HAWKINS WRIGHT

HAWKINS WRIGHT

HAWKINS WRIGHTHAWKINS WRIGHT

Pulp Market OutlookPulp Market Outlook

PricewaterhouseCoopers, VancouverPricewaterhouseCoopers, Vancouver

May 8May 8thth 20082008

HAWKINS WRIGHT

Pulp market themes

• Macro-economic influences

• Fibre availability

• Paper market restructure

• Supply & demand China

Price differentials

Substitution trends

HAWKINS WRIGHT

50

100

150

200

250

300

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Ind

us

tria

lC

om

mo

dit

yP

ric

eIn

de

x2

00

0=

10

0

300

600

900

1200

1500

1800

NB

SK

pri

ce

:U

S$

/to

nn

ec

ifW

es

tE

uro

pe

The Economist Industrial

Commodity US$ Price IndexLeft scale

Northern BleachedSoftwood Kraft market pulpRight scale

Sources: The Economist (commodity price index); Hawkins Wright (pulp prices)

Pulp versus other commodities

CRB index

HAWKINS WRIGHT

NBSK v euro/dollar

0

100

200

300

400

500

600

700

800

900

1000

Q18

0

Q18

2

Q18

4

Q18

6

Q18

8

Q19

0

Q19

2

Q19

4

Q19

6

Q19

8

Q10

0

Q10

2

Q10

4

Q10

6

Q10

8

NB

SK

pri

ces

(US

$/t

)

0.40

0.64

0.88

1.12

1.36

1.60

eu

ro/d

olla

rex

ch

an

ge

rate

NBSK price

Exchange rate

HAWKINS WRIGHT

Recessions

• Four recessions since 1973

• Affected both prices and volumes of market pulp and papersales

HAWKINS WRIGHT

Recessions and BCP demand

0

10

20

30

40

50

60

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

dem

an

d,

mil

lio

nto

nn

es

0

5

10

15

20

25

30

Glo

bal

GD

P,

an

nu

al

%ch

an

ge

1973-75 1980-82 1990-91 2000-01

Global GDP

HAWKINS WRIGHT

World P&W/tissue demand and global GDP

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Annualperc

ent

change

P&W and tissue paper

Global GDP (constantprices, PPP ex-rates)

HAWKINS WRIGHT

Recessions & Prices (nominal)

0

100

200

300

400

500

600

700

800

900

1,000

Q170 Q175 Q180 Q185 Q190 Q195 Q100 Q105 Q110

Lis

tprices,U

S$/t

onne

BEKP (Hardwood)

NBSK (Softwood)

HAWKINS WRIGHT

(2) Fibre constraints

• North America – lumber markets, (pine beetle, AAC,etc.)

• Europe – Weather, Russian export taxes, bio-energycompetition

• Asia – illegal logging in Indonesia, lack of matureplantations in China China, Japan, Taiwan, Korea all fibre importers

HAWKINS WRIGHT

404

516

471438 442

414 404 392367

416443 458 472

537554

344

462

387

342318 305 295 281 278

305 313336 347

390410

0

100

200

300

400

500

600

700

800

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

US

$per

tonne,

cif

West

Euro

pe

BSKP

BHKP

Global Weighted average costs of production

HAWKINS WRIGHT

(3) Paper market restructuring

• Flat demand, rising costs, falling prices

• A recognition that this a trend, not part of a cycle

• Smaller non-integrated companies close

• Integrated companies are divesting non-core businesses,rationalising capacity

• 3.8 million t/y European P&W capacity (excl. newsprint & tissue)closes 2005-08

• 6.2 million t/y North American P&W capacity closes 2005-08

• More closures to come, limiting fibre consumption

HAWKINS WRIGHT

(4) Supply & Demand for pulp

• Demand

• Supply

• Differentials and substitution trends

HAWKINS WRIGHT

Global pulp* demand growth 2000-07

-2,000 0 2,000 4,000 6,000 8,000

Japan

East Europe

North America

Latin America

West Europe

Other Asia

China

thousand tonnes

-3.4%

1.2%

5.3%

1.5%

4.4%

+18% pa

10.9%

• Chinese demand includes550,000t domestic BHKPproduction

• Korea, Taiwan, Thailand,Indonesia are mature orsupplied domestically

• Most growth in Europe andNorth America is re-classification of affiliatedshipments to market, ordisplacement of integratedpulp Real growth restricted to

tissue and fluff

*Includes UKP & high-yield

HAWKINS WRIGHT

Chinese pulp import growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

mill

ion

tonn

es

12 month moving total

hardwood kraft

softwood kraft

high yield

UK

HAWKINS WRIGHT

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

To

talca

pa

city

(tho

usa

nd

ton

ne

s)

-500

0

500

1000

1500

2000

2500

3000

3500

Ann

ua

lch

an

ge

inca

pa

city

(tho

usan

dto

nne

s)

Annual change in BCP capacity

BSKP

BHKP

FORECAST

Market pulp capacity

HAWKINS WRIGHT

BHKP capacity growth

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

1996

1998

2000

2002

2004

2006

2008

2010

2012

tho

usand

t/y

Average annual increment

1996-07 = 828,000 t

Average annual increment

2008-12 = 1.8 million t

HAWKINS WRIGHT

Supply/demand BSKP - theoretical

20,000

22,000

24,000

26,000

thou

san

dto

nne

s

90%

91%

92%

93%

94%

95%

96%

97%

98%

99%

100%

Ra

tio

%

Supply - LHS 22,411 22,981 23,551 23,741 23,806 23,906 24,026

Demand - LHS 21,530 21,800 22,080 22,360 22,590 22,815 22,985

Implied ratio - RHS 96% 95% 94% 94% 95% 95% 96%

2006 2007 2008 2009 2010 2011 2012

HAWKINS WRIGHT

Supply/demand BHKP -theoretical

18,000

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

thou

sa

nd

tonn

es

75%

80%

85%

90%

95%

100%

Ra

tio

%

Supply - LHS 22,625 24,305 26,960 28,675 30,585 32,745 32,895

Demand - LHS 21,840 22,735 23,355 24,255 25,145 25,955 26,805

Implied ratio - RHS 97% 94% 87% 85% 82% 79% 81%

2006 2007 2008 2009 2010 2011 2012

HAWKINS WRIGHT

Substitution

-120

-60

0

60

120

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

-8%

-4%

0%

4%

8%

Soft

wood

pulp

consum

ption

gro

wth

(YoY

%chg)

European price differential v softwood consumption growth

BHKP at a

premium

BSKP at a

premium

BSKP /

BHKP price

differential

(US$/t)

* Consumption data based upon 6-month moving average

BSKP consumption growth*Right scale

BSKP / BHKP price

differential

Source: Hawkins Wright Research/Utipulp

HAWKINS WRIGHT

The short-term outlook…

• Softwood v hardwood prices

Wide variations in price differentials between Europe, USA and Asiaare largely a function of discounts, freight rates and propensity forsubstitution

• Weakness in softwood likely to be short-lived

Further closures and curtailments are on the horizon

Stronger SW demand in Asia due to substitution

P&T acquisition…??

• Hardwood remains solid but for how long?

Inventories reached 36 days

Indonesia…??

HAWKINS WRIGHT

Scenario AnalysisScenario Analysis

Hardwood production/shipments, 2008

22,000

23,000

24,000

25,000

26,000

27,000

28,000

100% 99

%98

%97

%96

%95

%94

%93

%92

%91

%90

%

mill

ion

t/y

Production-to capacity ratio for 2008

Demand '07

'08, 4% growth?

'08, 8% growth?

Hardwood mills operated at 94.7% of capacityduring 2007. If they operate at the same level

during 2008, demand will have to increase by 2.7million t, or 12% for the increased production to

be absorbed

'08, 12% growth?

Needs 84% ORNeeds 84% OR

HAWKINS WRIGHT

Future considerationsFuture considerations

• Unpredictables…

The weather

Exchange rates

Mill closures, industrial action

Trade legislation (Russia, China etc)

Environmental legislation

Freight bottlenecks – are they now the norm?

• However, based on what we know today, times will remain“challenging” and for most…

• “…winning strategy = survival strategy”