Industry in Transition

Industry in Transition John Begley January 9, 2006 Oaxaca, Mexico

Outline • Introduction • Key Drivers of Change • Variables to watch • Risks & Expectations • Discussion

Port Townsend Paper

PTPC: an overview • Port Townsend Paper produces pulp, paper, containerboard and corrugated boxes with 6 manufacturing locations and a creative design facility. • In 2005, gross sales will exceed $220 million US • We buy over $50mm of fiber annually • We have approximately 800 employees producing 95m tons of pulp, 230m tons of paper and 1.4 billion square feet of boxes • The markets the Company focuses on are predominantly in the Pacific Northwest and Western Canada • Additionally, PTPC sells 95m tons of pulp and about 25m tons of paper and board into the Asian marketplace. • Our key export markets are: China, Korea, Taiwan, Thailand and Japan

Strong market position (1) Corrugated box volume from CCCA, other sectors based on management estimates. (2) For kraft paper and lightweight containerboard, cost position is calculated on a delivered basis to the U.S. west coast (defined as San Francisco). For corrugated boxes, based on Management estimates.

Introduction • Port Townsend Paper • John Begley • 33 years in Industry • 25 years with Weyerhaeuser • 8 years at Port Townsend

Key Drivers of Change • Globalization and increasing integration of world economies • Scale of customers is increasing resulting in consolidation of buying power and customer driven product and business system change • Financial industry interest and activity in the pulp, paper and packaging industry continues to have a major impact on how companies manage their assets • Georgia Pacific • Longview Fibre • Information technology • Environmental awareness, concerns and expense

Industry Response • Major players focusing on fewer end-use markets • Consolidation through acquisition and capacity rationalization in mature markets • Capacity in China • Increasing proportion of capital spent on environmental regulations versus productivity • Significant increase in the use of recycled fiber • Hi-yield plantation forestry • Trend to lighter weights (do more with less)

Chinese Containerboard Growth Chinese containerboard supply has been growing at 16% CAGR Unbleached pulp pricing driven as a function of both containerboard and market pulp both of which are expected to increase by 10% in 2004 China represents approximately half of global unbleached pulp consumption

Expansion/growth decisions are not based on solid financial analysis 42 pulp and paper projects are designated to be completed by 2010 Domestic banks are playing the leading role in making these financial commitments Packaging converting business has also expanded dramatically to service large export-based markets Almost wholly reliant on imported fiber - this has also led to a huge increase in OCC exports from North America to China and increase the volatility of pricing China represents approximately half of global unbleached pulp consumption China responded in part to the oversupply situation by filing anti-dumping charges against the US manufacturers with the WTO China

North American OCC Exports

Key Investment Criteria When making an investment in this industry, there are 4 major criteria: • Market opportunity • Capital availability • Physical site • Fiber supply

Variables to Watch • Chinese currency and economic growth • Latin America fiber supply impact • Russian softwood supply • Technology impact on the print media • Industry “specialization and focus” • US Economic Indicators along with the strength of the dollar

Risks • Upside • Energy is over priced • US housing starts • Downside • US trade deficit • Supply chain escalates passing on energy price increases • Inflation accelerates • Interest rates accelerate

Expectations • Globalization expands and continues changing how we do business • Despite generally good liquidity in the capital markets, this industry will continue to be constrained until sustainable returns are demonstrated • Some analysts are making dire predictions for many segments of the Industry • Companies will have to achieve more with less • System optimization throughout the supply chain will be the primary means to achieve acceptable performance • Continued growth in recycled usage. Growing importance of forest/supply chain certification

Our Strategy We will grow the Company through acquisition and internal productivity gains to increase the integration of the Company. This growth will be in a geographical proximity to our existing operations. This growth will: • Reduce open market exposure • Create the size needed to attract capital • Improve current financial ratios

Discussion

Industry in Transition