Paper market

1
Paper markets drivers, demand, supply structure
and outlook

• Björn Hägglund
• Stora Enso Capital Market Day
• 16 May, 2001

2

• It should be noted that certain statements herein
  which are not historical facts, including,
  without limitation those regarding expectations
  for market growth and developments expectations
  for growth and profitability and statements
  preceded by believes, expects, anticipates,
  foresees, or similar expressions, are
  forward-looking statements within the meaning of
  the United States Private Securities Litigation
  Reform Act of 1995. Since these statements are
  based on current plans, estimates and
  projections, they involve risks and uncertainties
  which may cause actual results to materially
  differ from those expressed in such
  forward-looking statements. Such factors
  include, but are not limited to(1) operating
  factors such as continued success of
  manufacturing activities and the achievement of
  efficiencies therein, continued success of
  product development, acceptance of new products
  or services by the Groups targeted customers,
  success of the existing and future collaboration
  arrangements, changes in business strategy or
  development plans or targets, changes in the
  degree of protection created by the Groups
  patents and other intellectual property rights,
  the availability of capital on acceptable terms
  (2) industry conditions, such as strength of
  product demand, intensity of competition,
  prevailing and future global market prices for
  the Groups products and the pricing pressures
  thereto, price fluctuations in raw materials,
  financial condition of the customers and the
  competitors of the Group, the potential
  introduction of competing products and
  technologies by competitors and (3) general
  economic conditions, such as rates of economic
  growth in the Groups principal geographic
  markets or fluctuations in exchange and interest
  rates.

3
Factors Affecting Supply/Demand Balance

• Demand drivers
• GDP development
• Advertising
• Number of magazine titles
• Number of households and persons per household
• Number of PCs and printers
• Number of Internet connections
• Industry consolidation

4
Europe Advertising Expenditureby Medium
USD billion at current prices
Magazines
Newspapers
TV
Zenith Media, April 5 2001
Outdoor
Radio
5
USA Advertising Expenditureby Medium
USD billion at current prices
Magazines
Newspapers
TV
Zenith Media, April 5 2001
Internet
Outdoor
Radio
6
Consumer Base in USA
Population
Persons per household
million
Average annual growth 1.1
Source U.S. Census Bureau
7
National Markets Ranked by Internet Penetration
Rates
Penetration
Sweden
Finland
UnitedKingdom
Netherlands
Germany
Spain
Italy
France
UnitedStates
8
Projection of European Users ofPCs and Internet
Million
PC users
Internet users
Source Forrester Research, 2000
9
Worldwide Growth of Document Printer Shipments
and Installed Base
Millions of units
Shipments
Installed base
Source Lyra research, Inc.
10
Boom in Electronic Media
Electronic media growing faster than print
products,but without replacing them
Print Media
Electronic Media
8-10 p.a.
2-4 p.a.
Source Heidelberg
11
Effect on Paper Demand

• Increasing PC and Internet usage has increased
  the amount of written communication dramatically
• Though the digital medias proportion of written
  communication is increasing, the overall increase
  in written communication, due to PCs and
  Internet, is also increasing the demand for
  office papers
• In office papers demand for high quality grades
  will increase

12
Effect on Packaging Board Demand

• Number of households has significant impact on
  packaging material demand
• Households are expected to increase use of
  convenience food
• Urbanisation enhances packaging consumption
• E-commerce increases the demand for packaging
  material and printed catalogues

13
Conclusions

• Analysis of paper demand drivers does not reveal
  any major fluctuations
• Accordingly we assume that true demand for paper
  and paperboard is, and will be, quite stable and
  steadily growing
• Volatility in the paper market is largely caused
  and amplified by production, logistics and
  distribution imbalances and imperfections

14
Capacity Structure
15
Concentration Development
Share of Top Five Firms of Total Grade Capacity
in the world

1995
2000
1990
16
Concentration by Continent
Share of Top Five Firms of Total Grade Capacity
in the World, 2000

Europe
Asia
North America
17
Average Capacity by Grade, 2000
PM capacity '000 t/a
Magazine paper
Coated woodfree
Newsprint
Uncoated woodfree
18
Raw Materials
19
Stora Ensos Breakdown of Costs
Personnel costs
Wood and timber
Freight and sales commissions
Chemicals and fillers
Energy
External purchases of pulp
Recycled paper
Other
20
Stora Ensos Operating Margin Sensitivity
Pulp
Recovered Paper
Energy
Wood
Freight and salescommissions
Costs -5
Costs 5
Chemical and fillers
Change of operating margin
21
Pulp Price Development
USD/tonnes
NBSK
Source Forrester Research, 2000
22
Pulp Balance

• Pulp purchases and sales are in balance thus
  operating profit is not affected by the
  fluctuations of pulp prices
• The primary significance of pulp for Stora Enso
  is the cost of producing it and the effect that
  pulp prices have on paper prices

23
Softwood Pulpwood Cost at Mill,Wood for
Mechanical Pulping, IQ 2001
Indexed
24
Softwood Pulpwood Cost at Mill,Wood for Chemical
Pulping, IQ 2001
Indexed
25
Hardwood Pulpwood Cost at Mill, Wood for Chemical
Pulping, IQ 2001
Indexed
26
Nominal ONP Price Developmentin the USA and
Germany 1986-2001
USD / short ton
USA
Germany
Note prices are FOB sellers dock
27
Manufacturing Cost CompetitivenessNortheastern
US DIP v. TMP-based Newsprint
USD/tonnes
Chemicals
Wood
Energy
RCP
Other manuf. costs
Personnel costs
Cost level 2000/IV
PM with annualcapacity of 350 000 mt
28
Stora Ensos Recycled Fiber use 2000
Source of fiber
Use of fiber
Liquid packaging board wrappings6
Cartonboard other4
Magazine paper12
Old corrugatedcontainers10
Packagingboards 22
Printing writing,woodfree8
Newsprint pamphlets72
Newsprint66
TOTAL 2.2 million tonnes
Yield range 70-80
Source U.S. Census Bureau
29
Market Outlook
30
Pulp Outlook

• Seasonal 96 KT decline of Norscan stocks in
  March took inventories down to 1.909 KT
• World inventories down by 74 KT in March
• Contractual business trading at
• NBSK 550-580
• BHKP 560-580
• To avoid further price erosion the industry is
  making efforts to manufacture to demand - Norscan
  producers have announced 320 KT downtime for
  April May
• Paper mills pulp inventories in North America
  and Europe are low to normal
• Widely shared view is that deliveries during the
  second half of the year would be back to normal
  levels and prices would bottom out

31
World Market Pulp Deliveries, Inventories and
Production 1997-2000
Deliveries
Inventories
Production
Tonnes
March 2001
) Covers about 90 of world market pulp
production
Source EPIS
32
Fine Paper

• Fine Paper markets are still weak and fragile and
  prices, especially in coated woodfree, are under
  pressure due to excess supply 
• The North American paper market continues to
  remain weak
• The announced U.S. uncoated woodfree price
  increase from February was rejected and prices
  have fallen even further in March and April
• Record low price level in China seems to be
  levelling out, but the Asian oversupply situation
  is not expected to ease before 2002/2003
• Further de-stocking expected to continue at
  merchants and end users in the next coming months

33
Prices of WF Papers in Germany
EUR / tonnes
UWF A4
CWF sheets 100g
Source Swedish Wood
34
Magazine Paper and Newsprint

• Magazine paper
• Magazine paper demand in WE rose by 3 in
  Jan-March, but is expected to slow down to appr.
  1 for the year
• CMR showing no growth, as this grade will be
  squeezed between SC and WFC-R (WFC capacity
  expansion and eroding prices) - SC will see a
  healthy growth of 3
• Weaker demand in WE and decreasing exports to USA
  will result in lower operating rates than
  expected earlier, slightly below 90 for CMR but
  a sound 94 in SC
• U.S. coated groundwood shipments in March were
  down 4.3 and prices have declined between 2-4.00
  cwt.
• Newsprint
• The publishers are facing decreasing revenue (ad
  spends) and increased paper prices
• Newsprint demand in Europe is still good,
  however, in both Asia and NA demand is declining
  due to lower advertising volume
• Producers have reacted by taking downtime and
  closing capacity to balance out the market and to
  safeguard pricing

35
Magazine Paper

• '000 tonnes 1999 2000 2001 2002
• Deliveries to W. Europe 8,740 9,746 9,850 10,119
• Growth () 4.2 11.5 1.1 2.7
• Total deliveries WE supply 10,704 12,039 12,059 1
  2,465
• Growth () 2.3 12.5 0.2 3.4
• Capacity 11,514 12,433 13,235 13,828
• Growth () 4.9 8.0 6.5 4.5
• Utilization rate () 93.0 96.8 91.1 90.1

Source Cepiprint
36
Price Development Pulp Publication Papers
USA - 1995-2000 monthly
USD / tonnes
CWF / No.3 reels 90g
Newsprint 30lb East
NBSK
Source PPPC Economics /RISI forecast
SC-A 35lb
LWC Offset 40lb
37
Price Development Pulp Publication Papers
GERMANY - 1995-2001 monthly
DEM /tonnes Paper / US / tonnes Pulp NBSK
CWF reels 90g
Newsprint 45lb
NBSK
Source PPI Pricewatch
SC rotoreels 56g
LWC Offset 60lb
38
Packaging Boards

• West European January-March deliveries were down
  compared to last year cartonboards -1.4,
  containerboards -6.4
• Downtime brings inventories under control and
  plays a key role in price stability both in
  Europe and in the U.S.
• Further slowdown is expected in the months to
  come
• Consumer boards market outlook is cautiously
  positive while containerboard market will
  struggle with growing over-capacity problem

39
The Order Backlog Is Still Decreasing (14 Days
Production W 15)
Cartonboards Released order backlog CEPI
members
'000 tonnes
4 weeks MAV
1999
2000
2001
1998
40
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