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Presented by: John Maine, Vice President April 2006 PowerPoint Presentation
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Presented by: John Maine, Vice President April 2006

Presented by: John Maine, Vice President April 2006

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Presented by: John Maine, Vice President April 2006

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  1. 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) Potential GDP Growth

  3. 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)

  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 Consumer Prices-% Ch. 2.7 3.4 3.3 2.8 3.1 Fed. Funds Int. 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 US$/Euro US$/CN$ Euro (left scale) CN$ (right 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 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) 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 35.1 35.1 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)

  12. Paper Purchased for Use in U.S. Books in Tons and as a % of U.S. Printing & Writing 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 Value of Books Imported into the U.S., Million $

  15. China Becomes Dominant Exporter of Printed Books to the U.S. U.S. imports of printed books, millions of books

  16. U.S. Imports of Printed Products from China 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 % of P&W Demand in Books 000 tons

  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

  21. Cash Manufacturing Costs for Softwood Pulp ($/tonne) 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 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

  26. European Supply of Coated Paper to N.A. Will Decline in 2006/2007 Due to Mill Closures 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 Q2:2005 UPM, Jiangsu China 165 (e) Q2:2005 April, Guangdong China 247 (e) 2006/2007 Nine Dragons China 220 2007 Oji/Nantong, Jinangsu China 440 2008 Coated Mechanical Jiangxi Chenming, China* 220 Q2:2005 Shandong Huatai, China* 220 Q1:2006 Daio Paper, Japan 318 Q3 2007 Jilin Chenming, China 100 Q3 2006 Shandong Huatai, China* 220 Q1:2007 Korindo, 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 Q2:2005 Hankuk, S. Korea 220 Q1:2006 Packages, Pakistan 132 Q1 2007 Ballapur, India 275 Q4 07 Phoenix Thailand 176 Q4 07 Uncoated Mechanical none

  30. Asian Supply of Coated and Uncoated Freesheet Paper to N.A. Will Continue to Rise U.S. Imports from Asia, 000 tons

  31. CGW Operating Rates Stay High Through 2008 Due to Capacity Closures Operating Rates Adjusted for Strikes/Lockouts

  32. CFS Operating Rates Finally Getting Back to Normal Levels in Europe, and are Now High in North America Operating Rates Adjusted for Strikes

  33. Unc. Mech. Operating Rates Ease After Strikes End Due to New European Capacity Operating Rates Adjusted for Strikes/Lockouts

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