Features Financial Reports & Markets
Industry Trends (November 01, 2007)

MIXED NEWS FOR INTERNATIONAL MARKETS

MIXED NEWS FOR INTERNATIONAL MARKETS

In China, further tightening of the macroeconomic controls is expected, after the news on real economic growth at 11.5% during Q3 and on inflation rate at over 6% both in August and September. The rapid rise of oil prices in October/early December puts a further strain on the inflation numbers. Various ways to decrease liquidity are the key. Excessive growth is bringing up the asset values in the Stock Exchange to an unhealthy level, too. Recent boost of the stock values of PetroChina brought the company value virtually to par with Exxon, currently the highest value company in the world.

In the paper industry, September statistics brought, with some exceptions, mainly bad news both in Europe and in the US, as far as the volumes are concerned. Price data was more encouraging. Further supply reductions, on both sides of the Atlantic, firmed the paper markets in October. More closures have been announced for early 2008.

In the US, demand for both uncoated and coated free sheet has fallen. The prices have not. This is partly due to the USD-weakness but mainly to the supply/demand balance being maintained by some improvement in the demand for coated and uncoated mechanicals and with capacity closures by e.g. Wausau in uncoated free sheet and UPM in LWC. Improvement of the coated paper prices also helps Europe as exports to the US become a more viable option.

In Europe, order inflow for coated grades appears to have improved in October. In uncoated woodfrees the order books and lead times appear to have shortened. Also, inventories at paper mills are reported to be higher.

In packaging grades, markets remain satisfactory both in the US as well as in Europe. But these are also the grades in which capacity has been growing very rapidly in Asia and where new capacity will be added in the medium-term future also in Western and Eastern Europe.

The North American pulp market has continued to be tight in spite of the anticipated slowing activity in many areas of the US paper sector. Additionally, more pulp will slowly be available from integrated pulp mills serving previously paper mills which are to be closed down. Increasing pulp demand in the recent months with improved paper pricing together with appreciating CAD, almost 25% since end of 2006 and 7% from a month ago, and rising fibre and energy costs, are supporting the pricing initiatives. The announced NBSK pulp price increases for November in the NA market have not been publicly followed by all major producers.

FOEX Indexes Ltd — PIX Newsprint Indexes

US ECONOMY “IN DEEP TROUBLE”

US economic growth in Q3 2007 was up 3.9%, according to preliminary data. The Fed brought the interest rate down by 0.25 %-points. The number of new jobs was up more than expected. Construction spending was up in September. All these good news hide the fact that the US economy is in deep trouble. Credit crunch and the housing slowdown will worsen. With oil price approaching 100 USD/barrel and dollar hitting all-time lows, inflation is pushed up. The game is just about over for the US consumer. And when the private consumption sinks, the US economy will sink, too, either close to a recession on into it.

In the EU, concerns over the impact of the credit squeeze re-emerged with poor Q3 results from several financial institutions. Another worry is the combination of the record-strength of the Euro and inflation creeping up over the 2% ECB comfort zone. The negative impact of the Euro is demonstrated more and more clearly in the export volumes outside the Union and in the industrial production. The latter dropped significantly in Germany. Construction is getting weaker across the Union. This will eventually lead to losses of jobs and reduce the growth in the private consumption.

Also in Japan, the most recent data on economy is predominantly negative. Housing starts plunged with a double-digit percentage. Unemployment went up from 3.8% to 4%. Tax revenues declined by almost 5%. Higher oil prices and the strengthening of the Yen could hurt the future growth as well. Yet, household spending rose in September at 3.2% rate, its fastest rate in almost 4 years, led by spending on consumer durables. BoJ left, once again, interest rates untouched at their October meeting.

FOEX Indexes Ltd. — PIX Pulp Index

MILLS ACHIEVE STRONG Q3 OPERATING RATES

The pulp segment recorded operating income of $39.2 million in Q3, a decrease of $4.2 million from Q2, on lower mill nets and slightly lower shipments. The reduction in operating income is the result of the 5.1% q/q appreciation of the Canadian dollar and 4% q/q rise in fibre costs. Q3 production was up by 7,400 tonnes q/q as a result of only less maintenance downtime and a reported mill operating rate improvement of 4%. The company estimates that the lost production as a result of the maintenance downtime totalled 4,000 tonnes in the quarter, down from the 8,600 tonnes taken in Q2. Average list NBSK prices were up approximately US$27 per tonne (3.3%) q/q in North America, while Foex Indexes Ltd. has prices up US$23 per tonne in North America and US$26 per tonne in Europe. We calculate that Canfor Pulp’s mill nets were down Cdn$10 per tonne (1.4%) q/q due to the rising Canadian dollar. Lower realized selling prices were compounded by the rise in chip costs, which the company reported increased by 48% on a y/y basis. Canfor Pulp satisfied 10-15% of its chip requirement from whole-log chipping in the third quarter and is currently operating using 15% whole-log chips. The company is also building chip inventories to get it through the Christmas sawmill shuts; inventories currently stand at just over 18 days versus the Q2 average of half this amount. Pulp shipments were down 2,700 tonnes (1.0%) q/q (not including shipments marketed on behalf of Howe Sound Pulp and Paper Partnership and Canfor’s Taylor pulp mill). Unit costs were up $3 per tonne (0.7%) q/q, with higher quarterly fibre costs mostly offset by the high quarterly operating rate. The segment generated an EBITDA margin of 29.5% in the quarter, down 1.1% from Q2, and down from 9.9% from Q3 2006. Canfor Pulp is expecting NBSK pulp markets to remain strong through 2007, a view that is supported by World-19 Pulp Statistics. We are anticipating that the US$20 per tonne NBSK price increase will be implemented before the end of the year.

Paper & Forest Products, Industry Digest

PAPER SEGMENT POSTS FLAT Q/Q RESULTS

The paper segment recorded an operating loss of $0.1 million in Q3, flat from the previous quarter. We calculate that Canfor Pulp’s mill nets were up Cdn$7 per tonne (0.8%) q/q due to the rise in the Canadian dollar more than offsetting the pricing gains made in kraft papers. Global demand for kraft paper was relatively flat in the third quarter, but on the supply side approximately 170,000 tonnes of global kraft paper capacity was shut in the quarter due primarily to high fibre costs. Paper shipments were down 5,100 tonnes (14.2%) q/q, whereas paper production volumes in Q3 were down only 900 tonnes, or 2.6% q/q. Maintenance downtime in the quarter totalled 1,900 tonnes of lost production whereas there was no downtime taken in the second quarter and only 500 tonnes in the comparable period in 2006. Canfor Pulp expects demand and pricing to remain strong through 2007, with the implementation of a US$50 per tonne North American and a 60 per tonne price increase in Europe expected start to be implemented in January. Canfor Pulp sells approximately 75% to 80% of its paper in North America, with the balance sold in Europe.

Paper & Forest Products, Industry Digest