PAPER MARKET OUTLOOK — Stocks Are on the Rise

Paper Mergers Covered

Mohawk Paper Mills, meanwhile, signed a letter of intent to purchase International Paper’s Fine Papers Business, which includes the writing, text and covers papers and artist papers segments. The Strathmore, Brite Hue, Via and Beckett brands are also to be transferred in the sale.

With growth in the U.S. economy expected to remain strong, but moderate from 2004 rates, the outlook for paper in the first half of 2005 is status quo. The mechanical paper sector is likely to remain the most challenging, in part due to a strike at UPM North America’s Miramichi facility along with work being done on machines by other producers.

One potential new wrinkle that popped up last year is the poor standing of the dollar relative to most major currencies. Paul Leclair, chief economist with the Pulp and Paper Products Council, tends to discount speculation about this trend having had an impact on the U.S. paper market.

“Exchange rates may not be as important as we sometimes think. Hedging operations enable companies to protect themselves against variations in currencies. They may be protected against exchange rate variations for six months to a year,” he explains. “Eventually, those positions do expire and then the exchange rate starts to kick in more significantly.”

Leclair expects the trend in exchange rates to remain basically the same or get weaker—despite some short-term, small appreciations in the U.S. dollar—through the first half of the year. This is due to longer term structural factors, he says, and will hold true for the dollar against all major currencies. Of particular significance for the paper market is the U.S. dollar’s weakness against the Canadian “Looney,” the economist adds.

The impact of the exchange rate with Canada can potentially be more significant since it is by far the largest source of U.S. imports, he explains. The weaker dollar makes Canadian mills less competitive and can also result in upward pressure on prices.

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