Industry Reports

Deutsche Bank Reports Summaries

071213 Deutsche Bank Report - Domtar Announces Closures

Deutsche Bank - Equity Research

Domtar {Ticker: UFS, Closing Price: USD 7.59, Target Price: USD 14.00, Recommendation: Buy}.

* Domtar announced today 342K tons/yr of uncoated free sheet capacity closures. The company plans to permanently shut its Port Edwards, Wisconsin mill (165K tons/yr) during 2Q08, and reorganize production of its Dryden, Ontario mill to reduce annual production by 177K tons. Today's announcement adds to the 220K tons/yr of UFS capacity shuts which Domtar previously announced this summer, for a total of 562K tons for the year.

* The announcement cannot be considered a surprise. Domtar previously disclosed that "further rationalization may be implemented in the near future," and UFS demand has been weak. U.S shipments of UFS are down 2.9% YTD, and even this number is aided significantly by positive trade flows driven by a weak US$. Actual U.S. purchases of UFS are down a sobering 6.6% YTD.

* Domtar is not the only one doing heavy lifting. Domtar's main competitor, International Paper, has announced the shut/conversion of 600K tons this year. Add actions by smaller competitors such as GP, Wausau, and Neenah, and we get to total industry capacity shuts of over 1.4MM tons, or over 10% of capacity, announced in 2007. We are impressed that the UFS industry is running ahead of the curve in removing capacity much faster than the decline in shipments.