OTT3107-domtar

I’m continuing to accumulate share in Domtar as I believe paper products will continue to be consumed. Here’s a brief analysis:

The North American Uncoated FreeSheet (UFS) market has eroded by 2.5-3.5%/year since 2000. In spite of this prices rose steadily through 2007/08 to where cut size copybond reached $1075/st in some markets. If these prices are to be maintained as the total market slides from over 13 million tons in 2003 to the current 10.7 million, all the major producers will have to curtail production. This does not mean just temporarily shutting machines but rather permanent shutdowns. Boise in Oregon shifted one paper machine to release papers while GP changed over two machines from UFS to tissue and towelling (also in OR). However, Domtar did not just shut down #2 paper machine at Plymouth but announced an expansion of the Fluff Pulp business with the additional softwood pulp now made available. This would seem to be a very wise strategic move.

First impressions were that Domtar would have been further ahead shutting down their older/smaller sulphite mill at Rothchild, WI rather than the comparatively newer/larger/faster machine at Plymouth. However, this overlooks the fact that Plymouth already is in the Fluff Pulp business and could easily expand this global business if more fiber was available. Shutting down this machine will free up about 250,000 tons of fiber. Granted 75% of this pulp had been hardwood which is not used in Fluff Pulp, but this can be easily corrected as the pulp mill begins to source more Pine logs and cook softwood instead of hardwood. Fluff Pulp has been a grade that has been on a roll for the past decade. It is now a 5 million mt/year market with new diaper plants starting up weekly in the Middle East as well as Latin American. Because of the very desireable Slash Pine fiber (thicker walls), the 7 US companies enjoy an 80% market share. Adult briefs are another product which uses Fluff Pulp and the world’s aging population would indicate this is another guaranteed growth area. The same can be said for feminine hygiene products and incontinent pads for hospitals and nursing homes. Without a doubt, this strategic move was well thought out and should prove to be immediately beneficial especially in light of the fact that Fluff Pulp is selling for a $175/admt premium over baled papergrade softwood sold on the spot market.

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