2,054 2,368 2,000 1,574 1,485 1,317 6% 9% 7% 7% 7% 6% 7% 6% 4% 3% 0 0% 1990 1992 1994 1996 Excess Capacity 37 5% 5% 4% 500 10% 10% 6% 5% 10% 1,520 849 1 000 1,000 15% 12% 2,500 1,500 2,617 2,458 2,406 2,671 1998 2000 2002 2004 % Excess Capacity 2006 Con ntainerboard - % Excess Ca apacity Containerboard - Ex xcess Capacity y (ST 000s) 5,000 N. Am. Container-Container board’s Excess Capacity Is Coming Back In Line G d Outlook Grade O tl k – N. Am. Containerboard Line erboard 42 lb. P Price ($ Short T Ton) 600 500 400 300 200 100 1990 1992 1994 1996 Real Price ($2001) 38 1998 2000 2002 Nominal Price 2004 2006 N. Am. Capacity Reductions Helped Containerboard Producers Maintain Prices – Will Facilitate Price Increases Going Forward Grade Outlook O tlook – N. N A Am. M Market k tP Pulp l Market Pulp p is an intermediate g good in the p production of the other paper and paperboard grades Pulp Investment returns -- among the poorest in the industry Environmental restrictions -- new capacity additions difficult International producers -- import pulp competitively to US Deinked pulps relatively more financially attractive than virgin pulps Implications: This grade is in serious, sustained trouble due to commodity nature & global low cost producers. Some capital for integrated g DIP facilities. Virgin g pulp p p mill investments only y if forced for maintenance & environmental purposes. 39 Market + Integrated Pulp Volume (Metrric Tons 000s) G d Outlook Grade O tl k – N. Am. Market Pulp 92,500 90,000 87,500 NA Pulp Follows Other Grades 85,000 82,500 80,000 77,500 75,000 72,500 70 000 70,000 67,500 65,000 1990 1992 1994 NA Demand 40 1996 1998 NA Capacity 2000 2002 Total Shipments 2004 2006 G d Outlook Grade O tl k – N. Am. Market Pulp 25% 10,575 10,834 10,000 20% 8,968 8,824 7 954 7,954 7,727 7,603 8,000 7,170 6,432 6,695 6,6006,612 5,964 12% 6,000 5,455 6,154 9% 4,000 12% 10% 10% 10% 9% 9% 5,293 4,344 8% 8% 6% 2,000 7.6% 7.6% 7% 7% 6.9% 5% 6% 5% 0 0% 1990 1992 1994 1996 E Excess Capacity C it 41 15% 1998 2000 2002 2004 %E Excess C Capacity it 2006 Pulp - % E Excess Capaciity Market + Integ. Pulp p - Excess Cap pacity (Metric To ons 000s) 12 000 12,000 Excess N. Am. Pulp Capacity Will Be Eliminated By Rebound In Demand & Closure of Capacity G d Outlook Grade O tl k – N. Am. Market Pulp 1,100 NBSKP Deliv.. To U.S. ($ Me etric) 1,000 900 800 700 600 500 400 300 200 1990 1992 1994 1996 Real Price ($2001) 42 1998 2000 2002 Nominal Price 2004 2006 Market Pulp p Prices Will Rise As Excess Capacity Is Made Productive – But the Fundamentals are Still Not Strong Going Forward Grade Outlook – N. N Am Am. Tissue Tissue is strongest overall segment in North America: End End--product demand is mature (Americans highest per per-capita consumers in world & incremental demand is slow) Demand is off in 2002 and excess capacity is building However, overall company financial returns less sensitive to supply / demand dynamics at mill level than other grades Regulatory R l t considerations id ti will ill limit li i large l M&A activity i i Both technology changes and new entrepreneurial entrants will drive spending p g Implications: Although this Segment may be losing some luster – it is a solid success story y & expansion p & upgrades pg will continue to lead the industry. 43 G d Outlook Grade O tl k – N. Am. Tissue Tissue Volume T e (Short Tons 0 000s) 10,000 N. Am. Tissue Experienced p A Rare Drop In Demand In 2002 -- But Is Resuming Growth In 2003 9,000 8,000 7,000 6,000 5,000 1990 1992 1994 US Demand 44 1996 1998 2000 US Capacity 2002 2004 Total Shipments 2006 G d Outlook Grade O tl k – N. Am. Tissue 25% 776 800 736 722 676 700 20% 692 606 565 6 565 600 592 495 457 301 433 11% 400 15% 479 550 500 384 288 10% 300 10% 8% 200 100 8% 9% 8% 7% 7% 7% 8% 7% 6% 5% 5% 4% 5% 5% 4% 0 0% 1990 1992 1994 1996 Excess Capacity 45 1998 2000 2002 2004 % Excess Capacity 2006 Tissue - % Excess Capa acity Tiss sue - Excess C Capacity (Shortt Tons 000s) 900 Excess Tissue Capacity Will Build B ild In N. Am. Through 2004 Before Coming Back In Balance M j Issues Major I Facing F i the th Industry I d t -Despite a tough situation – The US industry is positioned for some performance improvements during 2003 and more In 2004. But There are Five Current significant risks – To Survive – Prosper & (Re)Build a Profitable Industry 1 Prolonged economic downturn, 1. downturn, 2. Negative economic impacts of the Iraq Conflict, 3 Greater than anticipated substitution of US produced 3. P&P by Int’l competitors or nonnon-fiber based products, 4. Failure to maintain capacity management discipline, & 5. Not Continuing to Seek New Ways of Operating 46 Major Issues Facing the Industry -Even with this rebound at hand – The US (& Maine’s) P&P industry’s y Future is a p point of extensive debate within management circles Some believe the industry y has begun g a longlong g-term decline and as such -Will follow in the path of US steel and textiles – Others believe it will restructure and reassert itself In truth – true US (& Maine’s) Industry path is not clear – The degree to which US demand returns, returns & US capacity fulfills the demand . . . . Plus -- when the overall economy improves will be a good early l indicator i di t off the th industry’s i d t ’ directional di ti l fate f t 47 Also We Must Understand -Paper Is Essential To Society Paper is an essential building block of society – permeating modern civilization civilization’s s social fabric Meets a cornucopia of mankind’s needs From Books and photocopies . . . Tissue and sanitary products . . . And d newspapers, e spape s, magazines aga es . . . To packaging products and on and on . . . Even in surgical g gowns, g , gas g mask filters,, ice cream, toothpaste, and . . . . 48 A d -- There And Th Are A Three Th Important I t t Points . . . Winds of change are buffeting the paper industry . . . shifting from on paradigm to another . . . Very complex and difficult task Paper Industry Executives are not unmindful of these issues & need for change . . . One undeniable truth – stakeholders inside and outside the firms are all in the same boat 49 B tR But Remember b .... I Spite In S it Our O Industry’s I d t ’ Current C t State St t off Affairs -- As that Famous Arm Chair Philosopher Phil h Ziggy Zi O Once Said S id . . . . “You can Complain Because Roses have Thorns, or you can Rejoice Because Thorns have Roses” 50 Acknowledgment Is Made to ValueResolution for the Data Utilized in This Presentation Package.
