North American Containerboard Outlook

Ken WaghorneVice President, Paper Packaging

August 2013

Today’s Agenda

• Economic Overview• North American Domestic Demand• Global Trade Issues

– Asia

– Europe

– Latin America

– Rest of World

• Other Factors Affecting Prices• RISI’s North American Price Projections

2

Global Economy Improving ModeratelyAnnual Real GDP Growth

Source: IMF, RISI

3

Emerging Economies Continue to Support Global GrowthGlobal Real GDP* Growth

*Measured at purchasing power parity exchange rates

Source: IMF, RISI

4

US Household Net Worth Almost Back toPre-Recession LevelIndex, Starting Quarter = 100

Source: Federal Reserve

5

Housing Momentum BuildingExisting Home Sales and Housing Starts, Thousands of Units

Source: NAR, BEA

6

Consumption Growth AcceleratingReal Consumption Expenditure, Annualized Percentage Change; Unemployment Rate

Source: BLS, RISI

7

Consumer Spending on Food and Beverages (Billion 2005 Dollars) Was Weak in 2011-2012

8

Manufacturing Growth Supporting EconomyIndex of Industrial Production, Jan 2000 = 1.00; PMI

9

Durable Goods Drives ManufacturingIndex of Industrial Production – Durable, Non-Durable Goods, Jan 2000 = 100

10

Low Natural Gas Prices Helping US ManufacturersHenry Hub Natural Gas, West Texas Intermediate Crude Oil, $/MMBtu

11

The Declining Merchandise Trade Deficit Should Allow Manufacturing to Grow Faster Than Consumer Spending

12

Growth in Industrial Production (Percent) Is Expected to Exceed GDP Growth from 2013 to 2015

13

Today’s Agenda

• Economic Overview• North American Domestic Demand• Global Trade Issues

– Asia

– Europe

– Latin America

– Rest of World

• Other Factors Affecting Prices• RISI’s North American Price Projections

14

US Box Market Should Be Poised to Rally

• Shipments Fell 13% Between 2007 and 2009 – Steepest Decline for the Market Since the 1970s

• Shipments in 2012 were just 4% higher than in 2009– Far more subdued than the overall growth in manufacturing

– But fairly well in line with the performance of nondurable goods

• Uneven US economy held shipments flat in the first half of 2013– But market should accelerate by second half of the year

– Shipments should increase 1.6% in 2013 and 3.7% in 2014

• Long-term growth in box shipments will average 1.8%– Containerboard demand should grow at a more moderate 1.2%

pace

– Shift to lightweight liner will take hold in North America

15

Corrugated Box Shipments Have Been Volatile Since Mid-2012, But the Trend is Relatively Flat

Billion Square Feet Thousand Short Tons

16

Containerboard Cutup Has Exceeded Box Shipments in 2005, Implying Strong Growth in Non-Box Uses of Corrugated Sheets

17

US Box Shipments Tracked Closely with Nondurable Goods Production for Most of 2011-2012 -- Decline in Early 2013 Indicates an Inventory Drawdown

BSF per Index Unit

18

RISI’s Forecast: Box Shipments Should Recover Strongly Following Soft Patch of Early 2013

Annualized Growth Rate (%)

19

Growth in US Containerboard Apparent Consumption Is Expected to Remain Quite Slow

Growth, Million Tons

20

Today’s Agenda

• Economic Overview• North American Domestic Demand• Global Trade Issues

– Asia

– Europe

– Latin America

– Rest of World

• Other Factors Affecting Prices• RISI’s North American Price Projections

21

Asian Demand for Containerboard Far Surpasses Other Regions (2012)

22

Asian Demand Growth Should Bottom Out in 2012, But the 2013-2014 Recovery Will Be Modest Relative to Trend of the Last 10 Years

Annual Change in Million Tonnes

23

Chinese Demand Growth Is Expected to Average 2.1 Million Tonnes per Year in 2013-2014

24

Asian Containerboard Market Remains Oversupplied in 2013, But the Situation Might Start to Improve in 2014

Growth, Million Tonnes

25

Asia Is Expected to Be a Small Net Exporter of Recycled from 2013 Onward

Million Tonnes

26

The Western European Containerboard Market Has Suffered from Economic Distress since 2008 with Recycled Share Increasing Further

27

Euro Area Production Trending LowerIndustrial Production Indices, 2010=1

Source: Eurostat

28

Growth in Western European Containerboard Demand Is Not Expected to Resume Until 2014 Once Industrial Production Begins to Drive Box Demand

Annual Change in Million Tonnes

29

Eastern European Containerboard Market: Much Smaller than the Western European Market (9.1 Million Tonnes in 2012) But Growing Rapidly

30

Eastern European Demand Will Grow Almost 750,000 Tonnes in 2013-2014

Annual Change in Million Tonnes

31

The Western European Recycled Containerboard Industry Is Still Relying on Exports to Maintain Market Balance

Western European Net Exports, Thousand Tonnes

32

Poor Profit Margins (Prices/Variable Costs in Euros per Tonne) Should Lead to Permanent Closures in the European Recycled Containerboard Market

33

Assumed Capacity Closures in the Western European Recycled Containerboard Market Will Help Lift Operating Rates by 2%

34

Latin American Containerboard Demand Should Expand Faster Than Supply in 2014, Leading to Increased Regional Net Imports

Growth, Thousand Tonnes

35

Brazil Is the Only Net Exporter in Latin America and Sells Throughout the WorldKraftliner Exports, Thousand Tonnes

36

African Containerboard Demand Will Continue to Outpace Supply, Allowing Some Further Increase in Imports

Growth, Thousand Tonnes

37

Capacity Expansion Will Exceed Demand Growth in the Middle East Through 2014, Leading to Declining Net Imports

Growth, Thousand Tonnes

38

Capacity Removals in Oceania in 2012 Helped Tighten the Market, But Another Expansion Round is Possible in 2017-2018

Growth, Thousand Tonnes

39

Net Imports into Latin America and Africa Will Grow in 2013-2014, But Conditions Remain Challenging in the Middle East

Million Tonnes

40

Latin America and Canada Are the Dominant Destinations for US Kraftliner Exports

Million Tonnes, Annual Rates

41

Although Challenges Will Remain Through 2013, US Producers Are Well Positioned to Meet Future Growth in Global Kraftliner Demand

Share of ProductionMillion Tons

42

Today’s Agenda

• Economic Overview• North American Domestic Demand• Global Trade Issues

– Asia

– Europe

– Latin America

– Rest of World

• Other Factors Affecting Prices• RISI’s North American Price Projections

43

North American Brown Linerboard Mills Have Some of the Lowest Costs in the WorldCash Costs, First Quarter of 2013

44

Several Recycled Mills Were Quite Competitive with Kraftliner in Early 2013 Cash Costs, First Quarter of 2013

45

Old Corrugated Container (OCC) Costs Should Trend Upward Again Once Global Containerboard Demand Accelerated

46

Dollars per Short Ton

Driving Factor Behind OCC Price Increases: The Developing Markets Will Continue to Provide All Growth in Global Containerboard Demand Through 2014

47

Recycled Production Costs Are Expected to Rise Faster that Kraftliner Costs Through 2014Average Total Cost, US Dollars per Short Ton

48

N. American Industry Has Learned to Remove Capacity as Demand Falters, But Conversions from Graphic Paper Provide a New Dynamic

Thousand Short Tons

49

Capacity from New Entrants Will Eventually Drive Containerboard Operating Rates Down

50

The North American Containerboard Industry Is Very Highly Concentrated

51

The Herfindahl-Hirschman Index (HHI) Tracks Industry Concentration Levels and Indicates Competitive Behavior

52

The North American Containerboard Industry No Longer Owns Much Timberland Net Timberland Transactions, Thousand Acres

53

Today’s Agenda

• Economic Overview• North American Domestic Demand• Global Trade Issues

– Asia

– Europe

– Latin America

– Rest of World

• Other Factors Affecting Prices• RISI’s North American Price Projections

54

Containerboard Pushed Through a $50/ton Price Increase in Late 2012

• And followed this with another $50/ton increase in April 2013

• Market-related downtime trumped several negative factors– Relatively weak domestic demand– Steady decline in old corrugated container costs– Enduring oversupply in corrugated box market

• Prices are expected to remain flat for the remainder of 2013– As new capacity enters the market– Before accelerating in 2014-2015

55

Containerboard Inventories Were Below the Balanced Level in Late 2012 and Early 2013

56

Containerboard Prices Are Expected to Remain Flat for the Remainder of 2013 Before Rising in 2014US Dollars per Short Ton

57

High Industry Profitability Is Expected to Attract New Tonnage to the Market

Price/Total Cost

58

North American Containerboard Summary• Market has been moving sideways since 2010

– Lackluster domestic demand

– Export demand quite positive

– Capacity creeping upward

– Inventories remain well under control

• The downside risks to the market are substantial– Will the manufacturing renaissance play out?

– Has Europe stabilized?

– How much new capacity will enter the market?

• The upside risks are harder to envision– Given that our base forecast includes a US manufacturing revival

– How many increases will the industry attempt in 2014?

– How high do prices need to go to force some market changes?

59

Latin American Pulp & Paper 5-yearForecast www.risi.com/forecasts

Paper Packaging Monitorwww.risi.com/ppm

World Recovered Paper Monitorwww.risi.com/wrpm

Thank-you for your attention!

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