Paper Outlook — Another Notch in the Market's Belt
Industry consolidation continues, paper availability tightens and prices rise—but not by much.
BY CAROLINE MILLER
The April announcement that International Paper (IP) was upping the ante by making a $7.3 billion offer to purchase Stamford, CT-based Champion International came as no surprise to many in the printing industry.
"We were not surprised by International Paper's bid for Champion," remarks Tom Hayes, vice president of marketing and sales for R.R. Donnelley Paper Services. "When StoraEnso paid a higher market premium for Consolidated than what UPM was paying for Champion, it was almost a fait accompli."
International Paper's offer exceeds UPM-Kymmene's February move to acquire Champion. Based in Finland, UPM's all-stock offer of $6.6 billion dropped to about $5 billion after a 20-percent slide in UPM's share price. In the end, UPM-Kymmene chose not to submit a counter offer. International Paper hopes to close the deal in June.
However, this latest move towards consolidation will not be the last in the paper industry, according to Mark McCready, senior analyst with Jaakko & Poyry Group, a consulting and engineering firm for the forest industry. He expects to see a trend toward further consolidation. "The North American paper industry is still highly fragmented, much more so than the European paper industry."
McCready predicts consolidation will bring efficiencies to paper producers, such as helping to rid the industry of redundancies and inefficient machines. "It may or may not reduce price volatility; it depends on just how consolidated the market becomes." Still, some printers have concerns as to how consolidation will affect them in the future. "Fewer mills will obviously mean changes in the future. It is my hope that quality standards are not compromised," warns Debbie Creel, CFO of Las Vegas-based Creel Printing.
While the consolidation saga continues to take center stage, the rise in paper prices—and the availability of certain grades—still garners most of the commercial printing industry's attention.
Printers continue to report that prices are increasing, and that paper is available, according to Andy Paparozzi, chief economist for the National Association of Printing Leadership (NAPL). Each month, the association surveys printers on the availability and pricing of various grades of paper. In March, 81.4 percent of those polled indicated that prices were higher in comparison to prices three months prior. And 83.5 percent said that paper is still available.
"The price increases are substantial and well-established," Paparozzi reports. "However, the key thing here is that paper is still readily available, and that is what we watch very, very closely,"
Yet, when these figures are compared with polling results from March 1999, it is evident that with the rise in price, paper availability has tightened slightly. In March 1999, when prices were just beginning to rise, only 25 percent said that paper prices were rising, according to Paparozzi. However, in March 1999, 10.3 percent of those polled felt that paper was less available compared with March 2000, where 16 percent noted that paper is less available.
"If you look on the margins, you see a minority reporting that the supply has changed. Many more are reporting that paper is tighter," the NAPL economist adds.
But it's not just Paparozzi who is noticing the change in availability. Both Hayes and Creel report a tighter paper market when compared to 1999. "In comparison with last year, the paper market has definitely tightened. Paper is available, but lead times tend to be longer, machine trim is more of an issue and the mills are less likely to accept orders that are not a strategic fit," Hayes reveals.
Creel reports that groundwood products is where she encounters availability issues. "I would also state that grade 3 and grade 4 products seem less available, and are requiring more lead time to purchase than in the past," she remarks.
Hayes blames the rise in prices and tightening availability on the strong U.S. economy, and the growing Asian and European markets. "The reason for the tight paper market has to do with a strong global economy. Generally, all three of the major paper markets—Europe, the Americas and East Asia—are all experiencing strong economic growth. In addition, there has not been any significant capacity expansion on the grades used by our customer base," he explains.
Although paper prices are rising, it is important to step back and look at the price increases in context, Paparozzi urges. He points to 1998, when prices fell dramatically in response to the Asian financial crisis. "Paper prices are rising from very low levels. They fell, and fell substantially for about a year and a half," he remembers.
"You get used to doing business with your key material at a certain level of cost. Then something changes, whether it is an international recovery or something else. Suddenly, those costs are now increasing," Paparozzi says. And, as long as the world economy continues to churn along at its current pace, it is almost inconceivable that printers will begin to see prices moderate any time soon.
In fact, Hayes reports that printers may not see a break in pricing until 2001. "We suspect that there may be one remaining increase for each of the major grades of paper before the end of the year. Next year, our crystal ball is telling us that the market will be characterized by flat or declining prices—based on new capacity coming online and a likely economic slow down."
Paparozzi agrees and does not predict price moderation for at least a year. "I doubt that it is going to happen this year. It's very clear that Alan Greenspan is determined to slow the economy. He feels it's growing too fast. He wants to do it very gradually, and it may take him a year to do it."
However, the silver lining is that paper, although somewhat tighter than last year, still appears to be available. It is this availability factor that has kept printers from speculative buying, Paparozzi discloses. "I doubt that a real lot of speculative hoarding is going on. A majority of our survey respondents report that paper is still available. Until that number comes down significantly, I wouldn't expect to see speculative buying," he says.
Nor does Paparozzi predict a rerun of the mid-'90s, when the industry started to see a significant degree of inventory hedging to protect against supply disruptions. "Today, there are more efficiencies than there were five years ago, and more and more printers have gone to 'just-in-time paper delivery.' "
Although, he does urge some caution. Just-in-time is a wonderful strategy until there is a supply allocation. "We don't have to worry about that now because paper is readily available. But, it is something to be concerned about. If the day should come when there are significant supply disruptions, then printers have a problem. There is no full-proof management strategy."
