Industry Reports

Deutsche Bank Reports Summaries

051221 Deutsche Bank - Paper & Forest Products

Deutsche Bank - Equity Research

Reasonable numbers

US printing & writing paper shipments fell 0.6% y/y in November - not great, but also not bad in a year that has mostly seen bigger declines. YTD, total vol's are down 1.3%. The inventory situation was also mostly constructive, falling m/m in 3 of the 4 large categories: uncoated free sheet, light-weight coated, and uncoated mechanical. Only coated free sheet saw inventories rise m/m.

Segment Detail

The largest single category, uncoated free sheet, was down 1.1% y/y. This was the twelfth month in a row with a negative y/y comp. However, it's the best y/y comp in 6 months and a significant improvement over the 3.4% YTD decline. Coated free sheet shipments rose 0.3% y/y, moderately better than the 1.0% YTD decline. Light- weight coated volumes rose 1.1% y/y, also positive vs. the 0.5% YTD decline. Uncoated groundwood shipments were the big disappointment, falling 3.9% y/y, much worse than the 11.6% YTD increase.

The Takeaway?

Although the 0.6% y/y decline in shipment vol's is still sluggish, it represents a modest improvement over the disappointing YTD number. Continued improvement, along with ongoing capacity rationalization, will perhaps support better pricing. A price hike initiative of $60/ton is in the market for uncoated free sheet, although the effort on offset rolls enjoys much broader support than the one on cut-size.

Industry restructuring appears likely

The market, especially for uncoated free sheet, is approaching a crisis point. Further consolidation and rationalization appear inevitable. Over the next several months, we would not be surprised to see some combination of the white paper operations of Weyerhaeuser, Boise and/or Domtar. We think this consolidation could create the platform for rationalization.

For more information, please click on the attached document.

051214 Deutsche Bank - Abitibi

Deutsche Bank - Equity Research

Abitibi today announced the permanent closure of two previously idled newsprint mills at Stephenville, Newfoundland and Kenora, Ontario. The closures affect 344K mtons of capacity in addition to 90K mtons of permanent closures that were previously announced.

The combined total of 434K mtons amounts to almost 3% of North American capacity. The closures go a long way toward offsetting a 5% YTD decline in newsprint consumption. Industry operating rates in recent months have been in the mid-90's, suggesting that newsprint producers have been doing a good job of removing capacity to keep supply & demand in balance in the face of declining demand. This announcement continues that trend.

Since most of this capacity is currently idle, today's announcement should have minimal impact on the current newsprint market. However, we think that it is a positive sign that Abitibi is willing to make the hard choices needed to protect and, hopefully, build shareholder value. It also may allay fears that companies and local/provincial governments will continue to "band-aid" assets in a structurally declining businesses - - - only forestalling the inevitable.

In the early 1990's, a strong C$ and over-supply led to several provincial/quasi-provincial bail-outs. It's deja vu all over again, except this time the long-term trends are even clearer and starker. The strong C$ has hastened the crisis and made the need for sound decisions even more pressing. The question over the next several months across eastern Canada (in particular) is whether political leaders will add another layer of band-aids or start to think about new alternative future.

There is little question that the future of the newsprint business has a large political component. As investors, it is easy to forget that closing facilities (especially, in isolated rural areas like Stephenville and Kenora) can have a huge human cost to the employees and the communities. Many of Canadian newsprint mills are a hundred miles or more from alternative employment. No mill, no community???

Unfortunately, the closure decisions are economically inevitable. The issue of declining newsprint consumption shows no sign of going away - - - it's getting worse. At the same time, alternative paper markets just aren't big enough to allow all these mills to simply convert. It's also unlikely that most of these narrow old newsprint machines can be competitive in any paper commodity.

Unless shareholders or provincial governments want to fund the production of newsprint and then simply roll it into the St Lawrence River, mills must close. Companies like Abitibi must shutter high- cost capacity to balance the market. Failing to do so would risk the future of the entire company, potentially imposing an even greater human cost while also dissipating shareholder value.

For more information, please click on the attached document.

051212 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

UNCOATED FREE SHEET

Last week IP announced a $60/ton hike on most grades of uncoated free sheet, excluding cut size, beginning in January; they were followed by WY and most other producers. Recently, Domtar announced the incremental closure of 115k tpy of UFS. WY recently closed 280k tpy at a Western CN Mill. 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. We're increasingly convinced that some combination of WY, DTC and Boise white paper businesses is inevitable - - - probably in the next 4-5 mo's. All 3 producers seem to recognize the need to act.

LUMBER

Lumber prices fell slightly last week; the framing lumber composite was off $2/mbf to $362/mbf. After reaching $405/mbf post Hurricane's Katrina and Rita, lumber prices slipped sharply. Over the last month, prices have firmed. The US appears to be making some concessions on the anti-dumping duties. October housing starts and building permits came in slightly below Oct 2004 levels but are still 2MM+ on a seasonally adjusted basis. Nov data will be released Dec 20th.

PANELS

The structural panel composite price rose again last week, up $5/msf to $381/msf. The benchmark grade of OSB (7/16" in the North Central region) rose $5/msf to $300/msf. Pricing has been stable in recent weeks. October housing starts and building permits came in slightly below Oct 2004 levels but are still 2MM+ on a seasonally adjusted basis; Nov data will be released Dec 20th. With new capacity in OSB boosting supply by as much as 30% in the next five years, the market seems likely to come under pressure longer-term.

For more information, please click on the attached document.

051209 Deutsche Bank - Dr Paper's Weekly Wrap Up

Deutsche Bank - Equity Research

Madison Dearborn Partners (MDP) is selling 50% of PKG stake. Move suggests that there are no strategic buyers at current prices. DB trimmed PKG from Buy to Hold - $24 target.

Uncoated free sheet prices may be turning. IP announced $60 hike on offset grades & bristol grades for early January. WY (the #2 player) and others have followed. We think white paper may be near inflection pt.

UPM's Miramichi, NB mill will go down again. UPM announced a 3 month shut at the 450K tpy coated paper mill. Closure may help ctd mkts through seasonally slow winter month's.

For more information, please click on the attached document.