Industry Reports

Deutsche Bank Reports Summaries

080125 Deutsche Bank Report - January Newsprint Monitor

Deutsche Bank - Equity Research

* Weak demand, but tight inventories

December newsprint statistics show that consumption continues to decline briskly.   However, due to supply discipline and improving trade flows, inventories remain lean, and price hikes appear to be taking hold.

* Consumption trend is hard to interpret

Consumption at the US dailies fell a whopping 19.3% y/y in December, by far the biggest y/y decline ever reported.  However, the PPPC cover letter notes that this was caused in part by the fact that some publishers reported an extra week in December 2006, something that happens about one every five years.  Unfortunately, we do not know the market share of the publishers who reported an extra week, and therefore we cannot quantify the impact.  From a broader perspective, it seems clear that the consumption decline is continuing to accelerate.  On a full year basis, consumption at the US dailies fell 10.8% in 2007, compared to 7.1% in 2006 and 5.4% in 2005.

* Inventories remain lean

Inventories at the users fell 16K mtons to 705 mtons, and inventories at the mills rose 5K mtons to 367 mtons.  On a combined basis, the 11K mton decline in Dec. is roughly in-line with the 6K mton avg. decline over the last 10 yrs.  The combined inventory level of 1072K mtons is very lean from a historical perspective.

* Operating rates fell modestly m/m

The North American operating rate fell slightly m/m, from 91% to 90%.  The rate in Canada fell from 88% to 87%, and the U.S. rate fell from 96% to 94%.  The low rate in Canada is driven by the strong CN$, which squeezes CN mills.  These rates do not account for 515K mtons of closures announced by ABH for 1Q08.  Taking those into account, the North American operating rate would look like 94%.

* Overseas exports fell sharply

Curiously, overseas exports from North America fell 25.6% y/y.  We view this as a conundrum, considering the weak US$ and weak domestic prices.  Even with this sharp December decline, overseas exports for the year are still up 7.3%.  The small amount of imports from overseas fell 42.3% for the year.

* Prices/stocks

The $60/mton price hike initiatives announced by AbitibiBowater for1Q08 appears to be taking hold.  On top of the $25/mton price hike achieved in 4Q, this would take prices up $85/mton from the October low.  Unfortunately, even more price will be needed to take margins to acceptable levels.  While we think this is possible, we are skeptical that attractive margins can be reached and maintained over extended periods. We maintain our Hold rating on AbitibiBowater.