Under Pressure: Paper Costs and Industry Escalations

Objectives Explain the way economic downturns have caused decreased capacity in the market, shifted raw material availability and escalated prices Create a better understanding of these factors so that you may explain to YOUR customer why prices have increased Show Glatfelter costs and forecasts for the mill Through education, offer Glatfelter support, as a supply chain partner, to help you keep your businesses strong in these difficult economic times.

Explain the way economic downturns have caused decreased capacity in the market, shifted raw material availability and escalated prices

Create a better understanding of these factors so that you may explain to YOUR customer why prices have increased

Show Glatfelter costs and forecasts for the mill

Through education, offer Glatfelter support, as a supply chain partner, to help you keep your businesses strong in these difficult economic times.

Themes The paper business continues to be under pressure Demand Economy in recession Seasonal slowdown Inventory drawdown Decline in the use of paper While commodity prices are moderating, several cost inputs are continuing to increase Price / Cost gap causes margin squeeze We are well positioned to do better than our competition, but this is dependant on strategy and forecasting Demand generation, cost control and continuous improvement remain critically important

The paper business continues to be under pressure

Demand

Economy in recession

Seasonal slowdown

Inventory drawdown

Decline in the use of paper

While commodity prices are moderating, several cost inputs are continuing to increase

Price / Cost gap causes margin squeeze

We are well positioned to do better than our competition, but this is dependant on strategy and forecasting

Demand generation, cost control and continuous improvement remain critically important

Glatfelter Mill Chillicothe, OH

5) Converting & Shipping Paper Making process 1) Wood Yard 2) Digesting and Pulping 4) Paper Making 1-2 Football fields in length 3) Washing – screening Bleaching (ECF)

Wood Chips Wood chips, which are used to make pulp, are a byproduct of sawmills When housing construction slows, business slows at sawmills and the supply of chips tightens Some sawmills have shut down completely, meaning papermakers also incur higher transportation costs when they have to haul chips further distances from alternate sawmills. Print Solutions magazine, August 2008

Wood chips, which are used to make pulp, are a byproduct of sawmills

When housing construction slows, business slows at sawmills and the supply of chips tightens

Some sawmills have shut down completely, meaning papermakers also incur higher transportation costs when they have to haul chips further distances from alternate sawmills.

Glatfelter Wood Costs Wood Increased competition for wood products. We are having to compete with pallet lumber and post manufacturers for material that is pulpwood sized but being used for other products. Sawmill chips are more expensive because of demand for them being used for wood pellets, bio-fuel, and agricultural bedding. Diesel fuel cost increases. Although lessening some now, fuel cost has had a huge impact on wood and fiber cost over the last two years. Increased labor, insurance and equipment cost.

Wood

Increased competition for wood products. We are having to compete with pallet lumber and post manufacturers for material that is pulpwood sized but being used for other products. Sawmill chips are more expensive because of demand for them being used for wood pellets, bio-fuel, and agricultural bedding.

Diesel fuel cost increases. Although lessening some now, fuel cost has had a huge impact on wood and fiber cost over the last two years.

Increased labor, insurance and equipment cost.

N.A. UFS PAPER MACHINE CAPACITY RANKINGS (2005 - 2008) Red = PM Closures Blue = Operating PMs Yellow = GLT PMs PMs both large and small have been shut as companies strive to cut costs and refocus on core competencies. 2.8 M tons of capacity shutdown since 2005

Why have we avoided the same fate? Market position – leadership positions and / or niche markets Customer intimacy Diversification & flexibility Hard work by all employees to address costs DRIVE North American Restructuring Continuous Improvement Collaborative labor relations Integrated mills Neenah example of an “At-Risk Mill” Successful New Product Development engine

Market position – leadership positions and / or niche markets

Customer intimacy

Diversification & flexibility

Hard work by all employees to address costs

DRIVE

North American Restructuring

Continuous Improvement

Collaborative labor relations

Integrated mills

Neenah example of an “At-Risk Mill”

Successful New Product Development engine

NA - UFS MILL INVENTORIES Inventories continue to trend downwards as producers try to balance supply with falling demand Source: PPPC

NA SHIPMENT TRENDS ( Printing & Writing Papers) N.A. P&W shipments fell by - 400k tonnes from Oct to Nov and posted a -22% Y/Y drop as all grades experienced significant declines (UGW: -20%; CGW: -32%). This marks the 9 th consecutive Y/Y drop in total P&W shipments. UFS shipments fell by - 140k tonnes from Oct to Nov and posted a staggering -18% Y/Y drop. All UFS segments (offset, envelope, forms and bond) were down significantly. This marks the 9 th consecutive drop in Y/Y shipments. CFS shipments fell by nearly - 80k tonnes from Oct to Nov and posted a record -22% Y/Y drop. This marks the 11 th consecutive drop in Y/Y shipments. November ‘08

N.A. P&W shipments fell by - 400k tonnes from Oct to Nov and posted a -22% Y/Y drop as all grades experienced significant declines (UGW: -20%; CGW: -32%). This marks the 9 th consecutive Y/Y drop in total P&W shipments.

UFS shipments fell by - 140k tonnes from Oct to Nov and posted a staggering -18% Y/Y drop. All UFS segments (offset, envelope, forms and bond) were down significantly. This marks the 9 th consecutive drop in Y/Y shipments.

CFS shipments fell by nearly - 80k tonnes from Oct to Nov and posted a record -22% Y/Y drop. This marks the 11 th consecutive drop in Y/Y shipments.

Specialty Papers U.S. Uncoated Freesheet Market Overview – Profound Structural Change Consolidation in N.A. paper industry has changed the competitive landscape. Boise Cascade Weyerhaeuser SD Warren Champion Union Camp Willamette Consolidated Mead Crown Vantage Great Northern Chesapeake Pentair Finch Pryun Hammermill James River 1998: Numerous Producers Vying for Market Share International Paper 2007: Top 5 Producers With Over 80% Market Share Domtar Boise Cascade International Paper Georgia Pacific Industry landscape has changed very rapidly More globally focused Fewer players

Inputs Freight Raw material Finished Paper Chemicals Sulphuric Acid Caustic Starch TiO2 Lot more… Power from Coal No 6 Fuel Oil Wood Pulp Hardwood Softwood

Freight

Raw material

Finished Paper

Chemicals

Sulphuric Acid

Caustic

Starch

TiO2

Lot more…

Power from

Coal

No 6 Fuel Oil

Wood Pulp

Hardwood

Softwood

Market Cost Trends - NBSK Pulp 13-year trend RISI list price NBSK 2-year forecast – 2009/2010 NBSK List Price 13-year Trend (2009 Forecast up 20% since 2006) PULP Uncertainty in Global financial markets – downward Increased producer pulp inventories – downward Pulp producer downtime increasing – downward NA printing and writing paper YTD shipments and demand down > 6% year-over-year – downward Alternative uses for wood – upward

PULP

Uncertainty in Global financial markets – downward

Increased producer pulp inventories – downward

Pulp producer downtime increasing – downward

NA printing and writing paper YTD shipments and demand down > 6% year-over-year – downward

Alternative uses for wood – upward

Market Cost Trends – Coal NAPP Coal Price (RED) 3-year Trend (Up 122% since 2006) COAL NA market price increased over 300% in 2008 ; Q4 2008 down 33% Global demand drove pricing escalation; current recession is resulting in demand destruction 2009 market pricing up 60% year-over-year 2008

COAL

NA market price increased over 300% in 2008 ; Q4 2008 down 33%

Global demand drove pricing escalation; current recession is resulting in demand destruction

2009 market pricing up 60% year-over-year 2008

STARCH Alternative uses of corn (ethanol, corn syrup, cosmetics) – upward Corn pricing escalation of 100% in 2008; recently recovered to early 2008 pricing levels – neutral Corn starch supply/demand imbalance – upward Corn starch conversion costs up 8-10% in 2009 ; total cost is driven by corn pricing LATEX Input cost escalation for styrene and butadiene in 2008 resulted in latex pricing increases of > 30% December 2008 pricing for styrene and butadiene has returned to 2007 levels Latex pricing is slower to recover due to supplier consolidation and production reductions in NA ( Two 20% increases by Dow ) Q1 2009 pricing up 24% over 2008 average market pricing Market Cost Trends – Starch & Latex

STARCH

Alternative uses of corn (ethanol, corn syrup, cosmetics) – upward

Corn pricing escalation of 100% in 2008; recently recovered to early 2008 pricing levels – neutral

Corn starch supply/demand imbalance – upward

Corn starch conversion costs up 8-10% in 2009 ; total cost is driven by corn pricing

LATEX

Input cost escalation for styrene and butadiene in 2008 resulted in latex pricing increases of > 30%

December 2008 pricing for styrene and butadiene has returned to 2007 levels

Latex pricing is slower to recover due to supplier consolidation and production reductions in NA ( Two 20% increases by Dow )

Q1 2009 pricing up 24% over 2008 average market pricing

Market Cost Trends – Caustic & Sodium Chlorate Caustic 2-Year Trend – Up 220% since 2007 Source: Harrimon Gulf Coast Pricing Source: CMAI, Delv’d US Sodium Chlorate (contract prices) 6-year Trend (up 36% since 2006) SODIUM CHLORATE Supply/Demand imbalance resulting in tight supply – upward NA producer production curtailments – upward Electrical costs increasing – upward Global weakness in the pulp and paper market; resulting in improvement in inventory and supply/demand – neutral 2009 pricing projections up 9% from year end 2008 CAUSTIC Chlor-Alkali imbalance globally/resulting in NA operating rates less than 70% – upward North American supply consolidation and downtime – upward Global recession and housing market decline – upward Five force majeures with NA producers in 2008 – upward Import market competition on the East and West Coast – downward NA caustic pricing is up 150% year-over-year 2007/2008 ; 2009 pricing down 18% over 2008 year end pricing

SODIUM CHLORATE

Supply/Demand imbalance resulting in tight supply – upward

NA producer production curtailments – upward

Electrical costs increasing – upward

Global weakness in the pulp and paper market; resulting in improvement in inventory and supply/demand – neutral

2009 pricing projections up 9% from year end 2008

CAUSTIC

Chlor-Alkali imbalance globally/resulting in NA operating rates less than 70% – upward

North American supply consolidation and downtime – upward

Global recession and housing market decline – upward

Five force majeures with NA producers in 2008 – upward

Import market competition on the East and West Coast – downward

NA caustic pricing is up 150% year-over-year 2007/2008 ; 2009 pricing down 18% over 2008 year end pricing

5 Year Price Trend Major Chemicals Unprecedented escalation in raw material costs in the past 5 years

How far does $500 go? Domtar study, Print Solutions August 2008

Summary Input costs including Wood, Chemicals, Starch and Freight continue to increase at unprecedented rates Demand for paper has decreased, inventories are declining and paper machines continue to shut down Supply consolidation and unanticipated downtime has resulted in very tight supply in commodity markets; driving pricing Chemical price indices (CAGR 8%) is significantly outpacing Paper price indices (CAGR 3%) Glatfelter is pursing a variety of cost reduction initiatives to offset the price / cost gap. We are working every day to keep prices down and help offset the anticipated raw material increases in 2009

Input costs including Wood, Chemicals, Starch and Freight continue to increase at unprecedented rates

Demand for paper has decreased, inventories are declining and paper machines continue to shut down

Supply consolidation and unanticipated downtime has resulted in very tight supply in commodity markets; driving pricing

Chemical price indices (CAGR 8%) is significantly outpacing Paper price indices (CAGR 3%)

Glatfelter is pursing a variety of cost reduction initiatives to offset the price / cost gap. We are working every day to keep prices down and help offset the anticipated raw material increases in 2009