World Outlook for Book Publishing Papers

1
World Outlook for Book Publishing Papers

• John Maine
• Vice 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 2007Real GDP Growth,
Annualized Percent Change
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
U.S. Interest Rates
10-Year Bond Yield
Inverted Yield Curve
Federal Funds Rate
6
Overvalued U.S. Home Prices Beget Risky
LoansType of Mortgage Loan for Purchase, of
Total
7
U.S. Foreclosures Have Spiked in Recent
MonthsForeclosures Started During the Quarter
Mortgage Bankers Assn.
8
Overinvestment Makes China Vulnerable
Investment as Percent of GDP
9
Euro Will Remain Strong
10
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
Change in Apparent Consumption
12
World Demand Growth from 2000 to 2006 Shows
Decreasing Importance of North America
Million Tonnes
N Amer.
Europe
L Amer.
Asia
Other
World
13
World PW Demand Growth Stuck in Low Gear by
Stagnant North American Market
Change in World Demand for PW Paper
14
World PW 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)
Days
Data Source Calculated by RISI from IDEAlliance
data
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 PW 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
000 tons
of PW Demand
20
Paper Purchased for Usage in U.S. Books by Grade
(000 tons)
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 Childrens 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
Value of Books Imported into the U.S., Million
23
China Becomes Dominant Exporter of Printed Books
to the U.S.
U.S. imports of printed books, millions of books
24
U.S. Imports of Printed Products from China
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)
29
Coated Freesheet Coated Bristol Imports Into
the U.S. by Month (tonnes)
30
Coated Freesheet Coated Bristol Imports Into
the U.S. by Month (tonnes)
31
N.A. Paper Mill/Machine Closures (tonnes)
32
European Paper Mill/Machine Closures (tonnes)
33
European Paper Mill/Machine Closures (tonnes)
34
Major Capacity Changes in Asia, 20062009
Thousand Tonnes

• Woodfree Paper
• Hankuk, Ohsan S. Korea 200 Q1 2006 UWF
• Gold Huasheng, China 120 Q1 2006 UWF, CWF
• Tjiwi Kimia, Indonesia 120 Q1 2006 UWF, CWF
• Siam Paper, Thailand 100 2006 UWF, CWF
• Henan Xinxiang, China 100 Q4 2006 UWF
• Shandong Tralin (22) China 100 Q1 2007 CWF
• Shandong Tralin (23) China 100 Q2 2007 CWF
• Shandong Tralin (24) China 100 Q4 2007 CWF
• April, Kerinci, Indonesia 415 Q1 2007 UWF
• Packages, Pakistan 120 Q1 2007 UWF
• Sun Paper, Shandong China 250 Q1 2007 UWF, CWF
• Hubei Maxleaf Xiangfan China 100 Q2 2007 CWF
• Nippon, Japan -340 Q4 2007 CWF, UWF
• Abhishek, India 100 2007 UWF

35
Major Capacity Changes in Asia, 20062009
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 CWF
• ITC, India 100 Q2 2008 UWF
• West Coast Paper, India 100 Q4 2008 UWF
• Whitefield Paper, India 200 Q4 2008 CWF, UWF
• Shandong Chenming, China 150 Q3 2008 CWF
• Ballapur Bhigwan PM 3, India 160 08/09 CWF
• Tamil Nadu, Kagithapuram India 150 Q1
  2009 CWF/UWF
• Oji/Nantong Jiangsu China 400 End 2009 CWF
• Tatau Pulp, Bintulu Malaysia 750 Q3 2009 CWF/UWF

36
Major Capacity Changes in Asia, 20062009
Thousand Tonnes

• Coated Mechanical
• Henan Xinxiang, China 200 Q1 2007 LWC
• Daio Paper, Japan 290 Q3 2007 LWC
• Nippon, Ishinomaki, Japan 350 Q4 2007 LWC
• Puyang Longfeng, China 275 H1 2008 LWC
• Oji Tomioka, Japan 350 End 2008 LWC
• Uncoated Mechanical
• Stora Enso/Huatai, China 200 Q4 2007 SC
• Yueyang Paper, Hunan China 400 2008 SC

37
Asian Net Export Growth Shifting Back to Emphasis
on UWF in 20072008
Net Imports (exports) 000 Tonnes
38
CWF Operating Rates Finally Move Above 90 in
Europe Due to Closures in 2007
Operating Rates
39
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
Capacity Closures Keep Uncoated Freesheet
Operating Rates Above 90
Operating Rates
41
U.S. Publishing Paper Pricing by Quarter
(/short ton)
42
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,
SGA, and delivery.