World Outlook for Book Publishing Papers

John MaineVice President

April 2007

2

U.S. Economy in the Middle of a 5 Quarter Slowdown that Began in Q2 2006

U.S. Economy Responding to– Rise in Interest Rates– Energy Price Shock– Weak Housing and a Decline in Mortgage Cash-Outs

So Far, No Recession in Sight– GDP Growth Below Average, but Remaining Around 2%-2.5%– Business Investment Strong

Economic Growth to Remain Below Trend Through Mid-2007

3

The U.S. Economy Holding Up Well to Negative Influences so Far in 2007

Real GDP Growth, Annualized Percent Change

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Potential GDP Growth

4

Potential Recession?…Risk Assessment

Inverted Yield Curve Persists

Housing/Mortgage Collapse?

Fixing Global Imbalances May Require Much Weaker Dollar

Chinese Hard Landing?

5

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

`

U.S. Interest Rates

10-Year Bond Yield

Federal Funds Rate

Inverted Yield Curve

6

Overvalued U.S. Home Prices Beget Risky LoansType of Mortgage Loan for Purchase, % of Total

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005

Negative amortization

Interest only

7

U.S. Foreclosures Have Spiked in Recent MonthsForeclosures Started During the Quarter – Mortgage Bankers Assn.

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

0.55%

0.60%

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

8

Overinvestment Makes China Vulnerable

10%

20%

30%

40%

50%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

China India S. KoreaThailand Malaysia

Investment as Percent of GDP

9

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

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

US$ per Euro

Euro Will Remain Strong

10

$0

$10

$20

$30

$40

$50

$60

$70

$80

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9$0.60

$0.65

$0.70

$0.75

$0.80

$0.85

$0.90

$0.95

US$ per CN$ (R)

WTI Oil Price (L)

Falling Energy Prices Hold Canadian Dollar Below 90 Cents

(WTI Oil Price per Barrel and $U.S./$CN Exchange Rate)

11

World Printing & Writing Paper Demand Took Off Without North America in 2006

-10%

-5%

0%

5%

10%

15%

2000 2001 2002 2003 2004 2005 2006

N. AmericaEuropeL. AmericaAsiaOther

% Change in Apparent Consumption

12

World Demand Growth from 2000 to 2006 Shows Decreasing Importance of North America

-2

0

2

4

6

8

10

12

P&W Demand Growth From 2000 to 2006

Million Tonnes

N Amer. Europe L Amer. Asia Other World

13

World P&W Demand Growth Stuck in Low Gear by Stagnant North American Market

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

90 92 94 96 98 0 2 4 6 8

% Change in World Demand for P&W Paper

14

World P&W Demand by GradeMillion Tonnes, % Change

2005 2006 2007 2008

Ctd. Woodfree 28.7 29.7 30.5 31.8 %ch 3% 4% 2% 4%

Ctd. Mechanical 17.2 17.8 18.0 18.6 %ch 0% 3% 1% 4%

Unc. Woodfree 51.5 52.5 53.1 54.5 %ch 1% 2% 1% 3%

Unc. Mechanical 14.3 14.6 14.9 15.5 %ch -1% 2% 2% 4%

Total 111.8 114.6 116.4 120.4

%ch 0.8% 2.5% 1.6% 3.4%

World GDP %ch 4.7% 5.7% 4.6%5.1%

15

North American Market

Demand in Third Year of Stagnation or Decline– Started in 2005– Despite strong economy– Will Remain Weak in 2007

High Cost Domestic Capacity Shutting Down

Modest Demand Growth May Return in 2008– Stronger economy

16

Printer Inventories of Paper (Days of Supply, seasonally adjusted)

35

37

39

41

43

45

47

2003 2004 2005 2006 2007Data Source: Calculated by RISI from IDEAlliance data

Days

17

North America Grade Trends

Uncoated Freesheet Declining Since 1999– Further reductions expected

Coated Paper– Growth trend is close to 2% per year– But not in 2007 where demand will be down 1%-2%

Uncoated Mechanical Demand Is Robust– Competition with independent Telco directories– Switch to cheaper papers– Success of offset substitutes

18

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

2005 2006 2007 2008

Ctd. Woodfree * 6.1 6.3 6.3 6.6 %ch -2% 3% 0% 4%

Ctd. Mechanical 5.8 6.0 5.9 6.1 %ch -3% 3% -2% 4%

Unc. Woodfree * 13.0 12.8 12.6 12.7 %ch -5% -1% -1% 1%

Unc. Mechanical 6.2 6.1 6.3 6.6 %ch 2% -1% 2% 5%

Total 31.1 31.2 31.1 32.0 %ch -3% 0% -1% 3%

U.S. GDP %ch 3.2% 3.3% 2.5%3.1%

*Includes bristols and cotton

19

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

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11

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

20

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

0

100

200

300

400

500

600

CoatedMechanical

CoatedFreesheet

UncoatedMechanical

UncoatedFreesheet

2004 2005 2006

21

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

China Sales of Books to the US jumped another 11% in 2006

– 550 Million Books per Year Now Imported From China– Dominated by Children’s Books

Asia Exported $1.4 billion in Books to the U.S. in 2006

– Equal to Nearly 5% of U.S. Publisher Net Sales of Books

22

Asia Now Exports $1.4 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1996

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

1996

2006 Other

Canada

China

Hong K.

Sing.

Other Asia

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

23

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

1996 2006

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

24

U.S. Imports of Printed Products from China

$0$100$200$300$400$500$600$700$800$900

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

Books including Children's Greeting Cards all other

Million Real 2006 Dollars

25

CVD Duty Announced on Asian CFS Paper at the End of March

CVD (Countervailing Duty)– Due to Asian Governments Subsidizing Paper mills

• Principal subsidy is income tax abatement for investment in new mills, free from income tax for 2 Years, followed by 3 Years of 50% abatement

– Resulted in Duties of 10%-20% on Chinese and Indonesia CFS• But less than 2% of Korean CFS

• APP hit hard with some of the top duties

• All producers affected

• Applies to both sheets and rolls of CFS, but not coated board

• Importer of record now has to put up bond that will be escrowed until the fall when a final determination on the duty is made

• At that time, funds could be distributed to New Page and other affected parties

26

Antidumping Duty (ADD) Ruling Due at The End of May

Could Result In Additional Tariffs– Must prove the mills are selling below costs or below prices in

their home market– Prices are cheap in China,so this is not an issue, but the US

has declared China prices irrelevant because China is not a market economy

– DOC has chosen India as a substitute home market and prices in India are higher than in China

– Korea could get hit with ADD if DOC considers freight and mill net prices

27

Implications of CVD on Asian CFS Paper

Affects About 350,000 tons of Coated Freesheet (mostly sheets) Coming from China (300,000 tons) and Indonesia (50,000 tons)– Korea Basically Wiggled off the Hook (450,000 tons)– Up to 90% of Some Western CFS Sheet Markets are Supplied

by Asia, so the Impact Will be Very Regional– When ADD is Announced in Late May, Korea Could Come

Back into the Picture

What Will Change– Prices Will Likely go up Again by About 5%– Korean and European Suppliers Will Fill in for Lost Chinese

and Indonesian Tonnage– U.S. Producers to Increase Sheeter Utilization

28

Coated Freesheet + Coated Bristol Imports Into the U.S. by Month (tonnes)

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2003 2004 2005 2006 2007

Asia

Europe

29

Coated Freesheet + Coated Bristol Imports Into the U.S. by Month (tonnes)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2003 2004 2005 2006 2007

china

korea

Japan

30

Coated Freesheet + Coated Bristol Imports Into the U.S. by Month (tonnes)

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

2002 2003 2004 2005 2006 2007

sheets

rolls

31

N.A. Paper Mill/Machine Closures (tonnes)

CFS CGW UFS

2006 Cascades Thunder Bay 28,000 135,000

St. Jerome 9,000

Domtar Ottawa 27,000 31,000

Cornwall 114,000 124,000

New West. 120,000

Glatfelter Neenah 112,000

Weyco Prince Alb. 250,000

Bowater Dryden 140,000

Benton Harbor 77,000

IP Pensacola 318,000

NewPage Luke 90,000

GP Wauna 100,000

Boise Wallula 220,000

2007 Totals 379,000 212,000 1,304,000

32

European Paper Mill/Machine Closures (tonnes)CFS CGW SC

2006 Burgo Marzabotto 70,000

UPM Voikka 400,000

Kymi 150,000

Stora Enso Corbeham 250,000

Varkaus 100,000

Scheufelen Scheufelen 15,000

Klippan Molndal 45,000

2007 UPM Jamsankoski 110,000

M-Real Sittingbourne 210,000

Gohrsmuhle 100,000

Myllykoski Dachau 230,000

Stora Enso Reizholz 215,000

Totals 620,000 1,060,000 215,000

33

European Paper Mill/Machine Closures (tonnes)

UFS

2006 SAPPI Nash 35,000

Cran Cran-Gervrier 35,000

Paperalia Legorreta 90,000

IP Maresquel 70,000

2007 M-Real Wifsta 175,000

Stora Enso Berghuizer 235,000

Totals 640,000

34

Major Capacity Changes in Asia, 2006–2009 Thousand Tonnes

Woodfree Paper

Hankuk, Ohsan S. Korea 200 Q1 2006 UWFGold Huasheng, China 120 Q1 2006 UWF, CWFTjiwi Kimia, Indonesia 120 Q1 2006 UWF, CWFSiam Paper, Thailand 100 2006 UWF, CWFHenan Xinxiang, China 100 Q4 2006 UWFShandong Tralin (#22) China 100 Q1 2007 CWFShandong Tralin (#23) China 100 Q2 2007 CWFShandong Tralin (#24) China 100 Q4 2007 CWFApril, Kerinci, Indonesia 415 Q1 2007 UWFPackages, Pakistan 120 Q1 2007 UWFSun Paper, Shandong China 250 Q1 2007 UWF, CWFHubei Maxleaf Xiangfan China 100 Q2 2007 CWFNippon, Japan -340 Q4 2007 CWF, UWFAbhishek, India 100 2007 UWF

35

Major Capacity Changes in Asia, 2006–2009 Thousand Tonnes

Woodfree Paper (continued)

Siam Paper, Thailand 200 Q1 2008 UWF

Ballapur Bhigwan PM 2, India 140 Q2 2008 CWF

ITC, India 200 Q4 2008 CWF

Hokuetsu, Niigata, Japan 350 End 2008 CWFITC, India 100 Q2 2008 UWFWest Coast Paper, India 100 Q4 2008 UWFWhitefield Paper, India 200 Q4 2008 CWF, UWFShandong Chenming, China 150 Q3 2008 CWFBallapur Bhigwan PM 3, India 160 08/09 CWF

Tamil Nadu, Kagithapuram India 150 Q1 2009 CWF/UWF

Oji/Nantong Jiangsu China 400 End 2009 CWFTatau Pulp, Bintulu Malaysia 750 Q3 2009 CWF/UWF

36

Major Capacity Changes in Asia, 2006–2009 Thousand Tonnes

Coated Mechanical

Henan Xinxiang, China 200 Q1 2007 LWCDaio Paper, Japan 290 Q3 2007 LWCNippon, Ishinomaki, Japan 350 Q4 2007 LWCPuyang Longfeng, China 275 H1 2008 LWCOji Tomioka, Japan 350 End 2008 LWC

Uncoated Mechanical

Stora Enso/Huatai, China 200 Q4 2007 SCYueyang Paper, Hunan China 400 2008 SC

37

Asian Net Export Growth Shifting Back to Emphasis on UWF in 2007–2008

-1,600

-1,200

-800

-400

0

400

800

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

CWF - AsiaUWF - AsiaCme - AsiaUme - Asia

Net Imports (exports) 000 Tonnes

38

75%

80%

85%

90%

95%

100%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

CWF Operating Rates Finally Move Above 90% in Europe Due to Closures in 2007

Operating Rates

39

78%

82%

86%

90%

94%

98%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

Ctd. Mechanical Markets Very Weak in Early 2007, But Will Get Tighter as Europe Closes Capacity

Operating Rates (adjusted in 2005 for lockouts in Finland and Miramichi)

40

80%

82%

84%

86%

88%

90%

92%

94%

0 1 2 3 4 5 6 7 8

Europe

N. Amer.

Capacity Closures Keep Uncoated Freesheet Operating Rates Above 90%

Operating Rates

41

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

$550

$600

$650

$700

$750

$800

$850

$900

$950

0 1 2 3 4 5 6 7

Ctd. No. 3 60 lb. Ctd. No. 4 50 lb. Ctd. No. 5 40 lb.

SC-35 lb 50 Lb UFS Offset

42

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 9

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

LWC

Uncoated Freesheet

Coated Freesheet