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. 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
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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Global Demand for Printing & Writing Papers Started Declining in 2008, Newsprint in 2001 Million Tonnes 120 45 115 40 110 35 105 30 100 95 P&W Demand Newsprint Demand (Right Scale) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 25 20 5
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 2012 2013 2014 2015 2016 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
P&W Paper Demand Forecast for 2017 2018 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
Newsprint Demand Declining Across the Globe Thousand Tonnes, Percent per Year, 2017 2018 472 ( 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
North American P&W Demand Declining at Steady Pace of 4.5 5.0% for the Last Three Years Apparent Consumption, Thousand Tonnes, Seasonally Adjusted Coated Freesheet Coated Mechanical Uncoated Freesheet Uncoated Mechanical 2015 4,190 2,785 8,344 3,272 % Change -2.8% -10.7% -0.2% -11.6% 2016 3,977 2,608 8,010 3,072 % Change -5.1% -6.4% -4.0% -6.1% RISI 5 Months 2017-2.9% -1.3% -5.3% -10.6% RISI Forecast for 2017-3.8% -3.6% -4.3% -7.9% Copyright 92017 RISI, Inc. Proprietary Information
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Circulation of Printed Magazines in North America Declined 1.1% in 2016 420 6% Circulation Per Issue: Millions 400 380 360 340 320 300 280 Circulation % Change (R) 1.1% 4% 2% 0% 2% 4% 6% 8% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Alliance for Audited Media & RISI; includes consumer, farm, religious, paid & verified and analyzed nonpaid, excludes digital. 11 11
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 650 600 550 500 450 400 350 300 250 2012 7.5% 2013 7.9% 2014 11.8% 2015 9.3% 2016 9.7% Unit Draw %chya (R) 0% 2% 4% 6% 8% 10% 12% 14% 16% 200 18% Source: Magnet. Note that actual copies sold is only about 30% of copies distributed; data are for North America. 12 12
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 2014 10.4% 2015 10.6% 2016 10.7% 2017 12.5% 2018 6.8% 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
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 2014-1.9% 2015-3.5% 2016-2.1% 2017-3.4% 2018-2.3% 2019-1.8% 2017Q1-20% 14
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% 115 105 11 10 Marketing +0.4% Mail Periodicals -3.6% Total Mail -0.6% USPS Actual Postal Q2 2017 (Calendar Q1 2017) First Class -4.2% Marketing -3.5% Mail Periodicals -3.7% Total Mail -3.8% 15 Billion Pieces 95 85 75 65 55 First Class Marketing Mail Periodicals (R) 2017* 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Postal Fiscal Years * 2017=USPS forecast from operating plan 15 9 8 7 6 5
Unit Sales of Printed Books Rose for the Third Year in a Row, Rising 3.3% in 2016 680 670 Unit Sales %ch (Right) 660 650 640 630 620 610 600 590 2013 2014 2015 2016 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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Despite Recent Weakness in the Dollar, It Remains Strong Enough for Imports to Be Very Competitive Foreign Currency Per US Dollar 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 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 2010 2011 2012 2013 2014 2015 2016 2017 2018 18
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 $50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $100 $150 $200 19
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
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
US Imports of Cut Size Copy Paper from Five Tariff Target Countries Imports, Thousand Tonnes 900 800 700 600 500 400 300 200 100 0 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
US Imports of Cut Size Copy Paper from Non Tariff Target Countries Imports, Thousand Tonnes 250 200 150 100 50 0 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
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 450 400 350 300 250 200 150 100 50 0 Oceania/Africa Latin America Import Share 2011 2012 2013 2014 2015 2016 2017* * 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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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) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 26
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 2013 2014 2015 2016 2017 2018 1,322 7% 705 5% 3,632 +0% 296 0% 5,954 2% 1,284 3% 741 +5% 3,697 +2% 285 4% 6,007 +1% 1,164 9% 696 6% 3,477 6% 237 17% 5,573 7% 1,044 10% 630 10% 3,417 2% 210 11% 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
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 1,200 2010 2011 2012 2013 2014 2015 2016 2017 2018 28
Printing & Writing Demand in the Smaller Latin Countries Is Outperforming Brazil and Mexico (Except Venezuela) Thousand Tonnes 600 500 Other LA Argentina 400 300 200 100 0 Venezuela Ecuador Columbia Peru Bolivia Chile 2010 2011 2012 2013 2014 2015 2016 2017 2018 29
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 2011 2012 2013 2014 2015 2016 2017 2018 30
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Global Printing & Writing Demand Posted Unusually Large Declines for the Past Five Years, Forcing Numerous Mill Shuts Change in Global Demand (Thousand Tonnes) 0 500 1,000 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
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
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% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 34 34
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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 35 35
Industry Financial Outlook 36
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 2011 2012 2013 2014 2015 2016 2017 2018 Excludes tariff costs for Canadian mills, which may offset cost decline in 2016 37 37
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 $700 USA Europe Brazil in USD/tonne Brazil in BRL/tonne (R) 3,500 3,000 2,500 2,000 1,500 1,000 BRL per Tonne 38
US Publishing Paper Prices Prices still trending down, but recovery predicted for late 2017 to 2019 based on rising costs and mill shuts US$/cwt $54 $50 $46 $42 SC A Ctd. No. 5 40 lb Ctd. No. 3 60 lb. Unc. Offset 50 lb. $38 $34 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 39
Price to Mill Cash Cost Margins Average for all existing North American mills 1.8 1.7 Price/Mill Cash Costs 1.6 1.5 1.4 1.3 1.2 1.1 UFS Copy Paper Ume SC A Newsprint CFS 60 lb. rolls Cme/LWC 40 lb 1.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 SC margin is before impact of tariff on Canadian mills 40
Thank you for your attention! For more information: World Graphic Paper 5 Year Forecast www.risi.com/worldgraphic Global Cut Size Uncoated Freesheet Study www.risi.com/cutsize China s Influence on World Graphic Paper Markets in the Coming Decade www.risi.com/chinagraphic 41