PULP MARKET REVIEW

Heikki Vappula

President

Energy and Pulp Business Group

10 May, 2011

| © UPM

Contents

• Strategy and priorities

• UPM in Uruguay

• Pulp market outlook

• Financials Q1 2011

• Summary

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STRATEGY AND PRIORITIES

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Energy and Pulp Paper Engineered materials

• Expand in cost

competitive low-

emission energy

• Develop second-

generation biofuels

• Grow in cost

competitive pulp

• Focus on European

profitability

• Consolidation in

Europe

• Growth in China and

other growth markets

• Profitable growth in

self-adhesive label

materials

• Plywood renewal

• Drive product renewal

and develop new

businesses

STRATEGY AND PRIORITIES Market-driven business model increases insight and promotes action

Group level synergies from resource integration and global functions

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STRATEGY AND PRIORITIES

Diversified sources of operating profit – Pulp is a significant source of cash flow and major source of operating profit

Forest and Timber 3%

Pulp 19%

Energy 14%

Label 6%

Plywood 2%

Cumulative

EBITDA 2007-2010

Paper 56%

Forest and

Timber 15%

Pulp 30%

Energy 25%

Label 7%

Plywood 0%

Paper 23%

Cumulative

Operating profit 2007-2010

excluding special items

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STRATEGY AND PRIORITIES

Weight in strategic capex is on value

enhancing acquisitions

6

0

200

400

600

800

1 000

05 06 07 08 09 10 11e

€ million

Operational investments

350

Capital expenditure

Strategic investments

Depreciation

Uruguay

acquisition

6

Estimate

Myllykoski

acquisition

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Chemical pulp capacity 1,000 tons

Fray Bentos 1,100 Start-up 2007

Kymi 570 Rebuild 2008

Pietarsaari 790 Rebuild 2004

Kaukas 740 Rebuild 1996

Total own capacity 3,200

17% of Botnia's capacity 403

Total 3,603

STRATEGY AND PRIORITIES

Pulp capacity 3.2 million tons – produced at four modern mills

Fray Bentos pulp mill

Forestal Oriental plantations

UPM IN URUGUAY • Forestal Oriental

• Fray Bentos Pulp Mill

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UPM IN URUGUAY

Uruguay as a location for investment

• Availability of good quality raw material

- Ideal growing conditions for eucalyptus

• Logistics

- Access to river and sea transport

• Political, economic and legal conditions

- Politically stable country

- Transparency Index: second in Latin-America

• Professionals and qualified labour force

- Good standard of basic education

- High standard of university education, education free for students

FORESTAL ORIENTAL

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UPM IN URUGUAY

Forestal Oriental - History

1987 1990 1995 2000 2005 2009

1st pulplog export

from UY

UPM Kymmene

founded

Forestal Oriental SA

Plantations started

1st harvesting

operations

Botnia acquires stock from

Shell, one of the largest forest

owners in UY

Joint venture FOSA-Tile SA to

set up a company responsible

for all logistic and wood export

activities for both-largest

exporter in UY

Tile Forestal merges into

Forestal Oriental

UPM acquires

Botnia mill and

Forestal

Oriental

11

12

UPM IN URUGUAY

Forestal Oriental secures pulpwood supply

to UPM Fray Bentos pulp mill

• Forestal Oriental in Uruguay

– 225,000 ha of land owned and controlled

– 135,000 ha used for plantations

About 70% of the Fray Bentos pulp mill's wood

raw material comes from own plantations, largely

self-sufficient in the future

About 30% from private farmers through the

partnership programme FOMENTO

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UPM IN URUGUAY

Uruguayan wood basket

13

14

Protected areas Plantable area

Infrastructure Grazing

Native forests

60 %28 %

7 %2 %3 %

UPM IN URUGUAY

Sustainable land use

14

15

Nursery annual capacity for 20 million clonal seedlings

UPM IN URUGUAY

Technologically advanced nursery

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UPM FRAY BENTOS PULP MILL

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UPM IN URUGUAY

UPM Fray Bentos pulp mill

• Capacity 1,1 million tons of bleached eucalyptus pulp a year

• Start-up in November 2007

• Total investment 1.2 billion USD, machinery 700 MUSD

• Technology: BAT; Best Available Techniques (IPPC-BAT) securing minimum environmental impact

• Bleaching: ECF light

• High efficiency production

• High pulp quality

• Biomass Power generation for own consumption and external sales

• Low chemical, water and energy consumption

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150

250

350

450

550

650

750

0 10 000 20 000 30 000 40 000 50 000 60 000

Cumulative capacity, 1000 t/a

UPM IN URUGUAY

Significant cost benefits with plantation based pulp

€/t Market pulp producers' delivered cash costs to Frankfurt, EUR/t

UPM Finland

UPM Uruguay

Metsä-Botnia Finland

Plantation based pulp

Source: Pöyry estimate Q4/2010

World softwood

market pulp

World hardwood

market pulp

PULP MARKET OUTLOOK

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PULP MARKET OUTLOOK

World fiber balance

million tonnes

Source Pöyry 2009

Total

Chemical pulp

Bleached Market

0

50

100

150

200

250

300

350

400

Sulphite

Recycled paper

Mechanical pulp

Un-bleached

Non-wood

Integrated

Market BHKP

Market BSKP

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0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

2003

2004

2005

2006

2007

2008

2009

2010

2011e

2012e

2013e

2014e

BHKP BSKP UKP Sulphite

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PULP MARKET OUTLOOK

Chemical pulp demand is growing driven by various end-uses

Fine Papers, mature markets

Tissue

Packaging

Other

Source: PPPC, Pöyry, UPM

Publication Papers

Fine Papers, growth markets

Market pulp demand development 2003-2014

‘000 tonnes

Forecast

Chemical pulp demand by end-use

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PULP MARKET OUTLOOK

Capacity growth focus on regions with increasing wood availability and cost efficient plantation operations

Wood availability

Increasing

Stable / decreasing

Source: Pöyry

0

2000

4000

6000

8000

Total Latin

America

Asia North

America

Eastern

Europe

Western

Europe

'000 tonnes

2.4%

4.7%

4.3%

1.2%

1.8% 0.2%

Chemical market pulp capacity growth by region

2009 - 2014

Source: PPPC

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PULP MARKET OUTLOOK

New BEKP pulp lines – estimated start-ups by 2016

Year Quarter Country Company Mill Capacity

Mt/a

2011 Q3 China Shandong Chenming Zhanjiang 0.7

2012 Q4 Brazil Eldorado Tres Lagoas 1.5

2013 Q1 Uruguay Montes del Plata Punta Pereira 1.3

2013 Q1 China Oji Paper Nantong 0.7

2013 Q2 Brazil Suzano Maranhao 1.5

2014 Brazil Fibria Tres Lagoas II 1.5

20XX Australia Southern Star Bell Bay 1.1

20XX Brazil CMPC Guaiba II 1.5

20XX Others

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The investment decision has been made concerning the lines in green colour.

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PULP MARKET OUTLOOK

Market BHKP trade flows 2009 – Latin America has become a major source of BHKP

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Total 20 million tons

0.2 1.1

3.0

0.4

0.5

0.4

3.8 1.3

4.6

2.2

0.4

0.5

0.2

0.2 0.3

0.2 0.3

0.1

0.1

0.2

Source: Pöyry

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PULP MARKET OUTLOOK

World chemical market pulp demand shipments by region 3 months 2011 vs. 2010

Shipments rose sharply for Q1 compared to last year, and particularly to China. Notable is the strong development in Western Europe which comes on top of good growth numbers in 2010 too.

Source: PPPC

1000 t

25

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PULP MARKET OUTLOOK

World chemical market pulp demand shipments by grade 3 months 2011 vs. 2010

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Shipments of all grades increased compared to Q1 of 2010, softwood most noticeable with Northern Softwood at a shipment-to-capacity ratio of 98% for Q1 this year.

1000 t

Source: PPPC

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PULP MARKET OUTLOOK

World chemical market pulp shipments – driven by strong sales to China

27

2750

3000

3250

3500

3750

4000

4250

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010

2011

Mar +17.3 % Ytd +6.1 %

Source: PPPC

Shipments jumped to record level in March mainly due to very strong Chinese buying.

1000 t

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PULP MARKET OUTLOOK

Global chemical market pulp producer inventories – tight in softwood and balanced in hardwood

Source: PPPC

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PULP MARKET OUTLOOK

Chemical pulp market prices

300

400

500

600

700

800

900

1 000

1 100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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USD/ton

NBSK

Northern Bleached Softwood Kraft

Source: FOEX Indexes Ltd.

BHKP

Bleached Hardwood Kraft

USD 1009/t

USD 876/t

BHKP

NBSK

FINANCIALS Q1 2011

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FINANCIALS

Q1 2011 – margins improved despite

challenging cost environment

**) from the beginning of the year

Gearing

44% -2 pp (**

EBITDA margin

16.1% +2 pp

Operating cash flow

EUR 166 m -43 m

Net debt

EUR 3,197 m -89 m (**

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Sales

EUR 2,356 m +16%

EBITDA

EUR 379 m +32%

Operating profit (*

EUR 198 m +71%

EPS (*

EUR 0.32 +113%

*) excluding special items

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FINANCIALS

EBITDA improved by 32%,

main improvement in Pulp and Paper

32

0

50

100

150

200

250

300

350

400

450

500

EBITDA

Q1/10

EBITDA

Q1/11

EUR million

288 14.1%

Pulp Forest

and

Timber

Label Other

operations

Paper

379 16.1%

Energy

Plywood

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FINANCIALS

Pulp Q1/11 vs. Q1/10 – profitability improved

clearly due to higher sales price and deliveries

-100

-50

0

50

100

150

200

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11

-30

-15

0

15

30

45

60

34% Q1 2011 457 Q1 2010 341

Sales EUR million

+76 Q1 2011 160 Q1 2010 84

Operating profit EUR million*)

Operating profit excluding special items

EUR million

€ million % of sales

33

*) excluding special items

SUMMARY

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Summary

• UPM seeks to grow in cost competitive pulp

• UPM's pulp production portfolio results in excellent

operational performance

• Versatile international footprint provides a solid

platform to grow

• Pulp market outlook is strong – demand and share of

market pulp continues to grow

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