MARKET PULP

Our pulp business showed marked improvement in 2006, after coming off a relatively flat year in 2005. Global demand for pulp grew throughout the year while inventories remained low, which positively affected pricing across all grades.

We manufacture kraft pulp at four mills - three in the southeastern United States and one in Ontario. Our mills use roughly 31% of their kraft pulp production as fiber supply for our paper grades. The remaining 69% of our kraft pulp is manufactured as high-quality pulp sold in the global market primarily for use in tissue, towel and diaper applications.

During the year, we closed one of two pulp lines at our Thunder Bay, Ontario mill to improve the mill's cost structure. The larger pulp line at Thunder Bay is in operation and performing well. Bowater's product mix is now about 40% softwood, 30% hardwood and 30% fluff pulp production. Bowater remains well positioned to compete effectively in the pulp market.