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

061218 Deutsche Bank Report - Containerboard Quarterly - On Thin Ice

Deutsche Bank - Equity Research

* 3Q's bronze box award goes to PKG

PKG had the best operating margin at 13%, and it tied SSCC for most
improved, as both companies improved their operating margin by 3%
points q/q and by 8% points y/y. PKG's strong performance resulted
in record quarterly EPS.

* 3Q results

3Q was a strong quarter, both cyclically and seasonally. Most
containerboard producers delivered significant margin gains, both
q/q and y/y. Additional flow-through on earlier price hikes along
with seasonally strong volumes were the key performance drivers.

* Fundamentals

After a year of solid volume gains, fundamentals are beginning to
slip. Inventories have been rising steadily and now stand about 15%
above last year's low. Box volumes have moderated in recent months.
Indeed, October & November saw y/y shipment declines, the first
negative comparisons in more than a year. The steady decline in the
ISM index suggests further weakness ahead.

* Prices

There is widespread producer support for a $40/ton price hike
initiative in January. The mills have pushed through 3 hikes since
last autumn. However, this latest effort appears the most
challenging to date. Inventories have risen and demand is easing.
Moreover, three successful price hikes and moderate OCC costs have
provided nonintegrated recycled mills with margin leeway to compete
on the basis of price.

* 4Q and 2007

4Q should show y/y improvement thanks to the price hikes implemented
throughout 2006. Results are apt to soften on a q/q basis thanks to
the usual seasonal softening. Looking beyond 4Q, results will hinge
on the direction of pricing. While a move in either direction is
plausible, the risks appear skewed to the downside.