Q3 Paper Outlook — Big Paper Cuts

BY CAROLINE MILLER

As a weak U.S. economy continues to batter the printing industry, several pulp and paper producers have announced that they are either closing mills or cutting production. In a flurry of first quarter earning statements, companies such as International Paper, Weyerhaeuser and Sappi Fine Paper North America, among others, have announced plans to cut production in response to a softening economy.

In its first quarter earning report, Weyerhaeuser says that it expects the slowing global economy to result in a weaker demand for production in all its major pulp, paper and packaging product lines. This resulted in Weyerhaeuser's decision to institute additional production curtailment in its second quarter.

At the end of April, International Paper announced that it would close its Moss Point, MS, plant at the close of the second quarter. The company says it is closing the mill due to the high costs of running the mill, and the need to better align production with current customer demand. Moss Point produces nearly 200,000 tons of bleached board and bristol papers for products such as greeting cards, paperback book covers, cartons for frozen foods, pharmaceuticals and cosmetics.

John Dillon, chairman and CEO of International Paper, concedes that a slow economy has taken its toll on the company's earnings, which were down to $.05 per share compared to last year when earnings were $.60 per share. "While we can't change the economy, we are changing the company. We are taking actions that are benefiting shareholders in the short-term and positioning the company to win in the long-term. We are matching production to our orders, which has led to reductions in inventories."

Cuts Across the Industry
But International Paper isn't the only company to decrease production capacity in recent months as a result of weak demand.

During the first quarter, Bowater curtailed production by approximately 36,000 metric tons of newsprint and 45,000 metric tons of market pulp.

In February, Uniforet extended the downtime at its Port Cartier, Quebec, pulp mill until June. In a statement Uniforet called the measure "necessary because of the weak conditions that persist on the world pulp market."

In May, Sappi Ltd. reported that it would exit the U.S. uncoated paper and converting paper segments, and focus on its core business of coated fine paper. As a result of this decision, Sappi plans to close its 500-employee paper mill in Mobile, AL, which produces the Spectra-Tech line of uncoated papers. With an annual capacity of 300,000 tons, the mill also manufactures Lusterprint, a high gloss paper used for pet food bags and other converting grades. Lusterprint will now be produced at other Sappi facilities.

Tembec does not expect the short-term outlook for pulp to improve either. "Although we have seen some recovery in demand, as evidenced by significantly higher shipment volumes, pricing has suffered," reported company executives. "The recent weakening of the Euro against the dollar is also problematic. We do not expect to see any price recovery in calendar year 2001." Tembec is also planning approximately 50,000 tons of paper and pulp curtailment in June.

Not a Big Surprise
Yet, the movement towards a slowdown in pulp and paper production is not surprising, given the current economy. Paper pricing and availability have remained stable, according to the March 2001 NAPL paper price and availability survey, which is conducted each month. In fact, the numbers are quite revealing, according to Andrew Paparozzi, NAPL's chief economist.

In March, only 27.8 percent of those polled said that paper prices were rising, while 66.3 percent reported that prices were stable. It's quite a turnaround from March 2000, when 81.6 percent of printers were reporting that prices were rising. "Since last September, we've seen a huge majority of printers reporting that prices had stabilized, which is precisely the opposite of what we were seeing a year ago," Paparozzi says.

It's a trend that Joan Pope, purchasing manager for Padgett Printing in Dallas, has also noticed in the last several months. "Current pricing seems to be dropping slightly and, so far, availability is good. Our shop uses both web and sheet grades, and we have not had to adjust press dates to accommodate deliveries."

Landing Wasn't So Soft
The dramatic changes that the economy has undergone in the last year continues to amaze Paparozzi. "We've seen such a slowdown in the economy in the past year. This was not the soft landing for which the Federal Reserve was hoping."

However, there has been one bright spot for printers. "A year ago printers were really wrestling with sharply higher paper prices. They were able to pass some of it along, but some of it affected the bottom line. One of the positives of this significant slowdown is that a printer's most critical raw material has stabilized," Paparozzi claims.

And it's not just paper prices that have remained stable. Printers are also reporting that paper is readily available. In March of 2001, 90 percent indicated that paper is as available as it was three months ago. "Rarely do you see numbers like 90 percent," the economist points out. "It's just so rare to see that strong and solid of a number."

While paper prices and availability appear to have stabilized, prices may soon be on the rise, according to Debbie Creel, CFO of Creel Printing in Las Vegas.

Creel believes that as more and more pulp producers slow production, printers will see a rise in paper prices later in the year. "The overall weakening U.S. economy has produced a significant decrease in paper demand over the past four months; this has resulted in some larger-than-normal inventories for the paper mills, and they've responded with downtime," she says. "As the mills slow production and reduce inventories, we will begin to see a gradual increase in pricing throughout the year."

Still, the decrease in demand for paper is only likely to continue, states Paparozzi. The NAPL's Work On Hand Survey, which tracks how much work printing companies have in process and booked, continues to be very weak, he reports. "Those number are generally the ones that start to turn up first when business starts to pick up. But, right now, those numbers are very, very weak."

Creel adds that she has seen the impact of a slowing economy on her clients. "Companies are using less expensive forms of advertising in this unstable economy and printing on newsprint has become a way of economizing."

For the foreseeable future, the main story for commercial printers, as well as paper and pulp producers, will continue to be the state of the economy. "The economy, given the way that it slowed so radically and unexpectedly, has really overwhelmed everything else," notes Paparozzi.

While pulp and paper producers continue to cut production, he does not fear a paper shortage any time soon. "I don't ever remember seeing a paper shortage develop during an economic slowdown. We generally see shortages when the economy is really roaring and when supply can't keep up with the growing demand."