Industry Reports

Deutsche Bank Reports Summaries

051128 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

CONTAINERBOARD

WY and PCA have just announced $40/ton hikes for January 1st and are likely to be joined by others before long. Containerboard prices rose $30/ton in October. Offshore mkts appear to be tightening. Smurfit-Stone is also out with a $40/ton price hike for December 1 on exports. SCA announced a E50/ton increase on C'board effective Jan 1st in Europe. Ocotober box shipment and inventory data was positive. Y/Y increases in shipments rose 2.6% in October; avg. weekly shipments are at their highest levels since July 2000. Inventories fell 186K tons vs. a 10yr average decline of 60k tons. Overall inventories are at their lowest levels since 1994.

UNCOATED FREE SHEET

Estimated transaction prices on both offset and repro bond rose $5/ton in November. This may be the result of energy-related surcharges or some "clean-up" at the bottom of the market. We think Domtar will make a major announcement regarding their UFS capacity shortly. October shipments of uncoated free sheet were down 1.4% y/y. Shipment data has been consistently weak throughout the year, down 3.6% YTD. With surging energy and transport cost and price erosion the last several months, there is little question that the industry needs a price hike.

COATED FREE SHEET

We've been a bit surprised by reports of stable pricing in the trade papers, since many sources report a very competitive market. Trade paper prices on No. 3 60lb rolls rose $5/ton in November - reflecting estimated benefit from surcharges. October CFS demand was up 7.3% y/y, the third positive month in a row, but remains down 1.1% YTD. Capacity mgmt has given producers some pricing leverage for the time being. Sappi closed a 115k tpy machine @ Muskegon, MI this month and Pasadena Paper is not reopening its 170k/tpy in Pasadena, TX after closing it before Hurricane Rita. Last Tuesday Cascades announced the closure of its 165k tpy mill in Thunder Bay, Ont. We think Domtar will announce add'l closures this week.

For more information, please click on the attached document.

051128 Deutsche Bank - Is there enough Koch

Deutsche Bank - Equity Research

Can everyone have a Koch?

More private deals in the paper industry appear inevitable over the next several months. We expect private buyers will have key roles in the restructurings at IP and SSCC. They could also play a role if Weyerhaeuser opts to exit its market pulp & white paper operations. Frequently-rumored LBO's of building products firms or newsprint companies look like tougher situations.

What is attracting private equity interest?

One big theme has been a glaring disconnect between paper company valuations and the value on their constituent pieces. The biggest disconnect has been the spread between timberland valuations and paper company valuations. Another possibility is the ability to buy "noncore" or distressed operations for modest cashflow multiples. In some cases, this occurs after significant capital has been invested and promises the new owners an ability to "run for cash" for several years into the future. A third investment angle is the potential to improve performance and reduce costs in the acquired businesses.

Little competition from strategic buyers for reasonably priced assets

The fact that most paper companies are internally focused on cleaning up their own financial & operational houses has meant that fewer strategic buyers are bidding seriously when competitors sell operations. At the same time, it is clear that asset values have come down across much of the industry, reflecting an increasingly sober view of future prospects. The process has brought a seemingly endless stream of noncash write-downs by paper companies as well as more modest price/ton values on mill sale

Risks to further private equity activity in the sector?

First, it's still a brutally competitive industry. Private buyers - including some of the very savviest private investors - have done disappointing deals in this sector. Second, the structural pressures on the paper industry are mounting. Consumption trends in many grades have been negative for most of this decade and the threats from foreign competition & product substitution are quite real. Finally, the industry remains vulnerable to cyclical & external forces.

Companies that might go private?

Among the names that we cover, we think that the most obvious candidates are Temple-Inland & Rayonier. The two companies have some similarities in that they both own extensive timberlands and have net asset value which we think is well above current market value.

For more information, please click on the attached document.

051128 Deutsche Bank - Paper and Packaging

Deutsche Bank - Equity Research

$40/ton Price hike to come in January?

Industry sources report that 2 of North America's 6 largest containerboard producers (Weyerhaeuser, PCA) are talking with customers about a price hike on January 1. It would appear that the increases are in the $40/ton range.

A Price Hike in January?

Because January and early February tends to be one of the slowest periods of the year, a January price hike is unusual. However, against the backdrop of dramatically tighter supplies and sharply higher input costs, this isn't shaping up as a typical January.

Shipments and Inventory

In October, US box shipments jumped 2.6% y/y. Box plant inventories fell 208K in October and have fallen 356K in 2 months. Measured in terms of days of supply, box plant inventories are at only 2.8 weeks - - -the lowest level we can find in our 20+yrs of data.

The Ball has Only Just Started to Roll

Further supply reductions could heat the market even further over the next month or two. We think the reductions are coming in both Europe and North America. The merger of two of Europe's three largest producers (Smurfit Group & Kappa Packaging) is expected to be finalized on Thursday and should be seen as a catalytic event in the European sector. Once the merger is complete, the new entity is apt to quickly move to rationalize capacity as European producers grapple with a recent surge of new capacity and a strong currency. We think further closures could be forthcoming in the US & Canada. We'd focus particular attention on mills in Canada, where the combination of older capacity, a strong CN$, and higher energy costs are proving lethal for many mills.

For more information, please click on the attached document.

051122 Deutsche Bank Company Alert - Glatfelter

Deutsche Bank - Equity Research

Glatfelter {Ticker: GLT.N, Closing Price: USD 14.48, Target Price: USD 18.00, Recommendation: Buy}.

Glatfelter disclosed that it will receive $17.8MM cash (and record a corresponding pretax gain of $17.8MM) from an unidentified insurance carrier. In 2004, GLT reported a $32.8MM insurance recoveries tied to the same issue. The payments are in settlement of claims related to previously-disclosed environmental matters in Wisconsin's Fox River Valley. The environmental matters concern PCB's in sediments in the lower Fox River and the Bay of Green Bay, downstream from Glatfelter's facility at Neenah, Wisconsin. Discharges from the Neenah mill from 1954 to the late 1970's may have contained PCB's. Glatfelter acquired the former Bergstrom Paper Company mill in 1979. Earlier this year, Glatfelter had noted a rise in quarterly expenses in pursuit of additional insurance recoveries.

With this settlement, the Neenah insurance recovery well is apparently "tapped out." The settlement appears to exhaust the insurance available against the Wisconsin liabilities. The company already has taken $29MM in reserves against the liability and believes that no further reserves will be required.

In a separate matter, GLT continues to faces potential environmental liability at the former Ecusta, North Carolina site - - - a light- weight paper (tobacco, bible & prospectus papers) mill that GLT sold in 2001. The company took $2.7MM in additional reserves in 3Q. The mill's acquiror declared bankruptcy in 2002 and re-sold the facility to another set of buyers in 2003. The new buyers also potentially lack the resources to meet the environmental liabilities there, and GLT was recently cited by environmental authorities as another potentially responsible party. The extent of GLT's potential liability from this remains uncertain.

For more information, please click on the attached document.

051122 Deutsche Bank - October Newsprint

Deutsche Bank - Equity Research

Another weak consumption month. October newsprint consumption at the US Dailies fell 7.2% y/y and total U.S. consumption was down 6.9%. The comparison is "apples-to-apples" since both this year and last had 5 Sundays. The U.S. daily's decline exceeds the YTD drop of -5.1% and September's 4.7% decline.

Inventory situation relatively static. Total inventories fell by 26K mtons m/m, a bit less than the 44K mton decline which normally occurs between September and October. Publishers saw their inventories fall by 59K mtons, and mills saw their inventories rise by 33K tons. On a days-of-supply basis, inventories were flat at 37 days m/m.

View? Despite falling consumption, producers have taken out enough capacity in recent years to maintain fairly robust operating rates and keep inventories in check. However, if current consumption declines continue there will likely be a need for accelerated closures to maintain pricing power. The real trick? Moving from higher prices to real profitability.

For more information, please click on the attached document.

051121 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

MARKET PULP

Despite a $5/tonne list price increase in November, market conditions appear unsettled. The big concern is lack of pricing power in Europe and Asia. NA October NBSK prices were revised down $5/tonne; the November list price is now $640/tonne. However, the reality is that offshore prices are much lower. In Asia, NBSK appears to be trading near $500/mton. Domestic prices could start to wither if offshore markets continue to languish. Hardwood markets remain much firmer than softwood. September shipments for all grades rose 8.9% y/y and inventories fell 211k tons, a positive variance of 104k tons over the 10yr avg decline of 107k tons normally absorbed in September. There's more Latin pulp coming. In recent weeks, Aruaco, Suzano and VCP have all begun talking about the next round of big capital projects.

UNCOATED FREE SHEET

Estimated transaction prices on both offset and repro bond rose $5/ton in November. This may be the result of energy-related surcharges or some "clean-up" at the bottom of the market. We remain struck by the lack of pricing fortitude among UFS producers, particularly among CN producers who are being hurt by a strong CN$. Trade reports suggest that Domtar has been much less disciplined in recent months than we expected. September shipments of Uncoated Free Sheets were down 6.6% y/y. Shipment data has been consistently weak throughout the year, down 4.1% YTD. With surging energy and transport cost and price erosion the last several months, there is little question that the industry needs a price hike.

CONTAINERBOARD

Containerboard prices rose $30/ton in October, and Smurfit-Stone is already out with a $40/ton price hike for December 1 on exports. Ocotober box shipment and inventory data released last week was very positive. Y/Y increases in shipments rose 2.6% in Ocotber; avg. weekly shipments are at their highest levels since July 2000. Inventories fell 186K tons vs. a 10yr average decline of 60k tons. Overall inventories are at their lowest levels since 1994. Current market conditions appear to be pointing towards another price hike sometime in early 2006.

For more information, please click on the attached document.