Look for paper prices to keep going up

The cost of catalog paper will go up in the second quarter. Most of the major paper mills have announced an increase of $2 per hundredweight (cwt) effective April 1.

The price hike is no surprise, says Dave Goldschmidt, vice president of marketing, catalog division, for paper brokerage Strategic Paper Group. “The mills have been stingy with price protection and caps,” he says. “They have been holding pricing; inventories are low; and all signs were pointing toward a second-quarter increase.”

In addition to market tightness, mills are facing cost pressures from rising chemical, fiber, and fuel and transportation costs that will likely result in another paper price increase in the second half of the year, Goldschmidt adds.

Worse yet, Goldschmidt expects the market supply to tighten up because coated paper supplier NewPage shut down its Whiting mill in February, due to declining demand. The mill operates two paper machines, which produce about 250,000 tons of coated paper a year for catalogs, magazines and retailers. (See “NewPage’s prospects,” bottom left, for more.)

Another factor fueling the price hikes

Paul Buohl, manager of estimating and purchasing for direct marketing production consulting firm EU Services, points to rising fuel prices nationwide that will affect paper pricing in the second quarter and, possibly, for the remainder of 2011.

The prospect already has harried paper buyers scrambling. Lead times for many paper purchases during the end of the first quarter were less than a week so that companies could beat the April 1 price increase date, says Buohl.

“I would say that paper prices will increase again before the end of the calendar year as input costs continue to rise,” Buohl predicts. “The mills are doing their best to control the supply side, but demand is still weak.”

Gary Evjen, senior vice president of sales at Wade Paper Corp., agrees that the second-quarter price increase will be implemented “even though the mills aren’t jammed with orders.”

Mills are replenishing their inventories slowly, Evjen says. However, inventory volume building will accelerate during the latter part of the second quarter to prepare for the catalog season. “Inventory building will be weighed against profitability,” Evjen says, “and major paper mills won’t hesitate to take downtime to balance supply and demand.”

While there don’t appear to be any labor issues threatening capacity, the brutal winter for most of the country and subsequent spring thaw could present a disruption later in the spring, Evjen speculates.

“The incredibly tough winter across the upper tier of states will cause disruptions with weight limits on the roads and access to forestlands,” he explains. “The Southeast will also have issues with flooding and road conditions in the woodlands.”

Increasing energy and chemical costs will consume much of the benefit of the second-quarter paper price increases, Evjen says, and transit costs will have a sizable impact on mill profitability. He also believes fuel surcharges will be reinstated by those mills that dropped them in the past year or two.

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