Pulp, Paper and Paperboard Markets Gradual Upturn Underway after Recent Downturn

1. Pulp, Paper and Paperboard Markets Gradual Upturn Underway after Recent Downturn UNECE Market Discussion, September 2002

2. A steep downturn in industrial production (and GDP growth) in North America and Europe resulted in receding demands for paper & paperboard in packaging and print advertising media in 2001 • An upturn appears underway in 2002 for pulp, paper and paperboard markets, but recovery is likely to be gradual

3. North American paperboard output in the first half of 2002 is up by about 1% relative to first half 2001 • The upturn in paperboardoutput follows the upturn in overall industrial production

4. Paperboardproduction declined with industrial production, but an upturn is underway Sources: AF&PA, U.S. Federal Reserve

5. North American paper output in the first half of 2002 was down by about -6% relative to first half 2001 • An upturn in paper production is underway but lagging, mainly due to steep declines in advertising expenditures in 2001

6. Sources: AF&PA, U.S. Federal Reserve, McCann Erickson

7. The recent downturn follows a period of consolidation and structural change within the pulp & paper sector. • With higher capacity concentration in paper & paperboard, price impacts of the downturn were offset by strategic adjustments (mill closures, etc.), and price volatility was passed down along the supply chain . . .

8. Consolidation Trends – Capacity Shares of ‘Top 3 Companies’ in North America . . . Source: Miller Freeman

9. Market Volatility – Price Indexes of Commodities along the Supply Chain . . . Less Concentration, More Volatility Source: U.S. Bureau of Labor Statistics, Producer Price Indexes

10. The global pulp market collapsed from mid-year 2000 through 2001, but turned upward in the first half of 2002 • In the past several months, pulp prices have subsided with another short-term buildup of pulp inventory, but the longer term (futures) outlook remains positive with a declining inventory trend

11. prices turned up in 1st half 2002, then subsided • market views long-term as “deteriorated but positive” Sources: PPPC, PULPEX

12. Other Aspects of the Downturn: • EU/EFTA production dropped -3% as consumption fell by -4% in 2001 • Growth rates for the Russian Federation also dropped, although growth remained positive; the trade balance drifted into a deficit • U.S. purchases and production of paper & paperboard dropped by >10% since 1999 • Industry profits were severely impacted (as were capacity growth and investment) although profits turned upward in 2002 • Long-term sustainability of pulpwood demand becomes an issue for the United States

13. EU/EFTA – Paper & paperboard trends Change from one year earlier Growth in production and consumption both subsided Source: UNECE

14. Russian Federation – Paper & paperboard Change from one year earlier Production lagging; Growth declined but remained positive Source: UNECE

15. Russia's pulp and paper exports and Imports in 2000-2001 (million USD) 300 250 200 150 Million US $ 100 50 0 -50 -100 1st qtr. 2nd qtr. 3rd qtr. 4th qtr. 1st qtr. 2nd qtr. 3rd qtr. 4th qtr. 2000 2000 2000 2000 2001 2001 2001 2001 Exports Imports Total trade balance Sources: State Customs Committee, PPB Express

16. 5-month moving averages Down more than 10% since 1999 (largest drop since 1970s) Source: AF&PA

17. After-Tax Profits, Paper & Allied Products, Quarterly 2001/2000: -89% 2002/2001: +23% (2nd Qtr.) Linear Polynomial The downturn in profits was severe in 2001, although profits improved in 2002 Source: U.S. Department of Commerce

18. U.S. Capacity Growth With receding demand, weak exports and a flood of imports, U.S. paper industry capital investment declined, and capacity growth ground to a halt. In 2001, for the first time in many decades, U.S. capacity actually declined. Very little capacity growth is anticipated in the next several years. Source: AF&PA

19. Southern pine pulpwood stumpage prices have dropped by more than 50% since 1998: Southern Pine Pulpwood Stumpage (nominal $) • Supply Side: • Plantations  • Thinning  • Drought  • Beetles  • Recycling  • Sawmill • Residues  • Demand Side: • Purchases  • Production  • Exports  • Imports  • Pulpwood • Exports  Source: Timber Mart-South

20. U.S. Woodpulp Production and Pulpwood Receipts at Pulp Mills, Historical and Projected Woodpulp production and pulpwood receipts have declined by ~15% since the mid-1990s. Both are projected to recover gradually, not reaching previous peak levels until after 2020.

21. Macro Perspectives: • An upturn in GDP & industrial output is clearly underway, but a secondary slowdown or “double-dip” is still viewed as a concern. • There is still a long climb ahead to full recovery of growth in GDP and industrial output

22. U.S. GDP – Change from one year earlier, quarterly Upturn underway but “double-dip” still a threat Source: U.S. Department of Commerce

23. EU-15 GDP – Change from one year earlier, quarterly European GDP upturn lagging and less certain Source: Eurostat

24. While industrial production and capacity utilization have turned upward since 2001, there is still a long climb ahead to full recovery Source: U.S. Federal Reserve

25. EU-15 & euro zone industrial production – Change from one year earlier, monthly EU-15 euro zone Source: Eurostat U.S. industrial production – Change from one year earlier, monthly Source: Federal Reserve

26. Despite dramatic reductions in interest rates by the Federal Reserve, the U.S. Dollar and Trade Deficit remain very high

27. Summary: Economic outlook is positive but said to be . . . “slow and uneven” (Federal Reserve) or “deteriorated but positive” (IFO World Survey) • gradual recovery appears most likely for pulp & paper markets

28. Paper & Paperboard Trade: The U.S. trade deficit in paper & board has widened significantly since 1997 . . . Data Sources: AF&PA and Commerce Dept. Data include “paper, paperboard & products”

29. U.S. Pulp & Paper Industry Capital Spending & Depreciation 15 Trends show declining capital spending, now well below equipment depreciation levels . . . 12 9 Billions of Dollars 6 (Planned) 3 0 1996 1997 1998 1999 2000 2001 2002 Capital Project Spending Depreciation Sources: Capital Project Spending Trend – Pulp & Paper (Paperloop) Project Report Depreciation (Paper & Allied Products) – Bureau of Census

30. Imports subsided in 2000 - U.S. role as a “global engine of growth” diminished ? . . . but value of goods imports surged again recently Source: U.S. Department of Commerce, BEA