RISI Outlook for North American Book Paper Markets

John MaineVice PresidentMay 2010

2

John Maine, VP World Graphic Papers, RISI, Inc.

– Co-Founder of Resource Information Systems, Inc.– With RISI More Than 30 Years– Developed RISI P&W Models– Works With Over 200 Graphic Paper

Clients Worldwide– Assisted by 5 Local Economist in

RISI Regional Offices– Directs Numerous Multi and Single-Client

Studies on Graphic Paper

3

US Climbing out of Deep Recession(Real GDP Growth, Annualized Percent Change)

-7%-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Annual

2009 -2.4%

2010 3.0%

2011 3.2%

4

Key Paper End-Uses Have Collapsed

Newspaper Inserts– Struggling to find alternative distribution outside of collapsing

newspaper market

Magazines– Both circulation and ad pages declining– Further losses coming due to e-readers

Catalogs– Circ will come back from 09, but still down long-term– Page counts falling– Postal costs will rise– Do not mail legislation to come?

5

US Paper Demand in Major Paper End-Uses Collapsed in 2008 and 2009 (two-year loss)

Percent Loss Tonnage Lost (000 tons)

Inserts -26% -895

Magazines -39% -1,365

Catalogs -31% -1,112

Books -23% -380

6

Indexes of Circulation – 2000Q1=1.00

0

0.2

0.4

0.6

0.8

1

1.2

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 2 4 6 8 10 12 14

Newspapers Magazines Catalogs

7

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US Magazine Ad Pages on Long-Term “Stair-Step” Decline(Quarterly PIB Magazine Ad Page Index, 1982=1.0)

8

Total Paper Usage in US Magazines, Catalogs, and Newspaper Inserts Combined (000 tons)

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,00019

90

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

9

Book Industry Sales Hold Up Well In Recession, Dropping only 2% per Year in 2008 and 2009

$20,500

$21,000

$21,500

$22,000

$22,500

$23,000

$23,500

$24,000

$24,500

$25,000

$25,500

2002 2003 2004 2005 2006 2007 2008 2009

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Million $ %ch (rt scale)

Book Industry Sales in Millions

Souce: Amer. Publishers Assn.

10

Sales of E-Books Exploding (Millions of dollars)

$0

$50

$100

$150

$200

$250

$300

$350

2002 2003 2004 2005 2006 2007 2008 2009Souce: Amer. Publishers Assn.

11

But Sales of E-Books are Still Tiny Relative to Book Market (Millions of dollars)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2002 2003 2004 2005 2006 2007 2008 2009

E-Books All Books

1.3% of Sales

Souce: Amer. Publishers Assn.

12

US Imports of Printed Books Dropped 21% in 2009 to $2.0 Billion, but are Still up Sharply Compared With $1.4 Bill. in 1996

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

1996

2006

2007

2008

2009

China Hong K. Sing. Other Asia Other Canada

Value of Books Imported into the U.S., Million $ 8.4% of Book Industry Sales

10.6% of Book Industry Sales

13

U.S. Imports of Printed Products from China

$0

$200

$400

$600

$800

$1,000

$1,200

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9

Books including Children's Greeting Cards all other

Million Real 2009 Dollars

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Total Paper Usage in US Books (000 tons)

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,9001

99

0

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

15

Paper Use in US Books in 2009 by Type of Paper

Coated Free17%

Coated Mechanical25%

Uncoated Free23%

Uncoated Mechanical35%

16

Paper Demand Surging in 2010, Despite Weak End-uses

All Major Measures of End-Use Activity are Down– Mag ad pages – Mail volumes– Catalog circulation– Commercial print activity

Yet, Paper Demand and Shipments are Recovering– Inventory swing– Gain in market share from imports

17

US Producers Enjoyed a Rebound in Shipments in Late 2009, and Year-Over-Year Numbers Will Continue to Look Good in Early 2010, but Paper Demand is Still Low

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NA Coated Paper shipments, 000 tons per quarter

Currently Comparing This

To This

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

2007 2008 2009 2010 2011

Ctd. Freesheet * 6.1 5.3 4.0 4.1 4.2

%ch -8% -13% -24% 2% 3%

Ctd. Mechanical 6.0 5.1 4.0 4.1 4.1 %ch 3% -15% -21% 2% 1%

Unc. Freesheet * 12.4 11.4 10.0 9.9 9.8 %ch -5% -8% -12% -1% 0%

Unc. Mechanical 6.2 6.0 5.0 5.0 5.1 %ch 2% -4% -17% 0% 3%

Total 30.7 27.7 23.0 23.0 23.3

%ch -3% -10% -17% 0% 1%

*Includes bristols and cotton

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North American Operating Rates – Coming Off the Lowest Ever Recorded for Coated Paper

70%

75%

80%

85%

90%

95%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Ctd. Paper

Unc. Mech.

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U.S. Publishing Paper Pricing by Quarter ($/short ton)

$550

$650

$750

$850

$950

$1,050

0 1 2 3 4 5 6 7 8 9 10

Ctd. No. 3 60 lb. Ctd. No. 4 50 lb.

Ctd. No. 5 40 lb. 50 Lb UFS Offset

21

Cost Pressures Come to Bear on Non-Integrated Mills (NBSK Market Pulp Price Delivered to Northern Europe $/tonne)

$400

$500

$600

$700

$800

$900

$1,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

22

Price Trends for LWC 40 lb. (60 gsm) ($US/short ton)

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

$1,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US Price

European Price

Euro Price in Europe

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Price as a Percentage of Fully Weighted Costs 1 for Northern Mills Making 34 lb. LWC in Maine, Minnesota, and Wisconsin

80%

85%

90%

95%

100%

105%

110%

115%

120%

125%

130%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 Fully weighted costs include delivery, SG&A, Interest, and Depreciation.

Including $100 revenue per ton of paper from black liquor credits