Paper Outlook — Declaring War on Dumping

BY ALL indications, the paper manufacturing sector is doing everything within its means to ensure that capacity walks hand-in-hand with demand. Whether these measures will have an impact on what is largely perceived as a weak North American paper market through the front half of 2007 remains to be seen.

Some big names were on the move in the back half of 2006 on the coated freesheet side. International Paper sold its coated and super- calendered (SC) papers business to CMP Holdings, a subsidiary of Verso Paper Holdings, for roughly $1.4 billion. But perhaps the biggest news came from Weyerhaeuser, which combined its fine papers business with Domtar in a $3.3 billion megadeal. The deal created a “new Domtar,” which will likely have an impact on the supply side.

Out of Service

Capacity is being taken out of the equation, as well. NewPage recently announced that subsidiary Luke Paper, of Luke, MD, was permanently shutting down its No. 7 paper machine, leaving 130 jobless. Also, NewPage is idling its No. 11 machine in Rumford, ME, for three months in the first quarter of 2007, taking 25,000 tons of coated paper out of circulation.

One paper buyer for a magazine publisher, speaking on the condition that he not be identified, is not surprised with recent actions of paper manufacturers, given the stagnation in pricing. There has also been a domino effect with some neighboring grades.

“Mills have made a concerted effort to keep capacity in line with demand,” he says. “Another wild card is that newsprint consumption is declining rapidly. Publishers are also changing trim size to lower consumption. This usually has a ripple effect on all grades and causes downward pricing pressure, especially on coated and SC.”

With mill closures and the consolidation that has taken place in recent years, the buyer doesn’t anticipate much movement at all on the pricing end. “I don’t see any increases in the first half of 2007, and it’s too soon to tell about the second half,” he notes.

Eastern Influences

A slowing economy and rising postal costs are going to have an impact on demand, contends John Maine, vice president of RISI, a publisher of titles for the pulp and paper industry. Asian sourcing is becoming a hot button topic.

“We expect to see additional imports coming in, particularly from the Asian markets,” Maine says. “It remains to be seen what will happen in the (NewPage) dumping suit…I don’t believe it will have an impact in 2007, which means we’ll continue to see significant Asian paper in our market. That will keep the market amply supplied and, because of that, pricing is going to remain competitive.

“On the other hand, we do see a tightening in the European market. Those prices are going to escalate, to some degree, which means the European producers will be less interested in shipping to our market. But I don’t think the strength in the European market is going to be enough to offset the weakness that we’re having in North America and will continue to have in 2007.”

One paper manufacturer finds itself having to answer allegations of price fixing. Stora Enso North America was indicted last month by a grand jury for allegedly participating in a price fixing conspiracy to drive up the price of paper between August 2002 and June 2003. The Associated Press quoted the indictment as saying Stora Enso agreed to the price fixing scheme with an unidentified competitor. Stora Enso denies any wrongdoing and plans to plead not guilty.

On the import front, Asian sourcing continues to draw ire and fire from the U.S. manufacturing sector. Dayton, OH-based NewPage filed a petition with the U.S. International Trade Commission (ITC) accusing sources in China, Indonesia and South Korea of dumping coated freesheet imports in the United States. The ITC ruled there is “reasonable indication” that the U.S. paper industry is being materially harmed by the imports, and now the case goes before the U.S. Department of Commerce (DOC). The ITC and DOC are responsible for conducting antidumping (AD) and countervailing duty (CVD) investigations.

Web Catching On

“It started on the West Coast, and it’s moved across the country,” another paper buyer noted of the prevalence of imports. “What’s really getting attention is that China is starting to make web grades available. From a buyer’s perspective, it’s a good thing because prices are likely to stabilize.”

If the manufacturers of coated freesheet papers are publicly supporting the dumping claims, they’re not doing so through this magazine. A NewPage representative did not return requests seeking comment. Representatives for Stora Enso and Weyerhaeuser also opted not to comment, the latter largely due to the sale of its fine papers business to Domtar. Sappi North America did comment on the state of Asian sourcing, but would not speak specifically to NewPage’s complaint.

“In years past, Sappi—along with other coated manufacturers in the U.S.—have voiced concern over the Korean government’s willingness to subsidize its paper industry,” notes Brooke Carey of Sappi Fine Paper North America’s corporate communications department. “However, Sappi has not taken a position with respect to the petition filed by NewPage.”

By contrast, Tom Vendetti, spokesman for international paper sourcing firm China Paper Holdings of Beijing, feels the DOC’s antidumping and antisubsidy investigation into China’s exports of coated paper is “completely unfounded and detrimental to both the U.S. and global economies.”

Vendetti likened the Chinese government’s offering of subsidies to its domestic coated paper companies to the U.S. government’s practices of offering tax breaks and other incentives to create jobs and stimulate the economy.

“Any country should have the right…to introduce new products to new markets where there proves to be high demand,” Vendetti wrote in an e-mail. “For a country that so greatly values free enterprise and a competitive marketplace, it is impossible to understand why the United States would not support more industries in doing what the global textiles and technology industries have been doing for years—introducing the American economy to alternative products and competitive prices.”

The Printing Industries of America/Graphic Arts Technical Foundation (PIA/GATF) also came out swinging in defense of the Asian suppliers. In a letter to Marilyn Abbott, secretary of the ITC, PIA/GATF President and CEO Michael Makin detailed four points to support the association’s stance against NewPage’s dumping claim. The following is a brief synopsis of each point:

• A steady supply of paper is vital to the U.S. printing industry. Printers invest 30 percent to 40 percent of revenues dedicated to paper purchases. “Any shortage of or disruption to paper supplies, including such shortages or disruptions brought about by the federal government imposing restrictions on paper sources, will have a serious negative impact on the U.S. printing industry,” Makin wrote.

• The current state of the paper market is competitive. Citing the U.S. Bureau of Labor Statistics Producer Price Index (PPI), paper prices are rising in excess of general inflation rates and the overall PPI. Citing Labor stats, Makin noted that average prices have increased in each of the last four years, including 6.83 percent in 2005 and 5.8 percent for the first 10 months of 2006.

“The increasing paper prices experienced by the printing industry, along with the paper industry consolidating operations to make it more cost-competitive, demonstrate the current health of the paper industry. There is no economic reason to correct or modify the supply and demand of paper in today’s marketplace,” Makin wrote.

• Increasing demand for paper by the printing industry is expected to continue. According to the PIA/GATF Print Market Index, print markets have gained “considerable strength” over the 2000 to 2006 period (see chart). In fact, the PIA/GATF expects total printing shipments to increase from $171.1 billion in 2006 to $175.4 billion in 2007.

• Additional factors contribute to print’s need for paper from a variety of sources, contends the PIA/GATF. Among them are the inability to obtain regional supply or necessary quantities of paper should sources be restricted, quality differentiation between various producers and service.

For once, a firestorm of controversy is surrounding the world of paper supply and demand. With the price of postage on the rise and volatile oil prices impacting consumables as well, it is a storyline that merits following. PI