Paper Market Update — Paper Industry Strikes Out

BY MARK SMITH

Technology Editor

Can it ever be reasonable to have a wholly positive outlook for printing paper? The answer would seem to be "no," at least from the buyer's perspective.

Paper is so essential to print that one feels compelled to look for any potential sign of trouble. The cost of being caught short is too high and memories of the bad times (shortages and soaring prices) too lasting not to err on the side of caution.

Plant strikes are just the latest additions to the list of reasons for paper buyers to adopt a cautious outlook. Other concerns have been in place for some time, including paper manufacturers desperate to increase prices from historic lows, capacity reductions due to consolidation and expected growth in paper demand fueled by improvement in print buying.

July opened with an agreement to end a labor strike that had shut down the Finnish paper industry for seven weeks. Yet, announcements of the deal still included speculation that the full impact of the shutdown had yet to be felt by the global marketplace.

About the same time, it was announced that negotiations to end a strike at UPM Kymmene's Miramichi, Canada, paper mill had broken off. No new talks were scheduled.

Set against this uncertain backdrop was a series of announced price increases. Even as manufacturers were floating a second round of mid-year increases, reports were coming out about softness in various grades and erosion of earlier price hikes.

Drawing on years of experience as a marketing executive at a paper company, Jack Miller now provides independent consulting and market intelligence as president of MarketIntell in Shelton, CT. Miller agrees that there are areas of softness in paper demand and pricing.

"For uncoated free sheet, the price hikes implemented in the spring have now been just about completely eroded, and certainly will be by this month," Miller contends. Given that the declines in shipments have been roughly balanced by capacity reductions, he doesn't expect any big swings in pricing for the grade.

Shipments of uncoated offset are down due to loss of market share to coated grades and value-added, high bright uncoated groundwood grades, the industry consultant continues. "Declines in shipments overstate the drop in real demand, however, because there was some inventory building in 2004. That inflated the shipment and apparent consumption numbers for 2004, and reduced 2005 shipments as this inventory was worked off."

Pickets Make Their Point

Miller says there are indications of tightening in the coated free sheet and groundwood (coated and uncoated) sectors as a result of the strikes in Finland and Miramichi. "For lightweight coated (LWC), price increases announced for July will likely take effect due to the strikes, he says. "For coated free sheet, the market remains a bit sloppy. The AF&PA (American Forest and Paper Association) reports weak shipments through May, but that does not reflect the impact of the lockout in Finland."

Overall, prices for 2005 should more or less average what they did in the fourth quarter of 2004—a level not far off the long-term industry trend, Miller believes.

Rick Dethloff, director of purchasing at Arandell Corp. in Menomonee Falls, WI, says the strike at UPM's Miramichi mill has created some apprehension in the market as to whether the supply of coated groundwood will meet the projected demand. "This apprehension caused major buyers to place bulk orders in an effort to build inventory of coated groundwood," he observes.

In general, the market showed some support for higher prices on coated groundwood grades, but much less, if any, support for the increase on coated free sheet papers, Dethloff says. His experience is that of a leading printer of high-quality catalogs via web offset.

Paper distributors expected there to be an overflow from LWC paper demand into lighter weight free sheets, but this market dynamic never materialized, adds the director of purchasing. "Therefore, the January increase on coated free sheet was quickly extinguished for lack of demand."

Lower than expected demand through the first half of the year and a steady inflow of paper from the Pacific Rim kept the pressure on subsequent announced price increases for coated free sheet, Dethloff reports. "However, coated groundwood pricing held its own as the Mirimachi mill strike continued and exporting from Finnish mills was interrupted."

To address the uncertainty created by the strikes, Arandell let its regular suppliers know what paper requirements it had in the pipeline through the end of the year. "We are focusing on fewer mills with which we want to do business, and intend to strengthen our relationships with these mills and their distributors," Dethloff says.

Song Remains the Same

The paper management advice the printer has been giving to its customers remains basically unchanged. "We prefer to recommend grades to our customers that perform best on our presses and consistently meet both of our expectations. By using recommended grades, we can minimize waste, obtain quicker color approval and assure a source of supply," Dethloff asserts.

"We encourage customers to place paper orders early to ensure availability and caution them on the risk of solely shopping on price rather than establishing themselves with a dependable supply source," he adds.

Dethloff expects the demand for all coated grades to be very strong throughout the rest of this year. "Price increases on lightweight coated groundwood grades were announced for deliveries beginning July 1," he points out. "However, we would be surprised to see any price increases announced for third quarter delivery of coated free sheet grades because it will take a while for demand to surpass inventories."

Assessing today's paper market requires a global perspective, according to Dethloff. Paper companies are aggressively competing with each other for market share in the U.S., Europe and Asia, but there's also competition within the organizations for capital to support mills in these regions, he notes.

"Compared to their counterparts here, European and Asian operations have invested in more efficient machines," asserts Arandell's director of purchasing. "Unless the return on capital can justify new expenditures, domestic mills will fall further behind. If the present trend continues, we can expect to see more paper imported."

Lane Press' customer base also stood to bear some brunt of any fallout from the recent paper market travails. The Burlington, VT, printer specializes in short- to medium-run magazines, but also produces catalogs. Its "Paper Prophet" briefings keep clients updated on the consumable.

According to Tracey Moran, marketing manager, the company's strategy for dealing with uncertainty in paper pricing and availability is to "keep customers informed with paper market analysis and trend data, work diligently to ensure supply and push back on price increases. Our customers benefit from our policy of full disclosure about paper pricing and availability, and our excellent relationships with the mills," she says.

The printer uses its position as a large paper purchaser to advocate on behalf of its clients with the mills, Moran adds. Like Arandell, she says Lane Press' advice to customers on managing paper has remained consistent:

"Plan your paper needs well in advance of the time you are going to print. The mills are requiring paper lead times in the six- to eight-week time frame. While we'll work to accommodate shorter time frames, finding paper at the last minute will often put publishers in the position of accepting a different paper than they may have specified."

The labor situations at Miramichi and in Finland have made the company's planning more challenging, Moran admits.

"We are in the enviable position of having very strong relationships with the major coated paper manufacturers," she says. "We believe these relationships provide the type of protection our customers require to ensure an uninterrupted paper supply. Mills affected by the strikes generally were able to find alternative supplies."

Customers seem to be taking developments in the paper market in stride, Moran observes. "If we take the high volume of business coming into our plant as an indicator of the reaction to pricing, we would say that print buyers have accepted the increases. The strength of the industry segment we serve has helped overcome the concerns brought on by the timing, frequency and amount of the increases," she adds.

In the May/June 2005 edition of our sister publication, PrintMedia, Steven Frye of Frye Publication Consulting in Hailey, ID, offered publishers a top 10 list of suggestions for "Dealing with Rising Paper and Postage Costs." The suggested actions ranged from changing basis weight to reducing the number of wasted copies.

Frye says publishers haven't been reacting as strongly this time as they have in the past to similar conditions in the paper market. He hasn't seen any big move toward implementing the kind of measures for cutting paper usage that he outlined in the article.

"Publishers have been buying paper at historically low rates, so they've been expecting increases for several years now," he cites as the likely reason.

The Final Word

Frye's own take on the paper market outlook is for a slight softening through the end of 2005, with prices mostly stabilizing or even declining somewhat. "My longer term expectation is for prices to steadily, but moderately, increase because mills have changed the way they do business today compared to just a decade ago...and they are on a mission to raise rates," he says.

That specter of rising paper prices and tightening supply seems here to stay.

PrintCity Eyes Role of Rolls

AUGSBURG, GERMANY—PrintCity has launched a major industry-wide investigation into the potential impact of switching to larger paper roll diameters for web offset printing operations. The group says such a move "potentially would have massive cost savings for the industry."

The study will cover the end-to-end value chain, from paper making and logistics to the printer and onto the press itself. Initial efforts, including the publishing of a white paper on the impact for suppliers and customers, have drawn on the technical expertise of PrintCity member companies UPM Kymmene, MAN Roland, MEGTEC Systems and Sappi. The group also intends to offer a cost calculator for use by interested parties.

Andy Keil of MEGTEC Systems is spearheading the project. "There has been a huge interest in the study we are undertaking," he says. "Everybody involved understands that the economic viability of switching to larger roll diameters in the short- to medium-term will need careful assessment because it will require printers to invest in new pasters and roll handling equipment. Plus many mills would need to make substantial investments, too."

Keil adds that the group welcomes input because an issue of this import needs the widest possible discussion. (www.printcity.org)