22 January 2009
DB Paper & Packaging
Boxed In: Paper & Packaging
in Recession
Mark Wilde
Research Analyst
(1) 212 250 5570
mark.wilde@db.com
Christopher Chun, CFA
Research Analyst
(1) 212 250 8342
christopher.chun@db.com
Debbie Jones
Research Associate
(1) 212 250 2956
debbie.jones@db.com
Fundamental, Industry, Thematic, Thought –Leading
Deutsche Bank Company Research’s Research Product Committee has deemed
this work F.I.T.T. for investors seeking differentiated ideas. Here our Paper &
Packaging team takes an in-depth look at how our sectors are likely to perform in a
global recession. Apart from impact on volumes, prices, costs, and earnings, we
have evaluated issues such as debt maturities, liquidity, and pension impacts.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Top picks
Silgan Holdings (SLGN.OQ),USD46.10 Buy
Ball Corporation (BLL.N),USD38.75 Buy
Crown Holdings (CCK.N),USD18.47 Buy
O-I (OI.N),USD21.11 Buy
Fundamental: No signs of near-term recovery
Volumes have dropped off markedly in most paper & packaging businesses over
the past 4 months and show no signs of near-term recovery. The downturn has
quickly become a global phenomenon. Volumes are soft around the world. Many
companies report that their business is weakest outside the US. A sudden dropoff
in Chinese demand has triggered a virtual free-fall in commodities like pulp &
wastepaper. With unemployment rising and indicators like the ISM index falling to
30-yr lows, there isn’t much of a case for near-term improvement.
Industry: Will paper companies continue to trade volume for price?
Can this climate of “industrial détente” be sustained if the downturn continues
and financial pressures intensify? Most producers have been battling to avoid
inventory bulges and the resulting sharp price corrections. As Q4 numbers should
reveal, the cost of market downtime is significant, but the potential downside from
lower prices is typically even larger. Signs of mounting financial distress across
the sector will provide “the acid test” for this new-found discipline.
Thematic: Strong US$ and pensions are key issues
After a 6-yr decline, the US$ has begun to rally. For packagers, the stronger US$
is primarily a translation issue on foreign sales & earnings. For paper companies, a
stronger US$ can reverse the recent positive trend in trade flows (more exports,
fewer imports) and put pressure on US$-denominated commodity prices. We’re
particularly concerned with the FX impact on containerboard & coated papers.
From an earnings perspective, a number of paper & packaging companies will see
a pension expense increase (or income diminish) in their reported earnings.
Thought-Leading: More restructuring ahead - - - apt to be dramatic
We think both the Paper & Packaging sectors will see further restructuring. For
shareholders in stable & well-capitalized packaging companies this could be a time
of great opportunity. For the paper industry, two decades of gradual change could
hit a dramatic crescendo. The combination of a sharp cyclical downturn,
accelerating secular trends and tight credit markets suggest deeper changes.
We’d rather own the packagers in the current market
Most packaging volumes tend to be relatively stable across the economic cycle.
Among the packagers, we favor the rigid container producers over the flexible
packaging producers as they have the lowest level of commodity risk and a high
level of market consolidation. We find Silgan the most intriguing among these
names, followed by Ball, Crown and OI.

Table of Contents
Boxed in?............................................................................................ 3
How will they perform in recession? ........................................................................................3
Key Issues................................................................................................................................3
Supply/Demand Issues ..................................................................... 5
Demand in a Recession? ..........................................................................................................5
Supply Issues.........................................................................................................................11
Currency Issues................................................................................ 14
Rising US$ compounds pressure from slowing economy......................................................14
Translation Effect of Stronger US$..........................................................................................16
Costs................................................................................................. 17
Costs of most inputs are falling ..............................................................................................17
Liquidity & Financial Issues ............................................................ 22
Debt Maturities .......................................................................................................................22
Interest Coverage....................................................................................................................23
Pension Issues........................................................................................................................25
Timber .............................................................................................. 32
Timber Discussion ..................................................................................................................32
The Stocks........................................................................................ 33
Too early for the papers..........................................................................................................33
What’s ahead for Packaging?..................................................................................................34
What Could Change the Story?...............................................................................................34
Top Picks .......................................................................................... 35
Silgan .....................................................................................................................................35
Ball .........................................................................................................................................35
Crown Holdings ......................................................................................................................36
O-I ..........................................................................................................................................36