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Under Pressure: Paper Costs and Industry Escalations


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Under Pressure: Paper Costs and Industry Escalations

  1. 1. Under Pressure: Paper Costs and Industry Escalations
  2. 2. Objectives <ul><li>Explain the way economic downturns have caused decreased capacity in the market, shifted raw material availability and escalated prices </li></ul><ul><li>Create a better understanding of these factors so that you may explain to YOUR customer why prices have increased </li></ul><ul><li>Show Glatfelter costs and forecasts for the mill </li></ul><ul><li>Through education, offer Glatfelter support, as a supply chain partner, to help you keep your businesses strong in these difficult economic times. </li></ul>
  3. 3. Themes <ul><li>The paper business continues to be under pressure </li></ul><ul><ul><li>Demand </li></ul></ul><ul><ul><ul><li>Economy in recession </li></ul></ul></ul><ul><ul><ul><li>Seasonal slowdown </li></ul></ul></ul><ul><ul><ul><li>Inventory drawdown </li></ul></ul></ul><ul><ul><ul><li>Decline in the use of paper </li></ul></ul></ul><ul><ul><li>While commodity prices are moderating, several cost inputs are continuing to increase </li></ul></ul><ul><ul><li>Price / Cost gap causes margin squeeze </li></ul></ul><ul><li>We are well positioned to do better than our competition, but this is dependant on strategy and forecasting </li></ul><ul><li>Demand generation, cost control and continuous improvement remain critically important </li></ul>
  4. 4. Glatfelter Mill Chillicothe, OH
  5. 5. 5) Converting & Shipping Paper Making process 1) Wood Yard 2) Digesting and Pulping 4) Paper Making 1-2 Football fields in length 3) Washing – screening Bleaching (ECF)
  6. 6. Wood Chips <ul><li>Wood chips, which are used to make pulp, are a byproduct of sawmills </li></ul><ul><li>When housing construction slows, business slows at sawmills and the supply of chips tightens </li></ul><ul><li>Some sawmills have shut down completely, meaning papermakers also incur higher transportation costs when they have to haul chips further distances from alternate sawmills. </li></ul>Print Solutions magazine, August 2008
  7. 7. Glatfelter Wood Costs <ul><li>Wood </li></ul><ul><li>Increased competition for wood products. We are having to compete with pallet lumber and post manufacturers for material that is pulpwood sized but being used for other products. Sawmill chips are more expensive because of demand for them being used for wood pellets, bio-fuel, and agricultural bedding. </li></ul><ul><li>Diesel fuel cost increases. Although lessening some now, fuel cost has had a huge impact on wood and fiber cost over the last two years. </li></ul><ul><li>Increased labor, insurance and equipment cost.  </li></ul>
  8. 11. N.A. UFS PAPER MACHINE CAPACITY RANKINGS (2005 - 2008) Red = PM Closures Blue = Operating PMs Yellow = GLT PMs PMs both large and small have been shut as companies strive to cut costs and refocus on core competencies. 2.8 M tons of capacity shutdown since 2005
  9. 12. Why have we avoided the same fate? <ul><li>Market position – leadership positions and / or niche markets </li></ul><ul><li>Customer intimacy </li></ul><ul><li>Diversification & flexibility </li></ul><ul><li>Hard work by all employees to address costs </li></ul><ul><ul><li>DRIVE </li></ul></ul><ul><ul><li>North American Restructuring </li></ul></ul><ul><ul><li>Continuous Improvement </li></ul></ul><ul><li>Collaborative labor relations </li></ul><ul><li>Integrated mills </li></ul><ul><ul><li>Neenah example of an “At-Risk Mill” </li></ul></ul><ul><li>Successful New Product Development engine </li></ul>
  10. 13. NA - UFS MILL INVENTORIES Inventories continue to trend downwards as producers try to balance supply with falling demand Source: PPPC
  11. 14. NA SHIPMENT TRENDS ( Printing & Writing Papers) <ul><li>N.A. P&W shipments fell by - 400k tonnes from Oct to Nov and posted a -22% Y/Y drop as all grades experienced significant declines (UGW: -20%; CGW: -32%). This marks the 9 th consecutive Y/Y drop in total P&W shipments. </li></ul><ul><li>UFS shipments fell by - 140k tonnes from Oct to Nov and posted a staggering -18% Y/Y drop. All UFS segments (offset, envelope, forms and bond) were down significantly. This marks the 9 th consecutive drop in Y/Y shipments. </li></ul><ul><li>CFS shipments fell by nearly - 80k tonnes from Oct to Nov and posted a record -22% Y/Y drop. This marks the 11 th consecutive drop in Y/Y shipments. </li></ul>November ‘08
  12. 15. Specialty Papers U.S. Uncoated Freesheet Market Overview – Profound Structural Change Consolidation in N.A. paper industry has changed the competitive landscape. Boise Cascade Weyerhaeuser SD Warren Champion Union Camp Willamette Consolidated Mead Crown Vantage Great Northern Chesapeake Pentair Finch Pryun Hammermill James River 1998: Numerous Producers Vying for Market Share International Paper 2007: Top 5 Producers With Over 80% Market Share Domtar Boise Cascade International Paper Georgia Pacific Industry landscape has changed very rapidly More globally focused Fewer players
  13. 16. Inputs <ul><li>Freight </li></ul><ul><li>Raw material </li></ul><ul><li>Finished Paper </li></ul><ul><li>Chemicals </li></ul><ul><li>Sulphuric Acid </li></ul><ul><li>Caustic </li></ul><ul><li>Starch </li></ul><ul><li>TiO2 </li></ul><ul><li>Lot more… </li></ul><ul><li>Power from </li></ul><ul><li>Coal </li></ul><ul><li>No 6 Fuel Oil </li></ul><ul><li>Wood Pulp </li></ul><ul><li>Hardwood </li></ul><ul><li>Softwood </li></ul>
  14. 17. Market Cost Trends - NBSK Pulp 13-year trend RISI list price NBSK 2-year forecast – 2009/2010 NBSK List Price 13-year Trend (2009 Forecast up 20% since 2006) <ul><li>PULP </li></ul><ul><li>Uncertainty in Global financial markets – downward </li></ul><ul><li>Increased producer pulp inventories – downward </li></ul><ul><li>Pulp producer downtime increasing – downward </li></ul><ul><li>NA printing and writing paper YTD shipments and demand down > 6% year-over-year – downward </li></ul><ul><li>Alternative uses for wood – upward </li></ul>
  15. 18. Market Cost Trends – Coal NAPP Coal Price (RED) 3-year Trend (Up 122% since 2006) <ul><li>COAL </li></ul><ul><li>  NA market price increased over 300% in 2008 ; Q4 2008 down 33% </li></ul><ul><li>Global demand drove pricing escalation; current recession is resulting in demand destruction </li></ul><ul><li>2009 market pricing up 60% year-over-year 2008 </li></ul>
  16. 19. <ul><li>  </li></ul><ul><li>STARCH </li></ul><ul><li>Alternative uses of corn (ethanol, corn syrup, cosmetics) – upward </li></ul><ul><li>Corn pricing escalation of 100% in 2008; recently recovered to early 2008 pricing levels – neutral </li></ul><ul><li>Corn starch supply/demand imbalance – upward </li></ul><ul><li>Corn starch conversion costs up 8-10% in 2009 ; total cost is driven by corn pricing </li></ul><ul><li>LATEX </li></ul><ul><li>Input cost escalation for styrene and butadiene in 2008 resulted in latex pricing increases of > 30% </li></ul><ul><li>December 2008 pricing for styrene and butadiene has returned to 2007 levels </li></ul><ul><li>Latex pricing is slower to recover due to supplier consolidation and production reductions in NA ( Two 20% increases by Dow ) </li></ul><ul><li>Q1 2009 pricing up 24% over 2008 average market pricing </li></ul>Market Cost Trends – Starch & Latex
  17. 20. Market Cost Trends – Caustic & Sodium Chlorate Caustic 2-Year Trend – Up 220% since 2007 Source: Harrimon Gulf Coast Pricing Source: CMAI, Delv’d US Sodium Chlorate (contract prices) 6-year Trend (up 36% since 2006) <ul><li>SODIUM CHLORATE </li></ul><ul><li>Supply/Demand imbalance resulting in tight supply – upward </li></ul><ul><li>NA producer production curtailments – upward </li></ul><ul><li>Electrical costs increasing – upward </li></ul><ul><li>Global weakness in the pulp and paper market; resulting in improvement in inventory and supply/demand – neutral </li></ul><ul><li>2009 pricing projections up 9% from year end 2008 </li></ul><ul><li>CAUSTIC </li></ul><ul><li>Chlor-Alkali imbalance globally/resulting in NA operating rates less than 70% – upward </li></ul><ul><li>North American supply consolidation and downtime – upward </li></ul><ul><li>Global recession and housing market decline – upward </li></ul><ul><li>Five force majeures with NA producers in 2008 – upward </li></ul><ul><li>Import market competition on the East and West Coast – downward </li></ul><ul><li>NA caustic pricing is up 150% year-over-year 2007/2008 ; 2009 pricing down 18% over 2008 year end pricing </li></ul>
  18. 21. 5 Year Price Trend Major Chemicals Unprecedented escalation in raw material costs in the past 5 years
  19. 22. How far does $500 go? Domtar study, Print Solutions August 2008
  20. 23. Summary <ul><li>Input costs including Wood, Chemicals, Starch and Freight continue to increase at unprecedented rates </li></ul><ul><li>Demand for paper has decreased, inventories are declining and paper machines continue to shut down </li></ul><ul><li>Supply consolidation and unanticipated downtime has resulted in very tight supply in commodity markets; driving pricing </li></ul><ul><li>Chemical price indices (CAGR 8%) is significantly outpacing Paper price indices (CAGR 3%) </li></ul><ul><li>Glatfelter is pursing a variety of cost reduction initiatives to offset the price / cost gap. We are working every day to keep prices down and help offset the anticipated raw material increases in 2009 </li></ul>