Outlook for Book Publishing Papers: Capacity Closures Raise Concerns of Adequate Supply to the Market

Presented by:

John Maine, Vice President

April 2006

2

The U.S. Economy Reacts to Higher Interest Rates, Energy Costs, and Debt(Real GDP Growth, Annualized Percent Change)

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

95 96 97 98 99 00 01 02 03 04 05 06 07 08

Potential GDP Growth

3

$0

$10

$20

$30

$40

$50

$60

$70

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

We Assume Oil Prices Are Near a Peak(WTI Oil Price per Barrel in Current and 2004 Dollars*)

In 2004 Dollars

Nominal*Deflated by U.S. PPI for Finished Goods

4

High U.S. Home Prices Beget Risky Loans(Type of Mortgage Loan for Purchase, % of Total)

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005

Negativeamortization

Interest only

5

U.S. Economy Near-Term Outlook

2004 2005 2006 2007 2008

Real GDP% Ch. 4.2 3.5 3.3 2.8 4.2

ConsumerPrices-% Ch. 2.7 3.4 3.3 2.8 3.1

Fed. FundsInt. Rate-% 1.3 3.2 4.8 5.0 5.3

6

Canadian Dollar Not Tracking With Euro Any More Against U.S. Dollar, but Has Become an Oil Currency

0.85

0.95

1.05

1.15

1.25

1.35

1.45

99 0 1 2 3 4 5 6 7 8

0.6

0.65

0.7

0.75

0.8

0.85

0.9US$/Euro US$/CN$

CN$ (right scale)

Euro (left scale)

7

North American Demand for Publishing PapersRemains Stagnant

Negative Impact of Higher Costs for Paper and Postage

Loss of Market Share to the Internet– Advertising– Retailing (catalogs)– Communication– Remitting and Billing

Minor Recovery in 2006– Followed by no Growth in 2007

• Slowing Economy Again a Factor in 2007

8

U.S. Catalog Circulation Backtracks due to Higher Cost of Paper and Postage in 2006-07

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

97 98 99 0 1 2 3 4 5 6 7 8

Billions of Catalogs Mailed/quarter

Data: RISI

9

U.S. Magazine Ad Pages Will Gain Only 1%-2% Per year in 2006-2008

(seasonally adjusted quarterly ad pages)

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

98 99 0 1 2 3 4 5 6 7 8

Index 1982=1

Source: RISI Index created from PIB data

10

North American P&W Demand by GradeMillion Tons, % Change

2005 2006 2007 2008

Ctd. Woodfree 6.8 7.0 7.0 7.3 %ch -3% 3% 0% 3%

Ctd. Mechanical 6.5 6.5 6.6 6.8 %ch -1% 1% 1% 3%

Unc. Woodfree 14.5 14.6 14.4 14.5 %ch -4% 1% -1% 0%

Unc. Mechanical 6.8 6.9 7.1 7.4 %ch 2% 2% 2% 4%

Total 34.6 35.135.1 35.9 %ch-2% 1%0% 2%

GDP %ch 3.5%3.4% 2.8% 4.2%

11

Paper Purchased for Usage in U.S. Books by Grade (000 tons)

0

100

200

300

400

500

600

700

CoatedMechanical

CoatedFreesheet

UncoatedMechanical

UncoatedFreesheet

2003 2004 2005

12

Paper Purchased for Use in U.S. Books in Tons and as a % of U.S. Printing & Writing Demand

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Paper Used in Books Share of U.S. Demand (% )

000 tons % of P&W Demand

13

Update on U.S. Imports of Books Printed in Asia

China “booked” Another 30% Increase in Book Sales to the U.S. in 2005

– Over 500 Million Books per Year Now Imported From China– Growth in Chinese Book Sales to U.S. Has Averaged More Than 30%

per Year for the Past Six Years– Dominated by Children’s Books

Asia Exported $1.3 billion in Books to the U.S. in 2005

– Equal to 4.6% of U.S. Publisher Net Sales of Books

14

Asia Now Exports $1.3 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1995

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

1995

2005 Other

Canada

China

Hong K.

Sing.

Other Asia

Value of Books Imported into the U.S., Million $

15

China Becomes Dominant Exporter of Printed Books to the U.S.

0

100

200

300

400

500

600

Canada China HongKong

UK Mexico Sing. S.Korea

1995 2005

U.S. imports of printed books, millions of books

16

U.S. Imports of Printed Products from China

$0

$100

$200

$300

$400

$500

$600

$700

$800

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5

Books including Children's Greeting Cards all other

Million Real 2005 Dollars

17

Implications for Paper Market of Asian Imports

Most of the Growth in Paper Usage in Books is Coming From Books Printed in Asia

– Quality Paper Now Produced Domestically in China, both Coated and Uncoated, so They do Not Need to Import Paper to Print Books

The Growth in Paper Demand in U.S. Printed Books is Going Primarily to Blended Uncoated Mechanical “Superbright” Offset Papers

– Despite Issue With Brightness Reversion

18

Development of Superbright Uncoated Mechanical Offset Papers is Expanding the Use of

Uncoated Mechanical Papers in Books

340

360

380

400

420

440

460

480

500

0 1 2 3 4 5

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

26.0%

27.0%

28.0%

MF Uncoated Mechanical Used in Books

Share of Paper Used in Books

000 tons % of P&W Demand in Books

19

30% of The Canadian Fine Paper Industry Scheduled for Permanent Closure Between December 2005, and June of 2006

In Addition to Temporary Closure at Miramichi

Canadian Dollar

Wood Shortage and High Cost of Pulpwood– In East Only

Surge in Energy Costs– Losing Advantage of Low Power Rates

Inflexible Labor Rules

20

Recent Canadian Paper Mill/Machine Closures

Coated Uncoated Free.

Cascades Thunder Bay 180,000 tons

St. Jerome 10,000 tons

Domtar Ottawa 30,000 tons 35,000 tons

Cornwall 126,000 tons 138,000 tons

New West. 134,000 tons

Weyco Prince Albert 280,000 tons

Dryden 155,000 tons

Totals 470,000 tons 618,000 tons

21

Cash Manufacturing Costs for Softwood Pulp ($/tonne)

$250

$275

$300

$325

$350

$375

$400

$425

$450

$475

0 1 2 3 4 5 6

E. Canada

U.S. South

22

Can Offshore Imports Fill the Supply Gap?

23

N.A. Offshore Imports Have Captured Up to 25% of the Market for Some Grades

0%

5%

10%

15%

20%

25%

30%

1980 1990 2000 2005

News UFS UMEC CMEC CFS

Percentage of N.A. Demand

24

European Mills Are Shutting Capacity Also

Strong Euro

High Energy Costs– Idling of Some Nuclear Plants in Nordic Countries

High Transport costs– Related to Energy

Will Negatively Affect Supply of Coated Paper to North American Market from European Mills– Not Applicable to Uncoated Supply

25

Recent European Paper Mill/Machine Closuresfor Late 2005 and 2006

Coated Mech. Coated Free.

UPM Jamsankoski, FN

121,000 tons

Voikka, FN 440,000 tons

Kymi, FN 165,000 tons

StoraEnso Varkaus, FN 110,000 tons

Corbehem, FR 275,000 tons

Klippan Molndal, SW 45,000 tons

Totals 881,000 tons 275,000 tons

26

European Supply of Coated Paper to N.A. Will Decline in 2006/2007 Due to Mill Closures

0

200

400

600

800

1000

2000 2001 2002 2003 2004 2005 2006 2007

Freesheet Mechanical

U.S. Imports from Europe, 000 tons

27

Rising Asian Imports May Help Fill Supply Gap

Asian Capacity Growth is High– However, so is Asian Demand Growth– And, Chinese Government is Removing Export Tax Rebates

That Will Have Some as of Yet Unknown Level of Negative Impact on Chinese Exports to the U.S. in 2007

28

Major Capacity Changes in Asia, 2005–2008 Thousand Tonnes

Coated Woodfree

APP (Gold East) China 770 Q2:2005UPM, Jiangsu China 165 (e) Q2:2005April, Guangdong China 247 (e) 2006/2007 Nine Dragons China 220 2007Oji/Nantong, Jinangsu China 440 2008

Coated MechanicalJiangxi Chenming, China* 220 Q2:2005Shandong Huatai, China* 220 Q1:2006Daio Paper, Japan 318 Q3 2007Jilin Chenming, China 100 Q3 2006Shandong Huatai, China* 220 Q1:2007Korindo, Kalimantan Indonesia 143 Q3 2008

* Also can produce newsprint. Assumes 50/50 split.

29

Major Capacity Changes in Asia, 2005–2008 Thousand Tons

Uncoated Woodfree

April Kerinci, Indonesia 457 Q1:2007

UPM, Jiangsu China 330 net Q2:2005Hankuk, S. Korea 220 Q1:2006Packages, Pakistan 132 Q1 2007Ballapur, India 275 Q4 07Phoenix Thailand 176 Q4 07

Uncoated Mechanical none

30

Asian Supply of Coated and Uncoated Freesheet Paper to N.A. Will Continue to Rise

0

200

400

600

800

1000

2000 2001 2002 2003 2004 2005 2006 2007

Ctd. Free. Ctd. Mech Unc. Free.

U.S. Imports from Asia, 000 tons

31

75%

80%

85%

90%

95%

100%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

CGW Operating Rates Stay High Through 2008 Due to Capacity Closures

Operating Rates Adjusted for Strikes/Lockouts

32

75%

80%

85%

90%

95%

100%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

CFS Operating Rates Finally Getting Back to Normal Levels in Europe, and are Now High in

North America

Operating Rates Adjusted for Strikes

33

85%

88%

91%

94%

97%

100%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

Unc. Mech. Operating Rates Ease After Strikes End Due to New European Capacity

Operating Rates Adjusted for Strikes/Lockouts

34

80%

82%

84%

86%

88%

90%

92%

94%

96%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

UFS Markets are Tight in N.A. Due to Cap Closures, but Europe Still Has Oversupply

Operating Rates Adjusted for Strikes/Lockouts

35

Average Profitability for U.S. Printing and Writing Paper Producers by Grade

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0 1 2 3 4 5 6 7 8

Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery.

LWC

Uncoated Freesheet

Coated Freesheet