Paper Outlook — Paper Trails Economy

BY MARK SMITH

Technology Editor

Paper costs can account for as much as 60 percent or more of a typical commercial printing job. For that reason, the fortunes of both industries are inextricably linked. But it is not a one-to-one relationship.

Paper pricing and availability can swing in cycles that don't mirror printing business activity, either in timing or degree. Printers are insulated from the impact of rising paper prices, at least to some extent, because the material is more or less a pass-through cost.

In recent years, both industry segments have been enduring a dramatic drop in pricing power. Paper companies have responded by taking sometimes dramatic steps to try to bring production capacity and inventories more in line with demand. Combined with industry consolidation and other business trends, these actions have been seen as supporting price increases.

Paper makers have tried floating increases for a variety of grades, but they've generally had trouble getting the higher prices to stick. This has led to a "crying wolf" scenario, but there's still a sense that sooner or later the predictions have to be right.

"I've become a little gun shy to take any news about paper to my clients until it happens," comments Tim Poole, president of Dome Printing in Sacramento, CA. "I've been burned over the last couple years in going to clients and saying, 'Paper prices are going to start rising, and we need to be more cautious that inventories will get tighter.' Just about every time, paper prices subsequently went down and inventories became more available."

Back to the '80s

Dome Printing does more than $20 million in annual sales, about 70 percent of which is web offset printing and the rest sheetfed. Across the board, Poole says the company has been buying paper at mid-1980s pricing levels.

"While I don't see the situation changing readily, I can forecast that sometime during 2004 there will be a significant paper price increase. As paper mills have depleted their inventories and reduced capacity, they will be in a position to drive paper prices back up," the printing exec says. "And yet, we haven't heard any discussion of price increases for at least four months. If anything, we've seen increased competitive pressure in the marketplace."

Since paper should be a pass-through cost, Poole says he is more concerned about market stability than the actual level of pricing. The trend that could be more worrisome for printers is paper companies putting increased pressure on their distributors to carry more inventory while discouraging direct mill shipments, he adds.

By aligning itself with one primary supplier for web stocks, Dome Printing is able to have paper rolls delivered just-in-time, the company president reports. "We do minimal on-the-floor warehousing. A lot of our shipments are mill-direct shipments or off the distributor's floor," he notes. Poole believes the buying power that comes with Dome's volume of purchasing and working with one main supplier will protect it from being forced to change that practice if the market tightens.

One possible explanation for recent price stagnation is that the paper market has been undergoing a fundamental change, rather than just a cyclical downturn. Roman Hohol, marketing director of AMEC's Forest Industry Consulting Group in Oakville, ONT, believes there is evidence to support this theory.

At the Global Outlook Conference sponsored by Pulp & Paper Week, Hohol made a case for coated paper demand in North America "decoupling" from real GDP (Gross Domestic Product).

"I'm not saying it is definitely going to happen, but there are warning lights flashing that it could happen. The evidence is not conclusive," the industry analyst notes. "This (decoupling) has already happened with newsprint, and I believe it also has happened—or is in the process of occurring—with uncoated freesheet. There have been four consecutive years of demand decline in the uncoated freesheet market.

"If you look at some of the evidence and fundamental changes in demand, then I think it could happen to coated paper. 'Could' is the operative word," he adds.

Hohol points out that traditionally there has been a clear link between growth in real GDP, growth in real advertising spending and growth in coated paper demand. "I see that linkage weakening," he explains. "Real GDP increases do not necessarily lead to real ad spend increases. and it doesn't necessarily follow that they will lead to an increase in real coated paper demand."

One of the fundamental problems is that most of the major end uses for paper are in the mature to declining stage of their lifecycles, Hohol says. The industry is also being impacted by the "New Attention Economy" that is overloading consumers with information from new electronic sources, as well as traditional print, he notes.

Slowing Demands

If paper companies respond appropriately to the current market conditions, Hohol believes they could get pricing increases to go through. "Right now, there probably is still too much supply out there to satisfy a slowing demand," he notes.

In North America, the industry analyst says he doesn't see demand for coated mechanical papers rising more than 1.5 percent annually over the next five years. The outlook is only marginally brighter for coated free-wood, he adds. "I try to take a longer view, and I see problems in the longer term for demand growth."

On the supply side, the analyst says there are only two projects of any significant size pending (financed and construction begun) in North America. Industry watchers contend that a failure to invest in the latest technology is causing domestic paper making operations to lose ground to foreign producers. Capital expenditures are commonly running well below depreciation.

Hohol doesn't see European imports being a big market factor, however, especially since the major producers now own significant local capacity. "Imports hurt their own business," he explains. "Historically, imports have averaged only about eight percent of total North American demand."

While paper pricing and availability may not be pressing issues at the moment, there still are opportunities for printers to provide related educational resources to their customers. Dome Printing, for example, has addressed paper basics as part of its regular technical seminar series.

The first time around, the printer teamed up with Stora Enso to put on a presentation about how paper is made. The paper maker provided the speaker for the event, which was held at a museum and drew an audience of about 80 designers and print buyers. "Most of our clients will never get to experience a mill trip to see how paper is made," Poole observes.

Paper and Press Operators

More recently, the company put together a panel of its lead press operators to talk about designing for print. Paper figured prominently into the discussion.

The broader issue of paper procurement is a hot button for Banta Corp. in Menasha, WI. For obvious reasons, the company promotes the idea of customers outsourcing paper buying and management to the printer.

Banta has addressed the topic in a white paper (just updated last month) and routinely covers it in the one-day Technovation Exchange seminars it conducts around the country, says Marshall Spencer, director of purchasing. Recently, the printer has added a Webinar into the mix.

"The paper Webinar split between an update on the coated paper market and discussing supply chain management issues relative to paper supply," Spencer reveals. "A paper industry representative did the coated market portion and I provided the supply chain management part."

According to Nancy Wiggins, Banta's marketing communications manager, the printer's Webinars (which are intended to last one hour) provide a way to reach customers and prospects who are unable to attend a seminar in person. They also offer a way to provide training and education with a short commitment of time and are very cost-effective for Banta and participants. "We're even recording the Webinars and posting them on a Web server so anyone can access replays at any time," she adds.

Participants, of course, have to get past the irony of a seminar on paper being conducted electronically.