Paper Market Update :

Background information onJune 2010 price increase

2

ContentsDynamics 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 overviewDespite consolidation and closures a significant number of mills are at

risk

World EventsSupply challenges

Paper Prices 2003 -2010

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%-10%

-13%

-13%

-23%-23%

0%0%

-10%

-10%

-13%

-13%

-10%

-10%

-13%

-13%

-8%-8%-10%-10%

-20%

-20%

-13%-13%

-14%

-14%-9%-9%

-5%-5%

-16%

-16%

-15%

-15%

-11%

-11%

-11%

-11%

-21%

-21%

Significant year on year decline in paper volumes in all countries

Source: Eugropa - Merchant total sales volumes 2009 vs. 2008

Unprecedented Market Conditions

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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

Monthly average Spot exchange rate, Euro into Sterling

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

Source : Bank of England

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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

9

10 Source : US Energy Information Administration

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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.

www.swedishwire.com/business/4095-swedish-paper-mills-strike-is-over

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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 2003-2010Average Price of All Paper Products 2003 to Present

80

90

100

110

120

130

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Sep-0

5

Jan-

06

May

-06

Sep-0

6

Jan-

07

May

-07

Sep-0

7

Jan-

08

May

-08

Sep-0

8

Jan-

09

May

-09

Sep-0

9

Jan-

10

Ind

ex (

Jan

uar

y 20

03 =

100

)

Index Set at Jan 03

Average Sales Price

Retail Price Index

17

Price Index 2003-2010

Source: National Association of Paper Merchants

Average Price Coated Sheets 2003 to Present

80

90

100

110

120

130

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Sep-0

5

Jan-

06

May

-06

Sep-0

6

Jan-

07

May

-07

Sep-0

7

Jan-

08

May

-08

Sep-0

8

Jan-

09

May

-09

Sep-0

9

Jan-

10

Ind

ex (

Jan

uar

y 20

03 =

100

)

Index Set Jan 03

Average Sales Price

Retail Price Index

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Looking ahead

It will be some time before “normal” Pulp production is resumed

Oil and diesel costs look set to continue to riseBut 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