::The Center for Paper Business and Industry Studies::

080219 Deutsche Bank Report - Dr. Paper's Pulse on Pricing (2/19/08)

Deutsche Bank - Equity Research

* UNCOATED FREE SHEET

Domtar, International Paper, Georgia Pacific and Evergreen are out with a $60/ton March price hike on 50-lb offset rolls, with other UFS grades set to follow. The increase comes shortly after many producers announced a $60/ton increase on cut-size paper for Feb. Preliminary Jan. UFS shipments declined -1% y/y. While demand is weaker, the market remains tight and North American UFS capacity is shrinking (reduced by 1.4M tons in ‘07), with further capacity reduction scheduled in '08 - - -Fraser Papers has curtailed 109K tons of capacity of its Gorham mill (one machine in late '07 and two more scheduled for '08).

* COATED GROUNDWOOD

Both Kruger and Myllykoski have announced $60/ton LWC price hikes for early April. Both are 2nd tier suppliers, but we think other producers are apt to follow with the LWC market remaining extremely tight. DB is receiving reports of 10-12 wk backlogs as customers stock up in anticipation of further hikes. Prices rose $30-60/ton in January as an unusually early Q1 price hike appears to have "stuck". According to one well-placed industry consultant, price on 40# LWC have risen $190/ton between June of 2007 and January of 2008. Shipment volumes rose 11.5% y/y in December (+2.9% YTD). It looks like a good environment for smaller LWC producers like Domtar to consider exiting the market.

* CONTAINERBOARD

The 7 largest producers (75% of North American market) have announced a $50/ton price hike for early March. Inventories remain lean, operating rates are high, and fiber costs are rising. The big obstacle will be making a containerboard price hike "stick" in the wake of sluggish box demand. December 6.8% drop in box shipments appears an "overstatement" on the downside, but it does raise a yellow caution flag. Smurfit-Stone plans to install six new corrugators (one per month) in the first half of '08 to create "super" plants, which will be capable of replacing as many as

2-3 existing plants.