Global Graphic Paper Outlook

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1 Global Graphic Paper Outlook Declining Demand and Strong Dollar Spark Trade Issues Latin American Conference Renaissance Hotel, São Paulo August 14 17, 2017 John Maine Vice President, World Graphic Paper

John Maine VP Global Graphic Papers jmaine@risi.com Co Founder of Resource Information Systems, Inc.

2 John Maine VP Global Graphic Papers Co Founder of Resource Information Systems, Inc. With RISI for 38 years Developed RISI P&W models Works with more than 200 graphic paper clients worldwide Assisted by five local economists in RISI regional offices Directs numerous single and multi client studies on graphic paper 2

3 Some Definitions Graphic Paper Newsprint Uncoated Mechanical (Ume) Directories, paperback books, newspaper inserts, low end magazines/catalogs Uncoated Woodfree/Freesheet (UWF or UFS) Office copy paper, envelopes, offset printing, direct mail, books, forms, carbonless, tablets, stationery, specialties Coated Mechanical (Cme) Magazines, catalogs, newspaper inserts Coated Woodfree/Freesheet (CWF or CFS) High end magazines and catalogs, commercial printing, brochures, photo printing, menus, posters, displays, direct mail Tonnes = metric ton (2,205 lbs); tons = short ton (2,000 lbs) 3

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5 Global Demand for Printing & Writing Papers Started Declining in 2008, Newsprint in 2001 Million Tonnes P&W Demand Newsprint Demand (Right Scale)

6 Global P&W Demand Declining Steadily, with the Largest Hit in the Mechanical Grades Percentage Change in Global Demand by Grade Coated Freesheet Coated Mechanical Uncoated Freesheet Uncoated Mechanical Printing & Writing Average -0.7% -1.1% -1.4% -3.4% -3.7% -2.1% -3.3% -6.1% -3.5% -5.4% -5.6% -4.8% -0.2% +0.1% -0.9% -0.7% -0.8% -0.5% -7.4% -0.7% -3.9% -5.8% -2.3% -4.0% -1.7% -1.1% -1.7% -2.6% -2.2% -1.9% 6

7 P&W Paper Demand Forecast for Shows Slow Decline, but Varies by Region Thousand Tonnes, Percent per Year 835 ( 2.4%) 1,554 ( 4.0%) 163 (1.4%) 4 (0.0%) 26 (0.6%) 39 (0.4%) 72 (1.5%) 37 ( 1.5%) Two year total growth in tonnes (Two year average % change) 7 Global 2,100 ( 1.1%) 7

8 Newsprint Demand Declining Across the Globe Thousand Tonnes, Percent per Year, ( 7.2%) 606 ( 5.6%) 88 ( 3.2%) 749 ( 3.7%) 13 ( 2.3%) 130 ( 1.7%) 14 ( 1.3%) 39 ( 4.8%) 2 year total growth in tonnes (2 year average % change) 8 Global: 2,112 ( 4.7%) 8

9 North American P&W Demand Declining at Steady Pace of % for the Last Three Years Apparent Consumption, Thousand Tonnes, Seasonally Adjusted Coated Freesheet Coated Mechanical Uncoated Freesheet Uncoated Mechanical ,190 2,785 8,344 3,272 % Change -2.8% -10.7% -0.2% -11.6% ,977 2,608 8,010 3,072 % Change -5.1% -6.4% -4.0% -6.1% RISI 5 Months % -1.3% -5.3% -10.6% RISI Forecast for % -3.6% -4.3% -7.9% Copyright RISI, Inc. Proprietary Information

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11 Circulation of Printed Magazines in North America Declined 1.1% in % Circulation Per Issue: Millions Circulation % Change (R) 1.1% 4% 2% 0% 2% 4% 6% 8% Source: Alliance for Audited Media & RISI; includes consumer, farm, religious, paid & verified and analyzed nonpaid, excludes digital

12 Magazines Distributed for Single Copy Sales Are the Primary Source of Magazine Circulation Declines and Fell 9.7% in 2016 and 4.9% in the First Quarter of 2017 Millions of Copies Distributed % % % % % Unit Draw %chya (R) 0% 2% 4% 6% 8% 10% 12% 14% 16% % Source: Magnet. Note that actual copies sold is only about 30% of copies distributed; data are for North America

13 The Decline in Magazine Ad Pages Is the Primary Factor Driving Down Paper Use; 2016 dropped 10.7%, but optimistic that rate of decline will ease as growth of e media slows 5.0% 0.0% Percentage Change in PIB Magazine Ad Pages 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 Annual % % % % % 2013Q1 2014Q1 2017Q1 2016Q1 2015Q1 %Ch Year Ago 5.0% 10.0% 15.0% 20.0% 25.0% Includes Sunday magazines and the effect of discontinued print editions 30.0% 13

14 US Catalog Mailing Declined Only 2.1% in 2016, but 2017 Started Weak with 5.6% Drop in Q1 5% %Ch Year Ago Percentage Change in Catalogs Mailed 0% -5% -10% -15% 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 Annual % % % % % % 2017Q1-20% 14

15 US Postal Mail Volumes Marketing mail holding steady, but will decline slightly now that election mail is gone USPS Forecast Pieces of Mail 2017 First Class -2.5% Marketing +0.4% Mail Periodicals -3.6% Total Mail -0.6% USPS Actual Postal Q (Calendar Q1 2017) First Class -4.2% Marketing -3.5% Mail Periodicals -3.7% Total Mail -3.8% 15 Billion Pieces First Class Marketing Mail Periodicals (R) 2017* Postal Fiscal Years * 2017=USPS forecast from operating plan

16 Unit Sales of Printed Books Rose for the Third Year in a Row, Rising 3.3% in Unit Sales %ch (Right) Source: Nielsen Bookscan Unit Sales (Thousands) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 16 16

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18 Despite Recent Weakness in the Dollar, It Remains Strong Enough for Imports to Be Very Competitive Foreign Currency Per US Dollar US Mills Have Advantage Zone of similar delivered costs for US/European mills European and Other Offshore Mills Have Advantage Zone of similar delivered costs for US/Canadian mills Canadian Dollar Euro

19 The Strong Dollar Is Making US Markets Attractive to Offshore Suppliers US Dollars per Ton Difference Between Paper Prices in the USA vs Europe $250 $200 LWC 40 lb. Cut Size Copy Paper $150 $100 $50 $0 $ $100 $150 $200 19

20 Producers in the USA and Other Countries in Europe and Asia Resorting to Tariff Protection to Stem the Tide of Imports Anti dumping duties (ADD) For imports dumped into the US market at prices lower than the importer s home market Countervailing duties (CVD) Adjusts for government subsidies received by the importer 20

21 Tariffs on Imports of Cut Size Copy Paper to USA Range from 8% to 326% ADD CVD Combined Australia Paper 222% 222% Suzano 22% 22% Portucel 8% 8% APRIL Indonesia 2% 21% 23% APP Indonesia 17% 109% 126% Asia Symbol (China) 84% 7% 91% APP China 149% 7% 156% UPM China 149% 177% 326% Sun Paper China 149% 177% 326% Effect of tariff is waning as US operating rates decline and imports from non tariff countries explode At best, the tariff prevented further explosive surge in imports, but did not make the imports go away 21

22 US Imports of Cut Size Copy Paper from Five Tariff Target Countries Imports, Thousand Tonnes Portugal Indonesia China/Hong Kong Brazil Australia Five Country Import Share 25% 20% 15% 10% 5% 0% Import Share of Demand * Estimated from five months of actual data 22

23 US Imports of Cut Size Copy Paper from Non Tariff Target Countries Imports, Thousand Tonnes All Others Israel Germany Finland Thailand France Import Share 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Import Share of Demand * Estimated from five months of actual data 23

24 Western European Imports of Cut Size Copy Paper from Non European Countries Have Been Stable at 10 12% of Demand Weak euro makes the USA a far more attractive market Imports, Thousand Tonnes Oceania/Africa Latin America Import Share * * Estimated for the first four months of the year Asia/Middle East North America 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Import Share of Demand 24

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26 Latin American Demand for Newsprint Continues to Fall, but Printing & Writing Could Stabilize After Two Years of Severe Decline Thousand Tonnes 6,100 5,900 5,700 5,500 5,300 5,100 4,900 4,700 4,500 P&W Demand Newsprint Demand (Right Scale) ,400 2,200 2,000 1,800 1,600 1,400 1,200 1,

27 Latin American Demand for Uncoated Freesheet Will Recover, but Coated and Uncoated Mechanical Outlook Looks Poor Demand by Grade (Thousand Tonnes, %ch) Coated Freesheet Coated Mechanical Uncoated Freesheet Uncoated Mechanical Printing & Writing ,322 7% 705 5% 3,632 +0% 296 0% 5,954 2% 1,284 3% % 3,697 +2% 285 4% 6,007 +1% 1,164 9% 696 6% 3,477 6% % 5,573 7% 1,044 10% % 3,417 2% % 5,302 5% 1,030 1% 609 3% 3,448 +1% 198 6% 5,286 0% 1,035 0% 607 0% 3,506 +2% 193 3% 5,341 +1% 27

28 Printing & Writing Demand in Brazil and Mexico Fell Sharply, But Will Stabilize Thousand Tonnes 2,600 2,400 2,200 2,000 1,800 Brazil Mexico 1,600 1,400 1,

29 Printing & Writing Demand in the Smaller Latin Countries Is Outperforming Brazil and Mexico (Except Venezuela) Thousand Tonnes Other LA Argentina Venezuela Ecuador Columbia Peru Bolivia Chile

30 Latin America Continues to Import a High Percentage of Its Demand Despite Low Costs and Ample Fiber 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Net Imports as a Percentage of Demand Ctd. Mechanical Ctd. Freesheet Unc. Mechanical Newsprint Unc. Freesheet

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32 Global Printing & Writing Demand Posted Unusually Large Declines for the Past Five Years, Forcing Numerous Mill Shuts Change in Global Demand (Thousand Tonnes) ,000 1,500 2,000 2,500 3,000 Thousand Tonnes Percent 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Global P&W Demand Growth 32

33 Global Printing & Writing Capacity Is Shrinking, but Not Fast Enough to Push Global Operating Rates Back Above 90% Recent operating rates of 87% indicate weak global market Change in Global Capacity (%) 1.0% 0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Change in Capacity Operating Rate (%) 93% 92% 91% 90% 89% 88% 87% 86% 85% 84% 83% Global P&W Operating Rate (%) 33

34 Uncoated Woodfree Operating Rates Asian oversupply remains, Brazil struggling due to weak demand but showing some improvement in 2016/2017, and North American rates are sliding due to lack of capacity shuts 97% 95% 93% 91% N. America W. Europe Asia Brazil 89% 87% 85% 83%

35 Coated Woodfree Operating Rates Operating rates have been dropping globally due to weak demand 94% 92% 90% 88% 86% 84% 82% 80% N. America W. Europe Asia

36 Industry Financial Outlook 36

37 North American Mill Cash Costs to Rise 1 2% in 2017 and 2018 Ending a five year trend of falling costs 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Percent Change in Mill Cash Costs in US Dollars for Average of All Existing North American Mills UFS Cut Size CFS Rolls Ume Excludes tariff costs for Canadian mills, which may offset cost decline in

38 20 lb/75 gsm Copy Paper Prices Can the US maintain a premium in prices? Currency shifts have helped drive up Brazilian prices $1,400 4,500 $1,300 4,000 US Dollars per Tonne $1,200 $1,100 $1,000 $900 $800 $700 USA Europe Brazil in USD/tonne Brazil in BRL/tonne (R) 3,500 3,000 2,500 2,000 1,500 1,000 BRL per Tonne 38

39 US Publishing Paper Prices Prices still trending down, but recovery predicted for late 2017 to 2019 based on rising costs and mill shuts US$/cwt $54 $50 $46 $42 SC A Ctd. No lb Ctd. No lb. Unc. Offset 50 lb. $38 $

40 Price to Mill Cash Cost Margins Average for all existing North American mills Price/Mill Cash Costs UFS Copy Paper Ume SC A Newsprint CFS 60 lb. rolls Cme/LWC 40 lb SC margin is before impact of tariff on Canadian mills 40

com/worldgraphic Global Cut Size Uncoated Freesheet Study www.risi.

41 Thank you for your attention! For more information: World Graphic Paper 5 Year Forecast Global Cut Size Uncoated Freesheet Study China s Influence on World Graphic Paper Markets in the Coming Decade 41

Global Graphic Paper Outlook

Global Graphic Paper Outlook Declining Demand and Strong Dollar Spark Trade Issues North American Conference Seaport Hotel, Boston October 16 18, 2017 John Maine Vice President, World Graphic Paper John