::The Center for Paper Business and Industry Studies::

060816 Deutsche Bank Report - Containerboard Monitor

Deutsche Bank - Equity Research

Shipments
Corrugated box shipments rose in July but at a more measured pace
compared to May and June. According to date just released by the
Fibre Box Association, “avg. week” volumes rose 3.5% y/y in July,
but slipped by 1.7% on an “actual” basis. Typically, we like to
take a rough average of these two numbers, or 0.9% for the month of
July. On this basis, July represents a modest easing from strong
recent monthly trends. However, on balance, the containerboard
market remains healthy with supplies lean (3.4 wks of supply at box
plants) and operating rates high (98.3% in July, 97.1% YTD).

Inventories
Inventories did rise more than normal during July, but remain at
historically lean levels. Combined mill and box plant inventories
rose 162K tons m/m in July with all of that increase occurring in
the box plants. The average increase over the last 10 years has
been about 53k tons, implying a negative variance of about 109k
tons. The gain was driven by a 98.3% operating rate in July,
bringing the YTD rate to 97.1%. It is worth noting that the
absolute level of inventory remains quite lean by historic
standards. Box plant inventories are currently at only 3.4 weeks of
supply.

Prices
It looks like producers have been relatively successful in passing
the third c'board price hike into boxes.   To be sure, the box
market remains highly competitive. Producers appear to be passing
through most of the containerboard price hikes, but not getting
anything incremental to offset the higher costs in box
production/delivery (energy, benefits, freight).   We continue to
receive a steady stream of field reports on aggressive pricing,
especially by some of the largest integrated players - - -
apparently eager to lock-up tonnage. The upshot is lower margins
than one would have expected from current containerboard price
levels. Mid-90's prices are clearly not producing mid-90's margins.

With higher costs across the entire system, it is clear that higher
containerboard prices will be required to generate adequate
returns.   Our trade sources suggest that an autumn pricing
initiative is probable. We would not be surprised to see Georgia-
Pacific pushing aggressively for an increase. GP's new owners,
Koch, are clearly determined to improve across the firm. Based on
our dialogue with various players in the trade, Koch has brought a
more aggressive/determined stance to GP's white paper operations.
Koch is also pursuing cost-reduction initiatives at containerboard
mills which already rank as some of the industry's lowest-cost.

The Stocks?

The July figures should not significantly impact stock prices. The
y/y gains in box volumes in May & June comprise the strongest two-
month stretch in recent memory, and that strength may
have “borrowed” some from July. While the month/month jump in
inventories bears monitoring, absolute inventory levels remain lean
by historical standards.

060815 Deutsche Bank Report - Uncoated White Paper Producers Lining Up for Autumn Hike

Deutsche Bank - Equity Research

Boise (#4 NA producer) has recently announced a $40/ton price hike
for an array of uncoated free sheet papers, effective September 12.
The Boise announcement covers both cut-size and offset paper as well
as opaque & colored papers and reply card stock. Weyerhaeuser (#2
NA producer) has reportedly rolled-back its August pricing
initiatives to September. International Paper is reportedly close
to an announcement, probably for late September or October1. We
have no word on the position of the #3 player, Domtar.

The move is not a surprise, considering reasonably snug supplies and
continued cost pressures. With pulp costs still rising, most
nonintegrated white paper mills are struggling just to reach cash
break-even. Our sources suggest a market which appears in balance,
but no longer a truly “tight” market. Merchants are reporting some
evidence of increased paper availability and suggest that
inventories may be building at the printer level.

060814 Deutsche Bank Report - Dr. Paper's Pulse on Pricing

Deutsche Bank - Equity Research

LUMBER
The Random Lengths composite price slipped another $5/mbf to
$291/mbf last week. The 10-yr cyclical low was $265/mbf in November
of 2002. Mills in lower-cost regions like the southern US are
bleeding. Could it go even lower? We think so.    While a rising
CN$ would have flattened the NA cost curve, British Columbia mills
are dealing with yrs worth of "beetle kill" wood and mills across NA
continue to focus on using lower-cost, small diameter logs.

PANELS
The structural panel composite fell $3/msf to $288/msf last week.
The benchmark grade of OSB (7/16" in the North Central region) fell
$8/msf to $182/msf. Some Northern producers are reporting that
current OSB prices are below production costs. Last week, LPX
announced the indefinite closure of a 500MMSF Quebec OSB mill
(pointing to high wood, transportation & energy costs as well as the
strong CN$). With OSB prices in Canada at about $160/msf on 7/16"
grade and the CN$ high, this is not surprising. However, concern
over surrendering provincial cutting rights may delay shutdowns.

UNCOATED FREE SHEET
Markets remain healthy. Weyerhaeuser's recently announced $40-
60/ton hike on offset & opaques hasn't been followed by any other
players, but we understand that WY intends to push forward with a
September 1 increase. 1.7MM tons of NA capacity has been shut since
2003, with a good portion of that coming in 2006.    While imports
are rising, they are less than 3% of total NA consumption. Global
operating rates are close to 90% and forecasted to rise. As
discussed more fully in our July 20 bulletin (“Another Round of UFS
Hikes Taking Shape”), we expect some UFS combination of WY w/ Domtar
or Boise to be announced in the next few weeks.

CONTAINERBOARD
Company earnings announcements to date show the 3rd price hike is
being passed in the form of higher box prices. Some industry
participants are predicting a fall price hike; it would be the
fourth of the year. At the mill level, operating rates here in the
U.S. have averaged 97% YTD. June box shipments were up 4.9% on an
avg. wk basis. Export markets remain healthy with 90%+ operating
rates globally.   Rising OCC costs, which had created some cost-push
pressure, are now easing.