RISI Paper Market Outlook: A Possible Recession and Its Impact on Book Paper Markets John Maine Vice President May 2008

2 The U.S. Economy… Headed into Recession? ( Real GDP Growth, Annualized Percent Change) Potential GDP Growth

3 Weak Dollar and Strong External Demand Will Limit Damage to Manufact’g but Consumer Hit Hard in 08 (Ind. Prod. Index, Real Consumer Spend, % Change Above year-ago by Quarter) Industrial Production Real Consumer Spending

4 The Recession Will be a Consumer-Led Recession  Impact of Housing, Labor Markets, Stocks and the Wealth- Effect – Job Insecurity – Reduced Spending  Magazines, Catalog, and Retail Will be Impacted – Reduced Ad Spending – Slower Retail Spending – Move to Internet – Use Cheaper and Less Paper

5 Magazine Ad Pages to Decline 3.6% in 2008 With A Risk of A Larger Drop (PIB Magazine Ad Pages, Year-over-year Percent Change) Recession Years

6 Catalog Circulation Will Fall Again in 08 In addition to Exhibiting Less Pagination (RISI Catalog Circulation Index, Year-over-year Percent Change) Recession Years

7 North American P&W Demand by Grade Million Tonnes, % Change Ctd. Woodfree * %ch8%-10%-5%2% Ctd. Mechanical %ch1%3%-4%1% Unc. Woodfree * %ch0%-5%-4%-2% Unc. Mechanical %ch-1%1%-1%1% Total %ch2%-3%-3%0% US GDP %ch2.9%2.2%0.9%2.2% *Includes bristols and cotton

8 North American Five-Year Growth Trends for 2008 to 2012 by Grade (000 tonnes) -2.8% -8.2% 0.5%1.8%

9 Paper Purchased for Use in U.S. Books in Tonnes and as a % of U.S. Printing & Writing Demand 000 tonnes (metric)% of P&W Demand

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

11 Update on U.S. Imports of Books Printed in Asia  China $ Sales of Books to the US jumped another 15% in 2007 – 616 Million Books per Year Now Imported From China – High Component of Children’s Books (185 million) – Growth Rate of 20% Per Year for Past Five Years  Asia Exported $1.5 billion in Books to the U.S. in 2007 – Equal to Nearly 5% of U.S. Publisher Net Sales of Books

12 Asia Now Exports $1.5 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1996 Value of Books Imported into the U.S., Million $

13 U.S. Imports of Printed Products from China Million Real 2007 Dollars

14 Euro Area Growing Modestly, But no Recession Euro Area Real GDP Growth, Annualized Percent Change Potential GDP Growth

15 European Demand for Printing and Writing Paper Supported by Growth in the East Million Tonnes

16 European P&W Demand by Grade Million Tonnes, % Change Ctd. Woodfree %ch3%2%1%2% Ctd. Mechanical %ch2%4%1%2% Unc. Woodfree %ch1%1%0%1% Unc. Mechanical %ch7%3%1%2% Total %ch3%2%1%2% Euro Area GDP %ch2.9%2.6%1.5%2.1% Includes Eastern Europe

17 European Five-Year Growth Trends for 2008 to 2012 by Grade (000 tonnes) 4.6% 1.1% 6.8% 6.0% 6.1%

18 Asian P&W Demand by Grade Million Tonnes, % Change Ctd. Woodfree %ch4%6%6%5% Ctd. Mechanical %ch7%3%6%5% Unc. Woodfree %ch4%4%3%2% Unc. Mechanical %ch-8%3%8%5% Total %ch4%5%4%3% GDP %ch8.0%8.0%7.1%6.6%

19 Asian P&W Paper Demand Growth by Country, (Thousand Tonnes)

20 Asian Five-Year Growth Trends for 2008 to 2012 by Grade (000 tonnes) 21% 15% 29% 25%28%

21 World Demand Summary for Uncoated Woodfree Million Tonnes North America %ch0%-5%-3%-2% Europe (1) %ch1%1%0%1% Asia %ch4%4%3%2% Latin America %ch9%2%2%3% Middle East, Africa, and Oceania7%6%4%5% Total World %ch3%1%1%1% (1) Includes Western, Central, South Eastern and Eastern Europe

22 World Demand Summary for Coated Woodfree Million Tonnes North America %ch8%-10%-2%1% Europe (1) %ch3%2%1%2% Asia %ch4%6%6%5% Latin America %ch12%5%3%4% Middle East, Africa, and Oceania5%5%3%5% Total World %ch5%1%3%3% (1) Includes Western, Central, South Eastern and Eastern Europe

23 Supply Issues  Mergers Yield Fewer Options for Buyers  Capacity Declining Rapidly in North America and Europe  European Mills Shun North American Market Due to Euro  Asian Coated Shipments to North America Rise

24 Mergers Lead to Dominant Player in Each Sector

25 North American Market Share in the Peak of the Last Cycle Vs. Now for the Top Three Producers in each Segment

26 European vs. N. Amer. Combined Market Share of Top Three Producers in 2007 Indicates Further Consolidation to Come in Europe

27 N.A. Paper Mill/Machine Closures (000 Tonnes) UGWCFSCGWUFS IPPensacola318 NewPageLuke90 GPWauna100 BoiseWallula220 UPMMiramachi450 TembecSt. Francisville280 DomtarGatineau9023 DirigoGilman, Vt64 FraserMadawaska8264 DomtarPort Edwards31 DomtarBaileyville113 AbitibiBowFort William150 AbitibiBowDolbeau88 KrugerThree Rivers Totals

28 N.A. Paper Mill/Machine Closures (000 Tonnes) UGWCFSCGWUFS WausauGroveton, NH95 NeenahUrbana, OH35 DomtarPort Edwards117 IPBastrop, LA225 DomtarDryden, ON177 New PageRumford, Me6250 New PageNiagara, WI230 KrugerThree Rivers68 AbitibiBowDonnacona160 AbitibiBowDalhousie40 AbitibiBowBelgo260 AbitibiBowGatineau Totals

29 North American Capacity Closures Announced for 2007 and 2008 (000 tonnes) 9% of Demand 13% of Demand 16% of Demand 14% of Demand

30 European Paper Mill/Machine Closures (Tonnes) CFSCGWSC 2006BurgoMarzabotto70,000 UPMVoikka400,000 Kymi150,000 Stora EnsoCorbeham250,000 Varkaus100,000 Scheufelen 15,000 KlippanMolndal45, UPMJamsankoski110,000 M-RealSittingbourne210,000 Gohrsmuhle100,000 MyllykoskiDachau230,000 AndapakBelgium80,000 Stora EnsoReizholz215,000 Totals700,0001,060,000215,000

31 European Paper Mill/Machine Closures (Tonnes) CFSCGWSC 2008Stora EnsoSumma/Anjala80 M-RealKangas100 Stora EnsoAnjala155 Totals25580 European Paper Mill/Machine Expansions (Tonnes) CFSCGWSC 2008MyllykoskiPlattling, GY380 Totals380

32 European Paper Mill/Machine Closures (Tonnes) UFS 2007M-RealWifsta, Sw175,000 Stora EnsoBerghuizer, Ne235,000 Various SmallBe, Fr, Sp65, MondiSzolnok, Hu140, M-RealNew Thames, Uk230,000 Totals845,000 European ExpansionsUFS Dec 07 Q3 09 Stora EnsoVarkas, FN95,000 PortucelSetubal, PT500,000

33 Euro and Canadian Dollar Will Remain Strong Against Key Paper Supply Regions, Limiting Supply from Those Regions in 2008

34 European Supply of Printing and Writing Papers to U.S. Market is Declining due to the Strong Euro U.S. Imports From Europe (000 Tonnes)

35 US Coated Freesheet Offshore Imports by Source (000 Tonnes)

36 US Coated Mechanical Offshore Imports by Source (000 Tonnes)

37 US Total Coated Paper Offshore Imports by Source (000 Tonnes)

38 U.S. Coated Paper Imports From China by Month 000 tonnes per month

39 U.S. Coated Mechanical Paper Imports From China by Month – Sheets vs Rolls 000 tonnes per month

40 Operating Rates Get Extraordinarily High in 2008 Despite Possibility of a Recession, Especially for Coated and Uncoated Mechanical Grades Operating rates, North America

41 Printer Inventories of Paper (Days of Supply, seasonally adjusted) Data Source: Calculated by RISI from IDEAlliance data Days Coated Mech. Total Paper

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

43 Average Profitability for Coated Freesheet Paper Producers in Europe and U.S. Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery. West Europe U.S.