MAJOR MAIL USERS

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• MAJOR MAIL USERS
• Updated 8 June 2004

2004
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Economic TrendsLeading Indicators for Europe
USA
The composite leading indicators for Western
Europe and USA, which point to short-term general
economic development, show that following a low
point in early 2003, there is a positive trend
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Economic InfluencesU.S.A. Economic Sentiment
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The Forecast is for Global Growth
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Economic InfluencesAustralia is doing OK
Until the 1990s Australia actually lagged behind
other countries in terms of per capita GDP
growth. Australia has lifted its ranking among
OECD countries from 15th to 7th over the past
decade. Australias inflation rate has also been
lower than the OECD average for the first time
since the 1960s. In purchasing power terms,
Australians have a per capita real GDP which is
112 of OECD average, compared with USA 150,
Euro Area 105 and New Zealand only 88
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Woodfree Paper Demand and OECD Leading
Indicators
This chart compares total Woodfree paper demand
with the composite leading indicator from the
OECD. The leading indicator confirms a market
upturn is taking place.
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Paper Demand vs GDP
Up to 2000, paper demand corresponded closely to
GDP development, but the paper markets suffered a
serious setback in recent years.
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Economic InfluencesSharemarkets - An indicator
of Advertising Spend
Share prices in major markets are now trending
upwards after major falls. They are still below
the levels of 1998-2000. An improvement in Share
Prices is a good indicator of higher expectations
for Corporate Profitability and hence Advertising
Marketing spend. After several false starts,
the US share market appears to be on an uptrend.
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The Advertising DriverAdvertising to GDP Ratio
Despite strong upwards movements in the 1980s
and late 1990s, in recent years, Advertising
Expenditures have declined seriously relative to
GDP. The ratio of AdSpend to GDP in West Europe
has recently fallen, from a high of 1.05 to
about 0.9 That is about the same level as
1987. The fall in the US ratio is even larger,
from 1.1 to 0.87.
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The Advertising DriverAdvertising vs Coated
Woodfree Demand
This chart shows a relationship between the role
of Advertising in the economy and the resultant
market for Coated Woodfree demand in Europe. When
the upturn does come we might be surprised by the
strength in the recovery of paper demand ...
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Demand Trends European Coated Woodfree
European coated woodfree markets showed strong
growth until 2000 and since have shown negative
growth, primarily due to a collapse in the
advertising market
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Demand Trends European Uncoated Woodfree
Uncoated woodfree reels and sheets are a mature
market with essentially no growth (and an
emerging contraction). Cut reams have retained
strong growth until recently but growth since
2000 has also been close to zero. Growth may now
be beginning to re-emerge. While the growth pause
in cut reams is unlikely to be structural, the
cannibalisation of UWF sheets and reels markets
by cut reams must exhaust itself at some point.
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Historical Market Growth
This chart shows that growth in 2002 was 3.4
following -3.6 in 2001, which was the worst
growth period for many years. The chart also
shows that previously following recessions the
following years have been the strongest for
growth. This pattern may be repeating itself
again
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Global Paper Market Grade Growth
Global paper market demand was forecasted to grow
moderately in 2003, following the drastic
declines in 2001, and for growth rates below
historical averages going forward.
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EMGE World Demand Forecast by Region
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Technological InfluencesA Paperless Society?

• Only a few partial successes so far in creating a
  paperless office.

• More e-mail More paper
• More Internet More paper

• More computers More paper
• More electronic storage More paper

• Up until now, the more office automation, the
  larger the demand for paper
• Display technology high speed wireless
  communications is the key to paperless for a new
  generation who have grown up with screens
  electronic transactions. The technology is
  becoming affordable will soon be cheap.
• Schools are beginning to replace paper textbooks
  with CD Roms, Universities are going on-line with
  texts, the finance insurance industries are
  introducing minimum paper policies.
• Is major change is moving nearer? There are
  clear clues to a future with a low need for
  printing papers.
• Is reduction of secretarial work a lead
  indicator?
• Are companies being held back by their IT
  departments?

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Technological InfluencesThe BCG Predictions As
true now as in 1999

• A 1999 Boston Consulting Group study predicted
  that by 2003
• Of the three office paper sectors considered in
  the study, cut-size, special repro and
  envelopes/forms/labels, only cut-size will grow
  significantly - others will shrink
• A rise in e-mail will result in a significant
  loss in envelopes
• Paper for forms will drop and there will be a
  significant shift away from pre-printed
• The shift from offset printing, the rise in
  colour and demand for smaller product units will
  fundamentally alter the landscape of
  distribution, calling for strong
  retail/distribution skills, appropriate branding
  and knowing what the end-consumer wants.
• Direct substitution by on-line access will reduce
  demand of magazine paper by 6.4 when compared
  with the trend line - the biggest impact will be
  financial magazines
• Paper for catalogues will be reduced by 12
• 9.5 of total 1996 paper consumption by books
  will be lost to electronic substitutes
• Traditional reference books are already the
  biggest losers - encyclopaedias have been all but
  wiped out - and the study predicts technical,
  scientific, travel and education books will
  follow as electronic databases continue to
  expand
• Entertainment-oriented books will be the least
  affected, with fiction least likely to go online.

Recent data indicates that these BCG predictions
are quite accurate
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Technological Influences Paperless office?
The US market trend for Office Paper is similar
to the Australian trend
a decline in office use, but continuing strong
growth in home use. An underlying question isDid
the figures in this graph take into account a
fall in the total number of office workers?...the
lb/worker/yr figures are not without some
unanswered questions.
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Maybe things arent that bad at least in office
This graph, from The Age/SMH Employment Forecast,
indicates that the fall-off in office paper
demand we have seen is primarily due to a
temporary levelling/fall-off in the number of
office workers. This is now recovering.
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Comments on 2003

• Market Growth PW papers
• Western Europe 1.3
• North America 0.1
• Rest of World 3.7

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Industry Consolidation 1990 - 2003
This chart highlights the dramatic development in
industry consolidation, by comparing the Top 5
producers in 1990 and 2003. The size of leading
companies has changed so much that the size of
the Top 5 in 1990 would account for less than the
Top 2 leading players today.
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Trade InfluencesGlobalisation Integration

• The world fine paper industry is restructuring
• Larger groups continue acquiring eg Stora Enso
• Similar aggregation has occurred in merchants
• gt 66 of European ( world) production have their
  own pulp within the group Only just over 30 of
  pulp is market pulp
• Massive growth in Asia (mainly China) is still
  the wildcard
• This can facilitate
• Decoupling of pulp paper prices
• Action to prevent price collapse
• A pulp price squeeze on unintegrated companies
• to force closure or sale to large groups
• Rationalisation of production with closure of
  less
• efficient assets and single product operation of
• remaining assets

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Trade InfluencesRegional Trade Trends
There are wide differences in trade between
different world regions. Significant
developments are expected in trading patterns,
especially for Japan and North America. Japanese
paper companies now looking to establish world
scale machines in China and close old,
uncompetitive machines in Japan.
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Trade Influences PW - Nth. America vs W.
Europe, 1990 - 2003

• Capacity in N. America has been shutting down in
  both PW and packaging
• Exports from Europe to USA have increased
• USA paper companies have poor profitability
• European mills have bigger, newer, better
  machines which are generally kept more up-to-date
• The value of paper to the customer is trending
  towards the same prices wherever - in Western
  Europe or in North America

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Trade InfluencesPW - Nth. America vs W. Europe,
1990 to 2003

• Size is an emphasis for the Big European
  companies
• Europe is investing in maximising capacity of
  existing machines
• US is Closing out of date assets and NOT
  reinvesting
• Short term vs long term sharemarket and corporate
  focus
• Short Term Share Price vs Long Term Value
  Generation driver

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Trade InfluencesCapacity Growth
This chart compares annual paper machine capacity
growth in the 1990s with the forecast. In the
coming years, the rate of capacity growth is
expected to decelerate sharply, to just 1.0
pa. Growth in China is still very high, but there
is a net reduction in capacity in USA, Japan and
some other Western countries.
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Capacity Increases are Slowing
The growth emphasis is on existing machines for
quality improvements, grade substitution,
efficiency productivity
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Demand is now growing faster than Capacity
For the coming three years, EMGE suggests that
world PW paper demand is likely to grow at a
faster pace than capacity
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Demand-Supply BalanceUncoated Woodfree
Market oversupply in uncoated woodfree is
relatively minor and should be addressed within
the next few years. To some degree, this is
dependent on the greatly oversupplied coated
woodfree sector tightening, as some CWF capacity
is being diverted to UWF.
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The Industry DilemmaVolume Growth without
Revenue Growth
Although the forecast trend for paper volumes
shows a long-term positive growth of 3.1, the
monetary value of the global paper market is, at
the best STAGNANT. The implications of this
dynamic for business strategy in the industry are
major.
More Tonnes, Less Revenue !!!!
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The Industry DilemmaContinuously Falling Prices
Our industry has a 30 year history of prices
falling by 2 - 3 pa in real terms
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The Industry DilemmaDestroying Shareholder Value
!
Since 1994, the industry has been destroying
shareholder value ...
... But Forest Products hasnt been much
affected by recent world share price falls
World Share Index
Forest Products Paper
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The last 2 years seen very poor results
In 2002 and 2003, only UPM-Kymmene had acceptable
operating margins in fine paper production in
Europe. Over the last several years, the average
industry return has only PEAKED at 6.5 and has
generally been below 5. The paper industry is
the most capital intensive of all industries
without exception.
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Pulp Price Cycles 1982 - 2003
The chart shows the cyclical development of
market pulp prices. The two-decade repeatability
of market prices is quite amazing The forecast is
for another pulp price cycle in 2004 - 2006, with
a peak in 2005. Present across the board pulp
price rises may be a precursor to the next
cycle. The pulp price trendline is at about USD
500/ADt and falls at about USD 10 per year.
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Paper Price Cycles
Paper prices in this business cycle delayed their
fall, but have now fallen in a similar way to
previous cycles. Consolidation among the leading
suppliers initially led to better capacity
management and more proactive implementation of
machine downtime in the face of slack orders.
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EMGE World Price Forecast
The EMGE pulp and paper price forecast is
summarised in this table. Expectations are for
low prices in 2003-04, but strongly increasing
prices in 2005-06. Thereafter, in 2007, prices
are expected to tumble Overall, paper price
volatility is expected to play a key role in the
forthcoming market cycle, especially during the
period 2005 to 2007.
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In Summary