Paper Forecast — Calm Seas Ahead

BY CAROLINE MILLER

The paper market is not unlike the direction of the wind: It can change directions at any given moment. For the last year, the price of paper has been blowing steadily upwards. But that may be changing, according to National Association for Printing Leadership (NAPL) Chief Economist Andy Paparozzi. "Things have been pretty interesting since March, when we began to start to see some change in the market."

Each month, the NAPL surveys 500 printers across the country on paper prices and availability. In the past four months, the monthly survey has seen some dramatic changes that indicate rising paper prices may be coming to an end. For the last year, the panel has reported that paper prices were rising. In January 1999, 13.6 percent of the respondents said that paper prices were rising. This trend continued throughout 1999 and the first part of 2000. This past March, the respondent rate hit an all-time high with 81.6 percent of those surveyed reporting that paper prices were rising.

Then suddenly things changed.

"In April, we started to see a move in the other direction—and the drop was rather substantial and dramatic," Paparozzi describes. In April, 76.3 percent of those polled reported that prices were rising. In May, that number dipped again, to 69.5 percent. Then in June, the number of printers reporting rising paper prices fell yet again to 53.3 percent. Finally, in July, the number dropped below 50 percent, to just 45.1 percent reporting that paper prices were rising. In just four short months, the NAPL recorded a 35.5 percent drop in the number of printers reporting higher paper prices.

"For the first time in over a year, we had more of our panel reporting that prices were stable than those reporting that prices were rising," he notes.

The rather dramatic turnaround in the NAPL's paper survey may be one of the first indicators that the upwards pricing spiral that printers saw from the middle of 1999 to the first quarter of 2000 may be coming to an end. "The spiral seems to be unwinding some, not that prices are falling—yet. They do seem to be stabilizing, and that's quite a change from the last five quarters," Paparozzi notes.

Changing Tides
So what's changed in the last five quarters that has had such a dramatic impact on paper prices? Paparozzi traces the paper pricing stabilization back to the Federal Reserve's efforts to slow the U.S. economy. "The printing industry is extremely sensitive to changes in the economy, whether it's up or down," he explains.

Because the printing industry is so sensitive to changes in the economy, the June and July data are particularly interesting because they may be the first indicators that the Federal Reserve's interest rate hikes are beginning to take effect and that business is slowing.

"Contrary to what the second quarter GDP report and some of the other national indicators contend, all of our data shows that the economy is, indeed, slowing. That would be my first explanation as to why we are seeing prices level off," he says. "Business is slowing in line with what the Federal Reserve has been trying to do; it is just that a lot of national indicators haven't picked up on that yet."

Even so, there are some printers who disagree with Paparozzi's claim that prices are beginning to stabilize.

Mark Noe, of Broadview, IL-based Lehigh Cadillac Direct, has not seen any stabilization in prices. "The current pricing is somewhat unstable, except for groundwood coated." He also notes that uncoated freesheet is losing some of the year's previous increases. And in the past six months, transactional prices have increased about 5 percent on coated grades.

While Paparozzi believes printers will see continued paper price stabilization, Noe predicts a different paper scenario. "In the next six months, pricing will likely trend up slightly or hold steady as supply is kept in balance with demand." Noe also believes that further consolidation among paper companies and emerging online paper buying initiatives will have more of an impact on paper prices over the next year.

"Consolidation is allowing suppliers to better control excess capacity, which in turn allows for more stable pricing in the short term. In the long term, this capacity control will likely put an upward pressure on prices," he notes. But it's not just consolidation that will make its mark on the paper market in the coming months, according to Noe. The movement toward more online paper purchasing is going to greatly impact prices in the next year or two.

"These companies are not making a large impact now, but they are providing a great deal of information. As the online companies achieve greater scale in terms of transactions cleared, they should make a significant impact on the market," he says.

Karen Kelty, of King of Prussia, PA-based XYAN.com, also foresees a time when online paper buying will have a strong impact on paper prices. She agrees with Noe's philosophy that increased access to information will mean lower prices. "When you look at the e-commerce model, you see that the consumer has access to a lot of information. And when you have that kind of access, it gets highly competitive," Kelty explains. She also believes that more online purchasing of paper will require the paper industry to become much more streamlined and will help wring the current inefficiencies out of the market.

Smooth Sailing
While Paparozzi concedes that paper industry consolidation and e-commerce will impact paper prices, he still contends that the major issue for printers is the slowing economy. "All the other things that are affecting our industry will continue to have an impact but, on top of that, we have to start monitoring the economy very, very closely," he cautions.

"Fine-tuning the economy is like surgery: there's always a risk involved. Because interest rates have such a long lag time, we never know if the hikes have been too much, not enough or just right," Paparozzi describes.

The belief that paper prices are beginning to stabilize does not appear to be a popular one, according to Kelty. "I don't think that prices are going to go up. Some of my colleagues would disagree with me, though," she notes.

While Kelty isn't predicting a rise in paper costs, Roy Grossman, of Clifton, NJ-based Sandy Alexander, isn't ready to wager on what's going to occur in the paper market in the next six months.

"Right now, prices are very volatile. I think it really depends on whether or not the economy softens," Grossman says.

"The economy does seem to be slowing, and that impacts the paper market greatly. The economic peaks and valleys could be a real issue for us in the future. It all depends on whether we see a major softening in the economy," he explains.

Paparozzi believes that printers will see a smooth landing, but he does warn that printers need to pay close attention to the strength of the overall economy. "Printers will really need to tune into what the economy is doing. For the first time in five years, we have to watch the economy closely. In my opinion, that dominates every other consideration. Printers should recognize that the economy is going to slow. We'd all do well to listen and prepare for it—and that's really the issue."