Paper Market Update : Background information on June 2010 price increase

2 Contents Dynamics affecting paper supply & pricing Economic Downturn (11% reduction in UK paper consumption) Exchange rate falls (leading to lower returns for importing mills) Raw material increases (leading to higher mill costs) Pulp Oil Diesel Manufacturing base overview Despite consolidation and closures a significant number of mills are at risk World Events Supply challenges Paper Prices

3 Demand is down Paper consumption has fallen during the recession right across Europe and there has been an 11% reduction in the UK

4 -10% -13% -23% 0% -10% -13% -10% -13% -8% -10% -20% -13% -14% -9% -5% -16% -15% -11% -21% Significant year on year decline in paper volumes in all countries Source: Eugropa - Merchant total sales volumes 2009 vs Unprecedented Market Conditions

5 Paper Mill consolidation and closure Mills are making unsustainable returns and continue to close Since 2005 mill closures have taken 3,000,000 tonnes out of production across Europe Despite industry consolidation and closures a significant number of mills remain at risk

6 Source : Bank of England

7 Input Costs are Rising Pulp prices are rising sharply – the largest raw material Oil prices are increasing again – Paper manufacturing uses high levels of energy Diesel prices are rising – distribution is a significant element in the cost of paper

8 Wood Pulp Prices Source : PPI Europe

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10 Source : US Energy Information Administration

11 World Events Added to the issues facing the industry there have been a number of events that have happened in 2010 to make the situation for supply and demand even more challenging

12 Chilean Earthquake At the end of February, 12,000 people were left homeless by an 8.8 magnitude earthquake, the world’s fifth-strongest in a century in Chile. It also claimed a number of pulp mills. Chile is home to about 8% of the worlds pulp production. All 6 market pulp mills have been closed. Manufacturing has just started in one or two of the sites again but the down time has created shortages of pulp and a number of paper mills have had machines standing idle without pulp to produce paper

13 Finnish Stevedores Strike A Finnish stevedores' walkout crippled the country's foreign trade for two weeks. About 80% of Finland's exports are shipped by sea. Finland produces about 4% of the worlds pulp "The strike's effects will reduce Finnish work and jobs in the wood-processing industry as well as in its supplier network in other sectors," Timo Jaatinen, the managing director of the lobby, said in a statement.

14 Swedish Paper Mill Strikes A 10-day strike during April by some 3,000 paper mill workers that has cost the industry some 50 million Euros Paper workers from 6 mills had been on strike since April 16, and the union warned that another 7 production units would join the strike if last-bid talks broke down. The second round of strikes has been narrowly avoided after unions reached an agreement with employers over pay increases. paper-mills-strike-is-over

15 Paper prices over the last 7 year period Despite all of these issues the average price of all papers sold by merchants in the UK, whilst fluctuating over the last 7 years was only 3.29% higher in February 2010 than those of February 2003 If we look at coated sheets alone then the figure is only 2% higher over the same time frame Compare this to the Retail Price Index which is 17% higher during the same period, meaning that in real terms the price of paper has fallen in this time

16 Source: National Association of Paper Merchants Price Index

17 Price Index Source: National Association of Paper Merchants

18 Looking ahead It will be some time before “normal” Pulp production is resumed Oil and diesel costs look set to continue to rise But the £ looks although it will strengthen against the Euro providing some relief Overall Paper Manufacturers will continue to apply pressure under the threat of closure to increase prices and restore their returns