Executive Summary
• Sector rally continued in Q2/07, despite a spike in the Canadian dollar.
• As expected, capacity rationalization has been announced and more is expected due to continued
weak demand for paper, paperboard, and building products.
• Stocks rated 1-Sector Outperform: Canfor Pulp Income Fund, Cascades Inc., Domtar Corp.,
West Fraser Timber Co. Ltd., and Weyerhaeuser Company.
In Q2/07, the S&P/TSX Paper & Forest Products Index rose 5.16% (Exhibit 2), in line with the
S&P/TSX Composite Index’s 5.63% increase but below the S&P TSX Materials Index’s 8.17%
increase. The Q2 performance was somewhat surprising given the spike in the Canadian dollar and
continued weak demand and prices for most commodities.
The strengthening Canadian dollar was a key development in Q2/07. After being weak for the first
two-and-a-half months of the year, the Canadian dollar reversed course late in Q1 to reach a 30-
year high in Q2. From a low of US$0.8624 reached early in Q2/07, the dollar spiked to US$0.9446 in
Q2/07 to average about US$0.9111. Scotia Economics continues to forecast a strengthening Canadian
dollar for this year and next, averaging about US$0.9328 and US$0.9450, respectively.
The U.S. housing market shows no signs of turning around, but wood products did increase in
response to the strengthening Canadian dollar and production curtailments. Several companies have
announced significant curtailments due to weak lumber demand and prices, the stronger Canadian dollar,
the export tax on shipments to the United States, and a potential 50% increase (from 15% to 22.5%) in the
export tax for B.C.-based producers who may have exceeded their quota earlier this year. In response to a
stronger Canadian dollar, production curtailments and seasonal factors, lumber and oriented strand board
(OSB) prices moved higher during the quarter.
North American paper and paperboard demand continues to weaken. Through May, total U.S.
newsprint consumption dropped 11.1% year over year (YOY) and U.S. dailies’ consumption decreased
9.1% YOY. Uncoated freesheet (UFS) demand declined 7.4% YOY until April, while overall printing and
writing paper demand decreased 3.7% YOY for the same period. Similarly, demand for corrugated boxes
dropped 1.4% YOY in the first five months of the year (2.3% on an average week basis).
In response, during the quarter several companies announced market-related downtime and indefinite and
permanent mill closures. The bulk of the recent announcements were for coated papers. Further capacity
rationalization is required, particularly in newsprint, as the secular decline in paper demand continues
unabated.
In our opinion, further consolidation and rationalization are needed for North American producers
to regain lost scale and scope. We expect most of the required consolidation will involve only share
exchanges given most players’ limited financial flexibility. Divestitures, asset swaps, and further capacity
rationalization also remain likely.
We recommend investors focus on event-driven situations and on companies with substantial
financial flexibility. Our 1-Sector Outperform-rated stocks are Canfor Pulp Income Fund, Cascades,
Domtar, West Fraser Timber, and Weyerhaeuser.

Contents
Executive Summary 2
Sector Overview 5
Index and Share Price Performance 8
Commodity Prices Forecast 10
Newsprint Review and Outlook 11
Market Pulp Review and Outlook 16
Printing and Writing Papers Review and Outlook 19
Uncoated Freesheet 19
Uncoated Groundwood 21
Coated Groundwood 22
Coated Freesheet 24
Building Materials Review and Outlook 25
Softwood Lumber Agreement (SLA) Takes Effect 25
Building Materials Review and Outlook 26
Packaging Review and Outlook 29
Pulp and Paper Chemicals Review and Outlook 32
North American Sodium Chlorate Remains Tight 32
North American Chlor-Alkali 34
S&P/TSX Paper & Forest Products Index vs. Major Indices 35
Currencies 40
Price to Book Value 43
Our Top Picks 49
Canfor Pulp Income Fund 49
Cascades Inc. 50
Domtar Corp. 51
West Fraser Timber Co. Ltd. 52
Weyerhaeuser Company 53
Paper & Forest Products – Universe of Coverage Valuation Comparison 54
Paper & Forest Products – Financial Comparables 56