Industry Reports

Deutsche Bank Reports Summaries

080505 Deutsche Bank Report - IP Mill Explosion – Market Impact?

Deutsche Bank - Equity Research

International Paper {Ticker: IP.N, Closing Price: USD 25.73, Target Price: USD 40.00, Recommendation: Buy}.

An explosion occurred on Saturday at IP's Vicksburg, MS containerboard mill, killing 1 worker and injuring 17 others. The explosion occurred as contractors were restarting the mill's recovery boiler after an annual maintenance outage. For virgin fiber (kraft) mills like Vicksburg, the recovery boiler is essentially like the mill's lungs - burning residual "black liquor" from the pulping process, allowing for the recovery of process chemicals and generating much process heat needed for cooking the pulp & drying the l'board. No boiler, no production.

Our initial reports from IP suggest that the 560K tons/year linerboard mill will be out of production for a minimum of 2 months.

The mill represents over 10% of IP's total containerboard production and roughly 2% of US linerboard supply. With operating rates in the mid-upper 90's - - - l'board at 96.2%, containerboard at 97%, a prolonged outage would tighten supply/demand fundamentals.

A game-changing event? IP can shift production around its mill system and should be able to maintain product flow to its own box plants. The box plants consume around 70-75% of IP's mill tonnage. The impact on outside ("open market") sales will be more profound. IP is a large seller of c'board into the domestic & export markets. IP will have trim these sales. Customers will have to scramble for supply. With operating rates high and inventories already relatively snug, there isn't much visible slack in the system.

The Vicksburg outage immediately raises the probability of an uptick in industry prices over the next few months. It is probably too late to salvage a spring price increase, but raises the prospects for a mid/late summer price initiative.