Another quarter, another paper increase

The third quarter marks the fifth straight price rise for paper. Most of the major mills have announced price increases for many paper grades, ranging from $2.50-$3.00 per hundredweight (cwt), or between $50-$60 per ton, effective July 1.

It’s the same old story about why paper prices keep rising: several mill closures and rising energy and manufacturing costs have rendered paper markets extremely tight. What’s more, John Maine, vice president of forest industry research group RISI, says fuel surcharges are also back in the mix. Paper producers are resurrecting freight and drop-off surcharges on some portions of their sales “due to the skyrocketing cost of diesel fuel.

The surcharges vary by producer, mode of transport, and size and destination of the order. Rail shipments escape most of the surcharges, but truck surcharges can be significant. Most are less than $20 per ton, but some surcharges are designed to limit long truck hauls, “such as a $120-$140 surcharge in some cases for paper ordered from an Eastern source and shipped to the West,” Maine says.

The universal driver of the price increase is exorbitant cost increases for energy, transportation, pulp, and other fiber, Maine explains. Demand is actually weak — especially for coated paper. Catalog circulation dipped 3.5% in the first quarter of 2008, he says, while “paper usage declined even more due to smaller page counts, basis weights, and trim sizes.”

Due to weaker demand, he says, many end-users are discovering that they will not need their full allocation of paper in 2008. “So far in 2008, buyers have taken their complete allocation and have only recently begun to cancel program orders,” he explains. The result? A sharp increase in coated paper inventory, “and an inflated picture of coated paper demand in the first four months of the year that does not reflect the reality of true consumption.”

Maine expects a reduction in end-user inventory. “Despite weak demand and high end-user inventories, producers are forging ahead with the announced price increase due to their rising costs and insufficient profitability,” he says.

Is there any relief on the horizon? Blake Hutchison, director of purchasing for catalog printer Arandell Corp., believes that the July 1 price increase could the last for this year. “The mills should be done for the year, seeing how much of a strain they are putting on the end users of their products,” he says.

Gary Evjen, senior vice president of sales at Wade Paper Corp., also believes that there will probably be no more paper price increases during 2008. “The mills know this is the last increase they can squeeze out of this market during 2008,” he says.

But Dave Goldschmidt, vice president of marketing, catalog division for paper brokerage Strategic Paper Group, isn’t quite so optimistic. “Unfortunately, with five quarters of increases and fuel costs still on the rise, I would not be surprised to see another increase on Oct. 1,” he says.

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