The prospects for paper markets and the economy following the September 11th terrorist attacks are not good. To begin with, the economy will go into recession in the fourth quarter, and will then gain only 1.3% in 2002. Furthermore, the economic growth will shift from the consumer to other sectors such as government spending, which is a bad omen for paper demand. The recession will spoil the critical holiday shopping season, and everything from newspapers to magazines and catalogs will suffer from further declines in advertising and retail sales.

The coated paper industry will perhaps be harmed the most by the lower paper demand we are expecting in 2002. The industry is already bogged down by a sharp drop in advertising in 2001, and the new forecast of a mild economic recession in the fourth quarter (combined with a slow recovery in 2002) will make it all but impossible for advertising to come shooting back. Some publishers are already reporting a big decline in advertising for their December magazines. At best this could be a one month correction as advertisers adjust their campaigns. At worst it could signal another year of significant ad page declines in 2002. In addition, the proposed ~10% postal rate hike will most likely go into affect in the fourth quarter of next year. We had already incorporated this into our prior forecast, but it will nonetheless be a significant dampening factor in the outlook for both magazines and catalogs in 2002.

We cut our expected recovery in magazine ad pages for 2002 in half as a result of the economic conditions. Ad pages are expected to inch up only 1.6% in 2002, which is minimal in light of the 10%-11% drop this year. In addition, circulation will be hard pressed to show any gains with consumers in such a poor mood and with higher postal rates tying the hands of publishers.

Catalogs will be similarly affected by both the weak consumer spending and by the higher postal rates. We expect catalog circulation to drop slightly again in 2002, and we will continue to see trends towards lighter basis weight, cheaper papers, fewer page counts, and smaller trim sizes.

True consumption of coated paper will be showing minimal, if any, increase in 2002 because of these factors. The only reason we show any increase at all in apparent consumption is that we believe buyers will rebuild some inventory next year after a dramatic period of reduction in 2001. We estimate that consumer inventories of coated paper will drop about 200,000 tons in 2001 (by December 31st), and we are projecting a recovery of about 100,000 tons in 2002. This will allow purchases of coated paper to rise about 2% for coated groundwood and 5% for coated freesheet in 2002, but these gains are minimal compared to the respective drops of 5% and 11% in 2001. Again, most of the gain is due to inventory.

Worldwide capacity growth remains high for publishing papers despite the weak outlook for demand. Three new coated groundwood machines came on line within the past year in Europe, and North America is now set to take over the helm as major expansions are planned by Bowater, Kruger, and Madison. SC expansions are also underway at Abitibi, Great Northern Paper, SCA Laakirchen, and Stora Langerbrugge. Major coated woodfree expansions in China and Europe also threaten to keep that market very competitive despite a lack of capacity growth in North America.

The bottom line is that paper demand growth will be weak, while producers face a need to place new tonnage in the market. Thus, we expect coated paper markets to remain a buyers market for the rest of 2001 and most of 2002 and 2003.

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