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Q4 PAPER OUTLOOK -- Cuts in Capacity

September 2001

Paparozzi does note that he has begun to see printer confidence rise in NAPL's printing business index. "In our surveys, we are starting to see that printer confidence is beginning to rise. Our printing business index has leveled off after it peaked last August. However, it is important to recognize that the rising optimism is based on the expectation that the economy is going to respond to the tax and interest rate cuts by year's end," Paparozzi reveals.

Interest Rate Cuts
While key indicators appear to have stabilized for now, the economy's next move will depend on how well it responds to the stimulus that the U.S. Treasury and the federal government have applied.

The result of this current economic uncertainty is serving to fuel the merger fever that the paper producers have been caught up in this past year. "The market is extremely competitive and, given a stumbling economy, this could negatively impact the smaller mills and merchants, as they will not be able to survive the down cycle. We forecast more acquisitions and consolidation," states Brodock.

The slowing economy has also forced paper mills and merchants to look for ways to hang onto their existing business base by being more willing to negotiate prices than they would be in a more prosperous cycle, he claims.

"Opaque, as well as text and cover, mills are far more willing to negotiate than the coated mills. They are generally smaller and the economic slowdown has had a more direct impact on them," according to Brodock.

While not currently impacting printers, numerous consolidations followed by several mill closings could hurt paper availability, according to Roy Grossman, president of Sandy Alexander, in Clifton, NJ.

"Uncertainty is the key word here. With Sappi's withdrawal from the U.S uncoated paper and converting paper segments, we see a lack of stability in the short term. Availability, until recently, has not been an issue. However, due to production cutbacks, it is beginning to tighten."

And printers can expect to see even more cuts in paper capacity. "As expected, consolidation has removed some of the capacity. The larger economic force of the marketplace will remove still more. If not for the capacity withdrawals and mill closings over the last 12 months, prices would be much more volatile," Smith reports.

Although production cutbacks will have some impact on availability, Paparozzi is not worried about a possible paper shortage. "Eighty percent of the printers that we surveyed reported that paper is as available as always. We really haven't seen a change in paper availability. It remains very stable."

While the economy continues to take center stage, it is not the lone factor in lower paper prices. Further impacting pricing and availability in the U.S. paper market is the increase in imports from the European, Canadian and Asian markets. The year 2000 saw a 15 percent rise in imported coated paper, while U.S. production of coated paper fell by 1.5 percent.

"Our sources in the paper market have expressed concern with both foreign competition and the slowdown in our economy as they negatively affect the market overall," notes Brodock. He suspects that the domestic text and cover mills will be the most impacted by the growth of foreign grades in the American market.

Long-term View
Still, paper prices will remain stable and may drop even further with a struggling economy. Printers should not expect paper prices to remain low for long, warns Brodock.

"We suspect that once the demand increases, the mills will try to recover their past losses, as well as their increased production costs due to fuel prices being higher, which equates to an overall price increase. If the market demands weren't so weak, prices would have increased already."

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