RISI Predict Depreciating Dollar Will Lead to Rise in US Prices - Low Growth Long Term

SAN FRANCISCO, June 23, 2003 - Economists at RISI, Paperloop's independent economic analysis group, are suggesting that an already weakened dollar will further depreciate providing pressure for more grades to go the way of newsprint. John Maine and Andrew Battista, covering the North American graphic paper market for RISI, recently reported;

The dollar is now down 12% versus the Canadian dollar and 23% versus the euro over the past 12 months, and absolute peak-to-trough decline has been even greater. The acceleration of this decline over the past month will clearly impact the market for printing and writing papers in the months to come. Furthermore, we expect the dollar to depreciate another 7%-9% by mid-2004.

While the weaker dollar may reduce the rate of growth in imports, they will not disappear, the primary impact will be more pressure to raise prices in US dollars from Canadian and European suppliers. The quickest response has come in newsprint where Abitibi-Consolidated has already put forth a price hike of $50 per tonne for August 1.

The grades of paper that will be affected the most are the mechanical (groundwood) grades where Europe and Canada have a large market share. SC and other uncoated groundwood specialties will see the biggest impact because 75%-78% of the US market is supplied from Canada or Europe. Newsprint is next in line, with about 53% share, and coated groundwood is a step down with a 26% share. The grades least likely to be affected are uncoated freesheet and coated sheets. In the first case, imports supply a small percentage of the market, and in the second case, the imports come primarily from Asia where exchange rates are more closely linked to the dollar.

Demand will be stronger in the second half of the year due to a combination of seasonal factors and stronger GDP growth. When combined with the weaker dollar, the market will be primed for price increases. We expect virtually all printing and writing products to get a price increase for the year.

The weaker dollar is also a key component in longer range forecasting of North American graphic paper demand. With the euro headed to a peak of 1.28 in late 2004, U.S. competitiveness will be restored in both domestic and world markets. Import growth will continue, but at a moderated rate, and import prices will be forced up by the weaker dollar. The disappointing performance in the first quarter of 2003 will be replaced by optimism for the remainder of the year and over the next two years. Now that the war has ended, economic growth prospects are excellent and GDP growth will accelerate to nearly 4%. Furthermore, ad spending that had been delayed during the war will be released in anticipation of a robust second half of 2003.

This optimism will be tempered however by a return to low growth prospects in the longer term. The five-year growth trend for North American graphic paper demand is only 1.7% per year, and this is even inflated by the fact that we are starting at the bottom of a cycle. Averaged over a full cycle, the real growth is less that 1% per year.

Learn more about RISI products and services at www.resourceinfo.com.

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