::The Center for Paper Business and Industry Studies::

060830 Deutsche Bank Report - Containerboard Quarterly - Trying to Maintain Momentum

Deutsche Bank - Equity Research

* 2Q results

Most containerboard producers reported significant q/q margin
improvement in 2Q. Rising prices and modestly improving volumes were
the key drivers. While we remain cautiously optimistic, rising
inventories and a potentially slowing economy suggest a modest
erosion in momentum.

* Fundamentals

Fundamentals remain mostly constructive, but we are starting to see
some causes for concern. Inventories are still not high by
historical standards, but after several months of negative
variances, they are not nearly as lean as they were at the end of
last year. Box volumes increased nicely y/y during 2Q, but July saw
the growth rate moderate. This is broadly in-line with the trend in
the ISM manufacturing survey, which has been indicating slightly
slower growth in recent months.

* Pricing

After three rounds of price hikes within the last year,
containerboard prices are up $120-130/ton. Producers are
successfully pushing the containerboard hikes downstream into boxes,
but they are not getting anything incremental to offset other
increasing costs at the plant level, suggesting that box markets are
still competitive. Another price hike initiative in autumn has been
rumored, but it remains in doubt at this point.

* 3Q and beyond

3Q should see continued margin improvement. Volumes should be
seasonally strong, and average prices should be higher, as the third
round of price hikes continues to roll through into boxes. 4Q
results involve far greater uncertainty. Volumes become seasonally
weaker, and the y/y comps start to become tougher, since the current
rally began in 4Q05.

* Stocks

We remain constructive on most containerboard names. Valuation on
the stocks has not gained nearly as much as containerboard
fundamentals over the last few quarters, suggesting that investors
are concerned about the current rally's staying power. Our favorite
name in this group remains TIN, because of its high asset value.

060830 Deutsche Bank Report - Norampac closing Red Rock

Deutsche Bank - Equity Research

Containerboard producer Norampac, jointly owned by Domtar and
Cascades, has announced that it will indefinitely shut its 300K tpy
kraft linerboard mill in Red Rock, Ontario. The company cites poor
financial conditions, principally related to fiber and energy costs
and a strong CN$. The shutdown is to take effect within 90 days.
The mill represents about 20% of Norampac's total containerboard
capacity, and a little less than 1% of total NA containerboard
capacity.

We are somewhat surprised by this announcement. Linerboard prices
are up $120/ton over the last year, and the YTD operating rate for
linerboard in the US is 98.9%. Granted, this high operating rate
has driven 270K tons of containerboard inventory build YTD, but even
an operating rate driven strictly by supply/demand (with no
inventory build) would have been about 97% this year. This
announcement underscores just how acute the fiber and energy issues
are in eastern Canada. It also suggests that the much rumored fall
price hike initiative was a dead issue without this closure. With
the closure, the prospect of a fall hike may be back in play.

060829 Deutsche Bank Report - Newsprint Quarterly: Modest improvement continues

Deutsche Bank - Equity Research

Q2 results: modest improvement continues
Industry prices were approximately $18/ton higher Q/Q. Producers
have been showing better performance in recent quarters but remain
far away from acceptable returns. High energy and raw material
costs, along with a strong CN$, are diluting the benefit of higher
prices.

Demand
The consumption decline continues to accelerate into 2006.
Consumption at the U.S. dailies fell 9.0% y/y during July. YTD the
decline is 7.6%. We think 20% of this decline can be attributed to
lower basis weight papers. Most of the decline, however, is owed to
declining circulation, fewer advertising placements, and the removal
of elements like the stock tables.

Pricing & Costs
Prices rose approximately $18/ton sequentially during Q2. Abitibi
announced a $40/mton price hike initiative for August, but the
effort has been scaled back to $20/mton. This early concession,
along with reduced operating rates, suggests that pushing through
additional hikes is becoming increasingly challenging. North
American operating rates, which had averaged 95% for the first half
of the year, have declined to 93%, historically a tipping point for
producer pricing power.

Valuation/Risk
We struggle to make a fundamental case for the two companies in this
report that we cover, Abitibi and Bowater. They are trading at 0.5X
and 1.0X book value respectively. We are not projecting either to
produce positive EPS this year, and even given the earnings
improvement we are forecasting for '07, the stocks will still trade
at high multiples. With structural pressures intensifying, there
will likely be a need for additional capacity closures.

060828 Deutsche Bank Report - Dr. Paper's Pulse on Pricing

Deutsche Bank - Equity Research

Recycled Board
The market is very snug. CRB prices increased $10/ton in July, and
there is an announced September price increase for $25/ton-$60/ton.
August operating rates in CRB have been near 100%, and backlogs are
as high as 8 weeks in some cases. Cascades is purchasing CSAR's
Sprague mill and the order book at 2 Simkin's mills. The Simkins
mills will both be shuttered. Cascades also has an option on
equipment at CSAR's Rittman, OH mill, which may lead to its
closure. TPG's acquisition of Field Container creates the largest
market player with 28% of capacity.

Panels
The structural panel composite rose $11/msf to $287/msf last week.
The benchmark grade of OSB (7/16" in the North Central region) rose
$5/msf to $175/msf. Some Northern producers are reporting that
current OSB prices are below production costs. Earlier this month,
LPX announced the indefinite closure of a 500K msf Quebec OSB mill
(pointing to high wood, transportation & energy costs as well as the
strong CN$). Closures by Kruger and Tembec have also been
announced. Concern over surrendering provincial cutting rights may
be delaying some shutdowns.

Newsprint
Abitibi was forced to roll back its $40/ton August hike initiative
to $20/ton, a worrisome sign for producer pricing power. Continued
consumption declines may necessitate further capacity shuts. Still,
U.S. newsprint prices are up over 50% off lows set in 2002. Over
that same period NA consumption has fallen from 11.4MM to 10.0MM
mtons. July consumption by U.S. dailies was down 9.0% and is down
7.6% YTD. Export mrkts have offset weak demand, but that could
change with 1.8MM tons of Asian capacity growth. We think small
amounts of Chinese newsprint will hit West Coast.