1. You need to place sawdust in a Mortar & Pestle to make it into ground saw dust. The engram for this is Paper Crafting, and is at level 14.
  2. Next you use the ground sawdust and a filled water skin to make paper sludge in the mortar and take it to the work table. It takes 3 ground sawdust and one water to make one paper sludge.
  3. Craft wet sheet of paper at the work table which will spoil after about 10 minutes and give sheet of paper which can be used to make paper bag or note at the work table. One Paper Sludge makes one piece of wet paper.

(**Tip** holding shift and dragging wet paper will unstack it so it all spoils at once)