Paper — Price Hikes Blindside Printers!

After a year that saw paper manufacturers' bottom lines hit rock bottom, increases are being announced almost unilaterally. A recovering Asian economy is among the reasons for the boost.

BY ERIK CAGLE

Did you see it coming? Why of course you did.

Everyone knew that paper prices were going to go up. Yeah, we don't know anyone who wasn't aware of it.

Heh, heh.

Nice try, pal.

Like a critically acclaimed Madonna movie, the July price increases left many people with their mouths agape. According to Pulp & Paper Week, International Paper, Georgia-Pacific, Willamette Industries, Champion International, Crown Vantage and P.H. Glatfelter have announced price increases of $30 to $60 per ton. P&PW also revealed that Champion International, Mead Corp., Sappi Fine Papers, Consolidated Papers, International Paper and Potlatch Corp. had proposed price increases of $60/ton on coated free sheet.

Consolidated Papers also joined Champion International, International Paper and Repap Enterprises in instituting price increases on coated groundwood to the tune of $60 per ton. The publication reported another increase could take place in October.

While prices had been rising in certain sectors, most paper purchasers wondered aloud if price increases would take hold. Some even suggested that buying paper on an "as-needed" basis would help to retard any attempted boost.

Andy Paparozzi could see the price increases slowly making their way into the mainstream. The chief economist for the National Association for Printing Leadership (NAPL) conducts a monthly study that gauges the percentage of printers who feel prices are rising, falling or stable, and also asks if availability is higher or lower than it was three months ago. Last Sep-tember, only 8.6 percent of printers felt prices were rising. That figure rose steadily to 25.5 percent this past March and to 33 percent in May. For July, however, that figure ballooned to a whopping 60 percent.

No Surprise
"It's not terribly surprising," contends Paparozzi. "Paper is an international commodity. We kind of saw the worst of the international crises last fall. Internationally, Asia in particular, economies are still struggling, but they've clearly strengthened and are doing better than they were at the bottom of the crises. That is increasing demand for all kinds of commodities, including paper. Just look at what's happening to oil prices.

"Between the strengthening of the Asian economies and the continued, remarkable performance of the American economy, it's not surprising that we're seeing this kind of widespread report of paper price increases," he adds.

On the other hand, Paparozzi's research also indicates that 84.8 percent of printers believe paper is as available as it was three months ago. Thus, while prices are rising, no shortages are developing.

As Paparozzi states, the strengthening of Asian economies is playing a pivotal role. While countries such as South Korea and Indonesia are still foundering economically and, in the latter's case (politically, at least), overall progress can be seen elsewhere. Signs of economic healing were evident from the early stages of this year and have gained momentum during the summer months.

"The outlook seems to be getting better and better. That would certainly remove some of the excess capacity in paper markets," Paparozzi points out.

While many printers have acknowledged a trend toward price increases, most wonder if this influx is anything more than a "spike" or "blip" that will go away because the increases will not last. Brad Schreier, president and COO of North Mankato, MN-based Taylor Corp., says his company is among the doubters.

Staying Power?
"Our team senses an uncertainty in the market because not all coated mills have been adamant about putting increases in place," he says. "According to our leaders, who deal with our paper suppliers, there appears to be a short-term tightening in the paper market. We wonder if it may be seasonal, as customers are buying up because of Y2K concerns, as well as printing new advertising pieces for the new year. It will be interesting to see if demand in the first quarter will slow down. We sense that it may."

Schreier says Taylor Corp. is asking its company leaders to budget for a small increase. Those leaders do not see the price increases as an omen of things to come, as they feel the market will not support continued price hikes.

Others agree that the price increases are not here to stay. Kelly Gilroy, chief marketing and sales officer for Naperville, IL-based Solar Communications, had anticipated increases earlier this year, but she feels matters will return to normal in the early part of next year.

"I can't say that prices might not backslide based on the past three years, but there does seem to be more of a concerted effort between the five major paper producers to keep pricing up," Gilroy points out.

"My guess is that we will see some more increases in the fourth quarter, but conditions should soften a bit into the first quarter of next year," she explains. "Overall, the prices will probably be around the same area they are now after the dust settles around the end of next year's first quarter."

The current increases indicate more than a spike in prices for the catalog season, according to Gilroy. She believes the increases are a direct result of a concerted effort by paper manufacturers attempting to maintain an increase, and adds that decreasing pulp inventories are playing a role. Gilroy feels the top five manufacturers are expecting to pick up 15 percent more of the manufactured tons in world production.

One paper purchaser for a major national printer, speaking on the condition that he not be identified, believes the announced increases are designed to clean up the spot market. He points out that most of the increases were aimed at merchant tons rather than at mill-direct, contracted tons.

Expected Increases
One example that the increases were unexpected is the low level of consumer inventories. When buyers expect a price raise, they'll accumulate inventory, particularly free sheet.

"I thought things had bottomed out in January. I told people that prices would stay really flat, or the next move is to go up on coated groundwood," he says. "Then wouldn't you know it, there was some more deterioration in the price. Pretty soon, we got lulled to sleep and believed it was going to stay low for a very, very, long time."

Aside from supply and demand, a third factor that plays in the market is the psychology of the marketplace. According to this source, once buyers are convinced prices are going to go up, they begin to hoard paper and the increase becomes a self-fulfilling prophecy. The fact that paper purchasers have not blinked—and have not given in to forward buying—has helped to keep prices down and, subsequently, mills are running hand-to-mouth despite having had some downtime, he remarks.

"With all of the consolidations, you have fewer mills holding the cards. They're the mills that have been making money to the point where they can afford to take some downtime," the buyer says. "We've seen a lot of that this year; mills taking downtime to help control capacity to some degree. Basically, it's kept the prices from falling even further."

Small Potatoes?
Should the price increases take hold and be sustained, will that really be significant for printers since they're still short of previous levels? In a word, says Paparozzi, yes.

"Our industry is so competitive and profit margins are under such pressure that even moderate increases in paper prices, from the low levels we've seen over the last year, are still significant," he maintains. "The pressures are so great that any increase in cost is a concern. One critical aspect of our industry is that even a slowing of our economy is a concern, because we are an industry that has a shortage of profitable work and an excess of product capacity. So it doesn't take a recession to cause problems for margins in our industry.

"It's the same thing on the cost side—it doesn't take paper prices going up by 15 percent to 20 percent to cause problems," Paparozzi adds. "This is something printers need to be concerned about, even though the upturns are coming from very low levels."

Whether it's a Y2K-induced scare, the result of recovering foreign economies or a manufacturer's ploy to see price levels adhere to a certain scale, the once-predictable and flaccid paper industry merits intense scrutiny for the months to come, particularly the first few months of the new year.

While not all agree on what awaits purchasers heading into the new millennium, most are in concert to the notion that change is in the air.