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AF&PA Survey Forecasts US Paper Capacity Decline

March 10, 2006 - The American Forest & Paper Association (AF&PA) released its 46th Annual Survey of Paper, Paperboard and Pulp Capacity today in New York, NY.

The Survey indicates that U.S. paper and paperboard capacity continued to edge lower in 2005, declining 0.8% to 99.3 million short tons. U.S. paper and paperboard capacity contracted 4.4% between 2000 and 2005 or at an average annual rate of 0.9%. The Survey indicates that paper and paperboard capacity will decline another 2.0% in 2006 and then expand slightly during the subsequent two years—rising 0.2% in 2007 and 0.4% in 2008.

The Survey covers U.S. industry capacity for the years 2005 through 2008 for all pulp, paper and paperboard grades. Industry total capacity by grade for all U.S. mills is included in the report.

OVERVIEW

Extending a downward trend that began in 2001, U.S. paper and paperboard capacity edged down 0.8% in 2005, to 99.3 million tons, according to AF&PA’s 46th Annual Survey of Paper, Paperboard and Pulp Capacity. In all, U.S. paper and paperboard capacity declined 4.4% between 2000 and 2005, or at an average annual rate of 0.9%.

The 2005 capacity reduction of some 760,000 tons reflected the removal from the Survey base of 45 machines, which was partially offset by capacity growth from improvements in efficiency and the ramping up of new tissue paper machines. In actuality, more than one- third of the machines removed in 2005 had already been idled in previous years, but they were retained in the base due to the prospect of re-start. However, subsequent information indicated that they would not be restarted.

Looking ahead, the Survey suggests that paper and paperboard capacity will decline 2.0% in 2006 and then edge up slightly during the subsequent two years — rising 0.2% in 2007 and 0.4% in 2008. The 2006 decline reflects the residual impacts of machines removed from the Survey base for part of 2005 and the scheduled closure of five additional machines in 2006. The capacity reductions associated with the shutdowns will be partly offset by the start-up of four new tissue paper machines in 2006 and an additional three in 2007.

U.S. paper-grade market pulp capacity rose 2.3% in 2005, but is projected to decline at an average annual rate of 0.7% during the 2006-2008 projection period.

PAPER GRADES

In 2005, U.S. newsprint capacity dropped by 867,000 tons—or 13%—to 5.76 million tons, its lowest level in two decades. Since peaking in 2000 at 7.46 million tons, capacity had plunged almost 23% by 2005. The capacity slump is reflective of declines in U.S. newsprint demand.

Newsprint capacity is expected to fall another 2.4% in 2006 to 5.62 million tons. At that point it will be 515,000 tons, or 8.4%, below the level projected in last year’s Survey for 2006. Almost half of that difference is attributable to the permanent shutdown of a previously idled mill during early 2005. The machine had been retained in last year’s Survey, although it had been indefinitely idled at the time. Roughly another 40% of the difference is accounted for by the conversion of capacity from newsprint to other printing & writing grades, mainly uncoated mechanical, which had not been anticipated to the same degree in last year’s Survey. Most of the remaining difference reflects a scaling back of capacity by several producers, presumably due in part to lower basis weights.

Finally, newsprint capacity is expected to decline another 1.7% during the final two years of the Survey period, reflecting further capacity shifts from newsprint to other printing & writing grades.

U.S. printing & writing paper capacity (excluding cotton fiber papers and bleached bristols) climbed from 25.75 million tons in 2004 to 25.92 million tons in 2005, a 0.7% gain. However, capacity is expected to decline in 2006 and 2007, by almost 588,000 tons over the two-year period before essentially flattening in 2008. The entire decline is expected to be attributable to uncoated free sheet, which is projected to drop by 626,000 tons over the period 2006-2008. The other printing & writing grades are expected to show little change during this period.

Uncoated mechanical capacity rose from 2.07 million tons in 2004 to 2.24 million tons in 2005, or by 8.2%. Most of the increase can be attributed to capacity conversions from newsprint to uncoated mechanical papers. No appreciable change in capacity is scheduled through the remainder of the Survey period.

Unlike newsprint and the free sheet grades, uncoated mechanical capacity in 2005 was not below its pre-recession 2000 level. Indeed, it was up almost 15% from its 2000 level, albeit that was still 3% below its 1996 peak. It should be noted, however, that a 260,000-ton machine that had been idled in late 2003 is included in the industry capacity for 2005.

U.S. coated mechanical capacity in 2005 amounted to 4.99 million tons, up 0.2% from 2004. Capacity swings into and out of coated mechanical tended to balance out in 2005. Capacity over the next three years is projected to rise by an average annual rate of 0.6%.

U.S. coated free sheet capacity rose from 5.02 million tons in 2004 to 5.13 million tons in 2005, a 2.3% gain. The gain represented the net impact of rebuilds and improvements partially offset by machine closures. Despite this gain in 2005, it was more than 485,000 tons, or 8.6%, below its 2000 peak. In addition, capacity is scheduled to drop another 2.6% in 2006 and then rebound slightly during the final two years of the Survey period.

The anticipated capacity level for 2006 of 5.0 million tons is more than 330,000 tons below that projected in last year’s Survey. Most of the difference between the two Surveys can be attributed to two machines that were permanently shut down during the second half of 2005 with the full impact of these shutdowns being seen in 2006.

At 13.56 million tons, uncoated free sheet capacity in 2005 was down 0.9% from 2004. The entire capacity of several machines that were idled indefinitely during the course of 2005, but were not officially recorded as being permanently closed until year-end 2005, are still included in the 2005 total.

According to the Survey, capacity after 2005 is scheduled to fall by about 625,000 tons to 12.93 million tons by 2008, representing almost a 5% decline over the forecast period – with the entire decline essentially occurring this year and next year. The reduction reflects not only the impact of capacity closures but also the impact of capacity conversions, mostly to unbleached kraft liner and to a lesser extent coated free sheet and specialty papers. These conversions were somewhat offset by shifts to uncoated free sheet from another printing & writing grade.

By 2007, uncoated free sheet capacity is projected to be at its lowest level since 1991 and 15% below the peak level reached in 1999-2000. Consequently, even if the industry were able to produce at its practical maximum rate in 2007, uncoated free sheet production would still fall 10% below the actual 1999 production level.

The growth of tissue paper capacity has slowed markedly from an average annual rate of 3.7% during the period from 1999 through 2002 to 0.9% in 2004 and 1.3% in 2005. No new machines came on line in 2005, but tissue paper capacity increased nonetheless due to the ramp-up and fullyear operations of the five machines that began producing in 2004. Some of the capacity from the new machines was offset by shutdowns at other locations.

Tissue paper capacity is projected to decline 0.5% in 2006 and then rise 2.2% and 2.1% in 2007 and 2008, respectively. Four new tissue paper machines are slated to come on line in 2006 and three additional machines are scheduled to come on line in 2007.

Kraft paper capacity is continuing to decline. Unbleached kraft paper capacity contracted 2.2% in 2005 and is slated to fall an additional 3.8% this year. Bleached kraft paper capacity declined 0.9% in 2005 and is expected to drop 30.5% in 2006. The 2006 declines are in part due to the removal from the Survey of a mill that closed in 2002 but was removed from the Survey base effective December 2005.

PAPERBOARD GRADES

U.S. linerboard capacity held virtually stable in 2005, declining just 0.2%. Unbleached kraft linerboard capacity rose just 0.1% and recycled linerboard capacity expanded 0.4%. Efficiency improvements in the unbleached kraft linerboard category were largely offset by the removal of three machines from the Survey base. The machines had been idled in previous years but were removed in this year’s Survey because more definitive information became available. Bleached linerboard capacity was reduced by half in 2005 due to grade shifts.

Total linerboard capacity is slated to decline 2.1% in 2006. Recycled linerboard capacity is expected to decline by 7.5% (328,000 tons), reflecting the closure of a large machine effective February 2006. Unbleached kraft linerboard capacity is expected to contract 1.0% (217,000 tons) in 2006 due in part to the residual impact of three machines being removed from the Survey base in the second half of 2005.

Total linerboard capacity is projected to rise 1.3% in 2007, with nearly the entire gain attributable to the unbleached kraft category. The gain is partly rooted in the planned shift of a machine from uncoated free sheet to unbleached kraft linerboard. Finally, total linerboard capacity is expected to edge up by 0.6% in 2008, according to the plans reported to this Survey.

U.S. capacity to produce corrugating medium rose 2.0% in 2005, with a 2.6% (174,000 tons) increase in the semichemical category and a 1.1% (48,000 tons) expansion in the recycled category. Corrugating medium capacity is slated to decline 2.0% in 2006 with nearly all of the decline taking place in the semichemical medium category. This reflects the full-year effect of a machine closed in mid-2005 and the shutdown of another machine at the end of December 2005. The Survey shows corrugating medium capacity stabilizing in 2007 and 2008, with relative stability in the two major grade categories.

Bleached paperboard capacity (excluding linerboard) increased 2.5% in 2005, reflecting shifts to bleached board production from other grades. Most of the 2005 bleached board capacity increase was registered by milk carton and food service board (+156,000 tons) followed by folding (+46,000 tons). Capacity for the “other” bleached board category declined by 52,000 tons in 2005.

The Survey indicates that bleached board capacity will decline by 6.5% in 2006, with the preponderance of the reduction taking place in the folding boxboard segment. The 2006 decline largely reflects the removal of a mill closed since 2002 but removed from the Survey base effective December 2005 and the removal of a machine at a different location in the first quarter of 2006. Bleached board capacity is slated to remain approximately stable in 2007 and 2008, with little change in the distribution of capacity among the sub-grades.

Recycled paperboard capacity contracted by an additional 4.7% in 2005, after declining 2.5% in 2004. Last year’s decline in recycled paperboard capacity spanned all of the major grade categories with folding down 5.8% (161,000 tons); “other” down 3.7% (106,000 tons); and set-up down 3.5% (7,000 tons). Three recycled paperboard machines were closed during the course of 2005 and have been removed from the Survey base effective the dates they were closed. Two additional machines that had been idle for several years were also removed effective January 2005.

The Survey shows recycled paperboard capacity declining an additional 0.8% in 2006 with most of the decline taking place in the “other” category, and then holding approximately stable in 2007 and 2008. Capacity to produce gypsum wallboard facings declined 1.7% in 2005, to 1.87 million tons. Capacity to produce this grade is projected to rise 0.1% in 2006, 1.0% in 2007, and hold stable in 2008.

Unbleached kraft folding boxboard capacity rose 1.6% in 2005, reversing a decline of similar magnitude in 2004. With no new machines or shutdowns in prospect, future growth will be incremental, according to the plans reported to this Survey with capacity rising 1.5% in 2006, 0.6% in 2007, and 0.4% in 2008. Average annual growth over the three-year projection period works out to 0.8%. During the 1990’s, by comparison, unbleached kraft folding boxboard capacity expanded at an average annual rate of 7.4%.

MARKET PULP

Paper grade market pulp capacity rose 2.3% in 2005 due to reclassification of pulp from affiliated to market, opportunistic sales at some integrated facilities and the closure of paper machines that resulted in additional pulp available for sale. There has also been a modest swing out of bleached hardwood kraft and into bleached softwood kraft over the past two years in the U.S. South. U.S. chemical paper grade market pulp capacity is expected to stabilize at approximately 9.6 million tons over the 2006- 2008 period falling by 0.7% on average during this three-year period. This compares to an average annual growth rate of 1.4% during the 1990s.

The complete 46th Annual Survey of Paper, Paperboard and Pulp Capacity.Survey with detailed tables may be purchased through AF&PA's website www.afandpa.org for $750, or by contacting Jared Davis at AF&PA (ph: 202-463-2738, email: Jared_Davis@afandpa.org).

SOURCE: AF&PA




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