LUMBER

Bowater's lumber business fulfills a vital and strategic role by providing wood chips to our major paper mills. Our sawmills also produce a variety of lumber products for sale on the open market. Six of the eight sawmills we operate are located in eastern Canada and two are located in the southeastern United States.

Housing markets in North America, which had experienced steady growth in the previous five years, slowed during 2006. The reduction in new home construction led to weakness in overall pricing for our wood products, which caused us to reduce our lumber production during 2006.

2006 brought a resolution to the long-running softwood lumber duty dispute between the United States and Canada. Since 2002, we had been subject to duties on lumber shipped from our Canadian sawmill operations into the United States. By the end of the third quarter 2006, we had deposited about $113 million with the U.S. Department of Commerce. Under the terms of the softwood lumber agreement between the two governments, we received a duty refund of $104 million in November.