Q3 Paper Outlook — Waiting for the Rebound

BY CAROLINE MILLER

The price of paper continues to remain at an all-time low thanks in part to industry consolidation, a stagnant economy and weak demand. However, in the long term, market watchers are predicting that prices will begin to increase as the economy continues its slow climb out of the recession.

The National Association of Printing Leadership's (NAPL's) March survey of printers found that just 9.8 percent of those responding to the survey reported that paper prices were rising. "That is just half of the 18.4 percent who reported that paper prices were rising last November," reveals NAPL Chief Economist Andrew Paparozzi. "In the same token, 37.6 percent of the printers surveyed reported that paper prices are continuing to drop," he adds.

And it appears that, for now, paper prices will remain favorable for printers, agrees Ron Davis, chief economist at the Printing Industries of America (PIA).

"Most indicators point to continued stability or softness—at least for the short run. Printers' paper costs were down about 1 percent for 2001. As of January, printing and writing paper prices were down by 1.8 percent from January of 2001 based on government data," he claims.

Production Is Lagging

Overall, U.S. paper production declined by 5.8 percent in 2001 after already falling 2.5 percent in 2000, and printing and writing paper prices continued to decline in 2001.

While many agree that paper prices have finally hit rock bottom, Roy Grossman, president of Sandy Alexander in Clifton, NJ, isn't so sure. "Last year at this time, we thought we had certainly hit bottom. Here we are a year later with a new floor, so who knows."

But Tom Conley, vice president, general manager and co-owner of Professional Printers in Columbia, SC, believes that prices have indeed stabilized. "I am not sure how much lower they can go. The consolidation (among manufacturers) has helped to keep prices at today's levels. Can you imagine what the pricing would be if we still had the number of mills that we did five to six years ago?"

Still, the much talked about effects of paper mill consolidation seem to be impacting paper prices, according to Conley. "It appears that coated markets are in a state of 'flux.' They have been that way for some time, especially since the mill consolidations that have taken place. In the sheetfed market, prices remain relatively stable, although 'special' deals can be made on spot business," he says. "Imported sheets have been effective in keeping prices at the current level in the #3 market. Availability remains very good and we don't see this changing as we move into the latter half of 2002."

Conley also notes that the uncoated markets have settled down a bit. "Domestically, there aren't many more mills that can acquire each other. Pricing has seemed to bottom out, and some firming has taken place. While availability remains good, we get the feeling that uncoated mills will increase prices as soon as they feel the economy can absorb it," he states.

Still, PIA's Davis argues that, despite the mergers and acquisitions activity, prices will remain low, in part, because of the availability of imports. "Although there has been some mill restructuring, there is still plenty of worldwide capacity coupled with generally soft worldwide demand. Based on current global paper supply and demand, stable paper prices should remain throughout the year."

However, Davis expects that paper prices will rise as the economy begins to strengthen in 2003. "Paper markets may start to tighten in 2003 as economies in other parts of the world recover. We may see an alignment of growing economies throughout the world in 2003, which may result in rising paper prices," he reveals.

And while the U.S. economy may not rebound until 2003, there is one indicator that it is beginning to recover: Advertising is slowly returning.

A recent report by the Publishers Information Bureau (PIB) and the Magazine Publishers Association of America (MPA) found that magazine advertising revenues for the month of March closed at $1,377,102,513, only a 1.7 percent decrease from last year. Year-to-date, advertising revenues decreased 6.3 percent, closing at $3,286,776,734, and total ad pages were 46,624, down 14 percent over the last year.

Even so, ad pages only declined by 10 percent from March 2001. January's drop in demand was 15.9 percent from January 2001. The PIB tracks advertising pages and revenue for 215 magazines and five Sunday magazines.

Advertising Advancing

Five of the major advertising categories showed positive dollar growth this March. Gains were noted in food and food products, automotive, drugs and remedies, direct response, as well as media and advertising. Losses were most notable in the financial, insurance and real estate, transportation, hotels and resorts, apparel and accessories, technology and household furnishings sectors.

"Overall, the March declines are not as dramatic as those in recent months," notes Ellen Oppenheim, executive vice president and chief marketing officer at the MPA. "We hope that this signals the beginning of an advertising uptick."

In the long term, the consensus seems to be that, until the economy can find its way back on track, the trend of depressed paper pricing will continue.

"With commodity uncoated grades, we see some firming and those mills trying to hold the price," adds Conley. "And, as soon as the economy starts moving again, we will see some increases. In the coated arena, we don't see much changing. Imports will help keep pricing low, and until Europe and Asia get their economies going we can enjoy the pricing of this soft market for a while longer."

In general, printing and its related industries are still going through this latest round of "economic purging," he says. As printing companies continue to close or consolidate, and demand remains the same or continues to drop, suppliers will have to respond likewise.

"Paper mills and their distributors feel pricing is too low. This may be true as measured by the other segments of their businesses (industrial and other forest products), and they may be right," Conley admits. "But, huge jumps in pricing seems to scare customers away from print and they look for other ways to market their products.

"Most printers can accept smaller, measured price increases from year to year. But when there are huge jumps at one time, it's not good for any of us."