RISI Session Global Paper Market Trends & Forecasts

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1 RISI Session Global Paper Market Trends & Forecasts March 25, 2014 co-hosted by

2 RISI Session John Maine Vice President World Graphic Papers Ken Waghorne Vice President World Packaging

3 Paper2014, RISI Seminar Global Graphic Paper Outlook John Maine Vice President, Global Graphic Papers March

Global Economy Improving Moderately Annual Real GDP Growth Euro Area Japan USA 2.8% 1.9% 2.9% 3.3% 12 13 14 15-0.6% -0.4% 1.0% 1.4% 12 13 14 15 China -0.9% 1.6% 1.

4 Global Economy Improving Moderately Annual Real GDP Growth Euro Area Japan USA 2.8% 1.9% 2.9% 3.3% % -0.4% 1.0% 1.4% China -0.9% 1.6% 1.3% 1.7% Latin America 7.7% 7.7% 7.5% 7.2% % 2.6 % 3.1 % 4.0 % Source: IMF, RISI 4 Copyright 2014 RISI, Inc. All rig.hts reserved

5 Some Definitions Graphic Paper Newsprint Uncoated Mechanical (Ume) Directories, paperback books, newspaper inserts, lowend magazines/catalogs Uncoated Woodfree (UWF) Office copy paper, envelopes, offset printing, direct mail, books, forms, carbonless, tablets, stationery, specialties Coated Mechanical (Cme) Magazines, catalogs, newspaper inserts Coated Woodfree (CWF) High-end magazines and catalogs, commercial printing, brochures, photo printing, menus, posters, displays, direct mail 5 Copyright 2014 RISI, Inc. All rights reserved.

World Graphic Paper Demand Is the global market in decline?

7 Global Graphic Paper Demand Growth for 2014 and 2015 Thousand Tonnes, Percent per Year -1,545 (-3.2%) -2,249 (-4.0%) 264 (1.7%) 1,983 (1.7%) 140 (2.7%) 184 (1.2%) 207 (3.4%) -91 (-2.4%) 7 RISI Forecast February 2014 Global -1,108 (-0.4%) Copyright 2014 RISI, Inc. All rights reserved.

9 World Newsprint Demand Dropped 4% per year in 2011 to 2013, will decline 2-3% per year globally in 2014 to 2015, average loss will be 675,000 tonnes per year Millions of Tonnes Volume (L) Percent Change (R) 15% 10% 5% 0% -5% -10% % 9 Copyright 2014 RISI, Inc. All rights reserved.

10 Million Tonnes 10 Newsprint, UWF and Cme are the most impacted grades Main declining threats are new technologies, exacerbated at times by the weak economy P&W demand decline moderated from -6% per year in 2011 and 2012 to only -1% in 2013 Will fall 2-3% per year in * Annual growth rate, North America Defined by Declining Trends Overall Copyright 2014 RISI, Inc. All rights reserved. News -5.1%* UWF -3.0%* CWF -1.4%* Cme -3.8%* Ume -2.6%*

11 Million Tonnes N.A. P&W Producers Shift to Exports N.A. Exports of P&W Paper % of Production (R) % 10% 8% 6% 4% 2% 0% Copyright 2014 RISI, Inc. All rights reserved. Growth has been coming mainly from exports to Latin America Prior capacity shuts to reverse rising export trend in 2014: 925,000 tonnes of shuts in less than six months in uncoated woodfree Coated mechanical weakening rapidly, massive shuts already in Europe Coated woodfree supply has declined as capacity expansion in Asia has stopped and two PMs have shut in N.A. Uncoated mechanical capacity has recently shut in Canada and Europe in response to decreased demand

12 While N.A. Imports Rise 30% N.A. Imports of P&W Paper as a Percentage of Demand Recent key trend has been a rise in imports of UWF from Asia Imports to supply nearly 20% of cut size market in 2014 Cme imports to fall due to capacity cuts in Europe and strong euro 25% 20% 15% 10% CWF imports have come down 5% but remain the highest percentage of demand in North America 0% UWF CWF Cme Ume Copyright 2014 RISI, Inc. All rights reserved.

13 Million Tonnes Europe Another Mature Market in Decline * Annual growth rate, (Combined Western and Eastern Europe) Newsprint UWF CWF Cme Ume -4.0%* -1.8%* -3.3%* -3.8%* -0.4%* Persistent demand declines continuing due to economic woes and effects from new technologies Economic recovery will help reduce demand declines, although impact will be smaller than thought before Region slightly more protected from new technologies, but equally exposed to mature economies 13

14 Million Tonnes Exports Getting More Important than Ever 9 Declines in local demand has been the main driver Grades more reliant on exports are coated mechanical, followed by coated woodfree 30% 8 25% Consequences: Net Graphic Paper Exports for W.E. 20% 15% Helping to reduce overcapacity European producers having to compete on a global scale Region negatively impacted by strong euro % of Production (RT) % 14

15 Million Tonnes Asia, the Region with the Most Attractive Projections 32 Woodfree grades dominate the region Mechanical paper needs softwood and is often imported Graphic paper growth rate has slowed considerably 1% in 2012 and 0.4% in News -0.7%* UWF 2.6%* CWF 2.1%* Cme 1.7%* Ume 0.9%* 15 Average growth had been 4% China slowing, Japan decline accelerating * Annual growth rate, Copyright 2014 RISI, Inc. All rights reserved.

16 Newsprint Has Turned to Secular Decline in Asia Harbinger of future trends for other grades? 6.0 Million Tonnes Japan, South Korea, Taiwan China, Hong Kong, Singapore India, Malaysia, Philippines, Thailand, Other Copyright 2014 RISI, Inc. All rights reserved.

17 Thousand Tonnes Asia Troubled with Overcapacity 17 2,000 1,500 1, ,000-1,500 Chinese Net Exports Reach a Peak Coated Woodfree Uncoated Woodfree Region has grown into more of an export market oriented to woodfree grades Shift in focus from CWF to UWF exports Capacity expansion exerting pressure on operating rates, profitability Copyright 2014 RISI, Inc. All rights reserved. Chinese government trying to rein in excess capacity Forced closure of small, old, polluting mills Reduced aid for new expansions in markets with oversupply Resulting in significant increase in Chinese operating rates

18 Million Tonnes Latin America, Small Yes But Growing Market?? News -0.4%* UWF 1.9%* CWF 1.4%* Cme 0.7%* Ume 2.0%* UWF is the more buoyant grade for this region as well Growth rate has not rebounded after the downturn. Growth forecast remains conservative and has been lowered to only 1-2% per year Newsprint only grade in decline. Uncoated mechanical practically flat * Annual growth rate, Copyright 2014 RISI, Inc. All rights reserved.

19 Thousand Tonnes the Region s Imports Are Growing While Producers Focus on Pulp EBITDA margins are far better in pulp as it leverages the low wood costs better than paper Newsprint requires softwood or recycled fiber, neither of which is plentiful in Latin America, so it is the #1 import 19 1,300 1, Latin American Net Imports Rise UWF Ume CWF Cme News Copyright 2014 RISI, Inc. All rights reserved. Uncoated woodfree exports from Brazil offset by imports elsewhere All other grades require imports from abroad to fulfill market requirements CWF imports have inundated certain markets Operating rates are generally increasing, except in newsprint

20 Announced Net Newsprint Capacity Changes for vs. RISI Forecast of Demand Growth for the Same Period Thousand Tonnes ,000-1,200 Capacity Growth Demand Growth -1,400 Europe N. America Asia, ME, OCE Latin America Global 20 Copyright 2014 RISI, Inc. All rights reserved.

21 Newsprint Operating Rates Shuts have been in line with demand; operating rates stable in North America and increasing in Europe 100% 95% 90% 85% 80% 75% N. America W. Europe Asia Copyright 2014 RISI, Inc. All rights reserved.

22 Newsprint Profitability Dire outlook in North America as margins trend down, Canada held up by weakening Canadian dollar, Nordic trend up from low levels Price/Cash Cost Ratio (Regional Averages) Breakeven E. Canada Nordic US South Includes delivery 22 Copyright 2014 RISI, Inc. All rights reserved.

23 Historical 45 gsm Newsprint Prices (US$/tonne) US prices flat or down for more than three years, despite high operating rates $850 $800 $750 USA Europe $700 $650 $600 $550 $500 $ Copyright 2014 RISI, Inc. All rights reserved.

24 Announced Net Uncoated Woodfree Capacity Changes for vs. RISI Forecast of Demand Growth for the Same Period Thousand Tonnes 2,000 1,500 1, Capacity Growth Demand Growth -1,000 Europe N. America Asia, ME, OCE Latin America Global 24 Copyright 2014 RISI, Inc. All rights reserved.

25 Uncoated Woodfree Operating Rates 1.0 million tonnes of recent shuts in North America will reduce global capacity, despite some capacity growth in Asia 95% 94% 93% 92% 91% 90% 89% 88% 87% 86% 85% 84% 83% N. America W. Europe Asia Latin America Copyright 2014 RISI, Inc. All rights reserved.

26 Cut Size Uncoated Woodfree Profitability Fully integrated Southern US mills very profitable, nonintegrated European mills struggling, but few of these make copy paper Price/Cash Cost Ratio (Regional Averages) Breakeven Nordic W. Europe - Not Integrated to Pulp US South Includes delivery 26 Copyright 2014 RISI, Inc. All rights reserved.

28 Announced Net Coated Woodfree Capacity Changes for vs. RISI Forecast of Demand Growth for the Same Period Thousand Tonnes Capacity Growth Demand Growth Europe N. America Asia, ME, OCE Latin America Global 28 Copyright 2014 RISI, Inc. All rights reserved.

29 Coated Woodfree Operating Rates Lack of announced capacity expansion will cause operating rates to improve 95% 93% 91% 89% 87% 85% 83% 81% 79% 77% 75% N. America W. Europe Asia Copyright 2014 RISI, Inc. All rights reserved.

30 Coated Woodfree Profitability Profitability trending down, higher pulp costs have pushed some nonintegrated mills into negative cash flow Price/Cash Cost Ratio (Regional Averages) Breakeven W. Europe W. Europe - Not Integrated to Pulp USA Includes delivery 30 Copyright 2014 RISI, Inc. All rights reserved.

31 Announced Net Coated Mechanical Capacity Changes for vs. RISI Forecast of Demand Growth for the Same Period Thousand Tonnes Capacity Growth Demand Growth Includes Stora Enso shuts under discussion with mill employees at Veitsiluoto and Corbehem Europe N. America Asia, ME, OCE Latin America Global 31 Copyright 2014 RISI, Inc. All rights reserved.

32 Coated Mechanical Operating Rates Decline in North American demand leads to decrease in operating rate, shuts in Europe recently announced for % 95% N. America W. Europe 90% 85% 80% 75% Copyright 2014 RISI, Inc. All rights reserved.

33 LWC Profitability Margins are lower than uncoated woodfree and likely to improve in Europe due to shuts 1.6 Price/Cash Cost Ratio (Regional Averages) Breakeven Europe USA Includes delivery 33 Copyright 2014 RISI, Inc. All rights reserved.

34 Announced Net Uncoated Mechanical Capacity Changes for vs. RISI Forecast of Demand Growth for the Same Period Thousand Tonnes Capacity Growth Demand Growth Europe N. America Asia Latin America Global 34 Copyright 2014 RISI, Inc. All rights reserved.

35 Uncoated Mechanical Operating Rates Massive shuts in Europe cause global operating rates to increase; recent shuts also announced in Canada 100% 95% 90% 85% 80% N. America W. Europe 75% Copyright 2014 RISI, Inc. All rights reserved.

36 US Historical Publishing Paper Prices ($US/ton) Trend has been flat or down for the past three years $1,100 $1,000 $900 $800 $700 SC-A (printer price) Ctd. No lb Ctd. No lb. Unc. Offset 50 lb. $ Copyright 2014 RISI, Inc. All rights reserved.

com/worldgraphic Global Woodfree Risk of Closure Study www.risi.

37 Thank you for your attention! For more information: World Graphic Paper 5-Year Forecast Global Woodfree Risk of Closure Study China s Influence on World Graphic Paper Markets in the Coming Decade 37 Copyright 2014 RISI, Inc. All rights reserved.

38 Paper2014 US Boxboard Outlook Ken Waghorne, Ken VP Waghorne, World Paper Vice Packaging President March 25, 2014 RISI Paper Packaging Practice 19 November, 2013

39 The RISI US Boxboard Outlook Overview of Industrial Markets Boxboard Markets US domestic demand Global trade issues Cost trends and profitability

40 The Recovery in Consumer Spending on Food and Beverages (Billion 2009 Dollars) Has Been Muted, At Best, Since ,600 1,400 1,200 1, At Home Away From Home Annualized Growth % (R) 2013 Forecast

41 The Purchasing Managers' Index Rallied in Late 2013, But the Harsh Winter Has Had an Effect on Manufacturing Light Bar Indicates Manufacturing Sector Contracting

42 Industrial Production Will Strengthen Whenever Consumer Spending Starts to Recover Nondurable Goods Processed Foods J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S

43 The Domestic Cartonboard Markets Have Been Low Growth for Decades Heavy reliance on foods and persistent competition with other products The most significant competition was in the folding cartonboard market Demand was 10% below the pre-recession peak in 2013 Cup & plate stock is benefitting from shift in preferences away from plastic foam cups With 2013 demand 9.5% higher than the 2007 level Liquid packaging board demand has trended up gradually since 2010 Demand for all three grades was exceptionally strong at different points in 2013 Modest growth resumes from second half of 2014 onward

44 7,400 7,200 7,000 6,800 6,600 6,400 6,200 6,000 5,800 5,600 US Folding Cartonboard Demand Has Been Quite Flat Since Q Q1 (Thousand Tons, Annual Rate) 2007 Q Q Q Q Q Q Q Q Q1

45 Plate &Cup Stock Demand Surged in 2013, and Should Remain Strong Through ,400 2,200 2,000 1,800 1,600 1,400 1,200 (Thousand Tons, Annual Rate) 1, Q Q Q Q Q Q Q Q Q Q Q1

46 Liquid Packaging Demand Has Trended Up Gradually Since the Recession Ended 1,600 1,400 1,200 1, (Thousand Tons, Annual Rate) Q Q Q Q Q Q Q Q Q Q Q1

47 Trade Issues Will Continue to Dominate the Boxboard Landscape in 2014 and 2015 A Massive Oversupply Situation Has Developed in the Far East Creating disruptions in the export market Increasing the potential threat from imports

48 China: Announced Cartonboard Capacity Expansion in Thousand Tonnes Company Location Capacity Date Grade Fujian Liansheng Paper Zhangzhou :Q1 Other Recycled Board Guangxi Jingui Pulp & Paper Qinzhou 1, :Q1 Ivoryboard Nanning Meishi Paper Guangxi :Q2 Ivoryboard Bohui Paper Dafeng 1, :Q2 Ivoryboard Jiangsu Fuxing Paper Xiangshui, Jiangsu : Coated Duplex Hangzhou Dongda Paper Fuyang City :Q4 Coated Duplex Jiangmen Xinghui Paper Jiangmen :Q4 Coated Duplex Jiangsu Longheng Paper Xiangshui, Jiangsu :Q4 Coated Duplex Shandong Asia Pacific Rizhao, Shandong Liquid Packaging Board Sichuan Yibin Paper Industry Sichuan :Q1 Cup Stock Ningbo APP Zhejiang :Q2 Ivoryboard Henan Xinxiang Xinya Paper Xinxiang, Henan :Q2 Ivoryboard Fujian Liansheng Paper Fujian :Q4 Coated Duplex Shandong Asia Pacific Rizhao, Shandong Cartonboard Guangxi Stora Enso Forest Guangxi Liquid Packaging Board Subtotal 2013 China Total ( ) 3,580 6,880 Asia X China Total:

49 China Net Exports To Average Almost 2.0 MMT Annually in Coming Years Net Exports (Thousand Tonnes) 2,500 2,000 1,500 1, ,000-1,500-2,000 China Rest of Asia 49

50 Asian Ivoryboard Cash Costs Are Roughly on Par With European FBB ($/FST)

51 2005 Q Q Q Q Q Q Q Q Q Q Q Western European Cartonboard Exports Declined Substantially in (Million Metric Tonnes)

52 US Clay Coated Bleached Board Exports Have Not Been Hurt by Disruption in Global Markets Through 2013 (Thousand Tonnes per Month) Canada Mexico Rest of Latin America Europe All Other China Rest of Asia

53 3.0 But Conditions Will Become More Challenging in Million Tons Liquid Packaging Other SBS Unbleached Folding All Other

54 Will Imports Become a Bigger Factor in the US Cartonboard Markets? Challenges faced by imports: Lack of distribution system for overseas producers High transportation costs to converting plants Quality and reliability concerns The performance characteristics of overseas board differ from US board High integration levels between mills and carton plants Can imports overcome these challenges? Overseas producers are making an attempt Imports increased nearly 11% in 2013

55 US Clay Coated Boxboard Imports by Grade and Country of Origin Thousand Tonnes 700 Multi-Ply/Multi-Furnish from RoW 600 MP/MF from Latin America MP/MF from Rest of Asia MP/MF from China MP/MF from Sweden 300 "Unbleached" from Finland 200 MP/MF from Finland MP/MF from Canada 100 Clay Coated Recycled SBS & Unbleached from RoW

56 RISI Forecasts that Import Penetration Will Accelerate Modestly in % Import Share of Apparent Consumption 14% 12% 10% 8% 6% 4% 2% 0%

57 Imports Will Likely Capture All the Growth In Apparent Consumption in Million Tons Bleached Unbleached Recycled Import

58 RISI s Conclusion: A Significant Contraction in Bleached Board Production is Likely in (Annual Growth, 000 Short Tons) Bleached Board Total Folding Cartonboard

59 Historical Net Cartonboard Capacity Changes Annual Change, Thousand Tons SBS Removals Recycled Removals CUK Removals Net Capacity Change

60 US Bleached Folding Boxboard Operating Rates Could Fall Well Below 90% if Exports Decline As Much As Forecast 100% 95% 90% 85% 80% 75% Total Boxboard Bleached Folding

61 Boxboard Industry Profitability Is Expected to Come Under Pressure Shifting International Trade Patterns Threaten to Push Operating Rates Down Substantially Recycled Mills Had a Brief Respite From Rising Costs During But recovered paper costs will trend upward once global economic growth accelerated

62 Global OCC Recovery Rates Are Being Driven Upward by Strong Containerboard Demand Growth in Developing Markets Million Tonnes 100% 90% 80% 70% 60% 50% 40% 30% World OCC Consumption World Containerboard Production World OCC Recovery Rate (Right)

63 US ONP Recovery Rates Are Also Rising, Although For Different Reasons Than OCC 12 Million Tonnes 100% % 80% 70% 60% 50% 40% Newsprint Production ONP Recovery Rate Newsprint Consumption

64 US Sorted Office Paper Prices Reflect Both the Trends in Virgin Pulp Prices and the Potential Supply of High $1,000 $800 Grades (the consumption of printing and writing paper) US $/Tonne BHKP US SOP #37 SOP/BHKP $ $ $ $ Copyright 2014 RISI, Inc. All rights reserved. 64

65 The Gap Between Production Costs of SBS and CRB Will Close Again (Avg. Total Cost, $ per Short Ton) Clay-Coated Recycled Bleached Board

66 Profit Margins for Cartonboard Producers Are Expected to Erode Gradually Price/Total Cost Bleached Recycled

67 US Boxboard Summary US domestic demand will creep upward in But imports will capture all of the growth in the folding cartonboard segment Virgin producers are facing increased competition in the export markets, but modest increases in costs Recycled producers will continue to be hit with rising recovered paper costs, generating a squeeze on profit margins

RISI Completed Two Comprehensive Studies on the World Boxboard Markets in 2012 2012

68 RISI Completed Two Comprehensive Studies on the World Boxboard Markets in China Boxboard Study World Boxboard Study

69 RISI Session Global Paper Market Trends & Forecasts March 25, 2014 co-hosted by

Global Graphic Paper Outlook Derek Mahlburg Senior Economist, Graphic Papers June 2015

Global Graphic Paper Outlook Derek Mahlburg Senior Economist, Graphic Papers June 2015 1 Derek Mahlburg, Senior Economist, North American Graphic Paper Has covered North thamerican graphic paper markets