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Q2 PAPER OUTLOOK -- Run of the Mill Demand

April 2003

Uncertainty and Iraq. In the first quarter of 2003, that's basically all that was needed to be said about the short-term outlook for the U.S. economy and all of its industry segments. In many cases, though, this extraordinary (in economic terms) concern masked underlying weakness in demand. That was true for paper and printing, alike.

The new year had been expected to mark a rebound in the paper market. Chiefly because of the aggressive moves made by manufacturers to bring capacity more in line with demand. The problem is, the demand side of the equation hasn't shown clear signs of performing as expected due to the aforementioned factors. Paper manufacturers started floating some modest price increases, but it still remains to be seen if the market will bear them.

A fairly steady stream of announcements about paper mill and machine shutdowns, along with company mergers and consolidations, provided isolated evidence of this realignment of industry capacity. The big picture can be seen in the recently released "43rd Annual Capacity Survey" conducted by the American Forest & Paper Association (AF&PA) in Washington, DC.

The survey report notes that, for the first time, total U.S. paper and paperboard capacity has declined in consecutive years. Capacity fell by 1.9 percent in 2001 and 1.3 percent in 2003, according to AF&PA. "The contraction reflects the industry's efforts to adjust to stiff foreign competition and a period of cyclically weak paper and paperboard demand," the report states.

Looking ahead, the association says its research indicates overall paper and paperboard capacity will remain essentially unchanged for the next three years. After declining slightly in 2003 (-0.5 percent), the survey forecasts marginal increases in capacity for 2004 (0.8 percent) and 2005 (0.4 percent).

All told, 40 mills and 104 machines were permanently closed in the 2001-2002 period, AF&PA says. Those numbers do reflect a change in its reporting procedures, though.

Under the previously followed ground rules, unless shuttered mills were immediately dismantled, they had to remain closed for one year before their capacity was removed from the survey. The association's current rules call for immediate removal of capacity from all shutdown machines where the owner's intention to close them permanently has been clearly stated in a public announcement. The net result is that two years' worth of capacity reductions have been removed from the current survey.

The capacity survey found similarities and differences in the numbers for individual paper grades.

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