Paper prices continue to climb: Coated stock has gone up three times this year so far. Coated groundwood saw an increase of $1.50 per hundredweight (cwt) in April, $3/cwt in July, and $3/cwt for Sept. 15/Oct. 1.
Will this last increase stick? Dave Goldschmidt, vice president of marketing, catalog division for paper brokerage Strategic Paper Group, thinks the coated price hike will hold through the fourth quarter because mill operating rates remain high. Also, he notes, “we have seen a small uptick in demand.”
But some believe any rise in demand won’t be sustained. Gary Evjen, senior vice president of sales at Wade Paper Corp., says some printers and publishers have been building their paper inventories since the price increases began in April, so they won’t need to buy paper later.
While the paper mills don’t believe the inventory building to be true, “a truckload order here and another there can remain hidden,” Evjen says. “Following implementation of the September increase, there will be no incentive to continue inventory building, and [paper mill] order entries will slow.”
A fragile market
Given the slow economic recovery nationally, Evjen says the demand for paper remains fragile, and the current market conditions should not surprise anyone.
“The double-digit [paper shipment] increases, year over year, are based upon 2009 figures, which were the worst in decades,” he says. “The looming postal increase will dampen the recovery for the first half of 2011.”
The uncertainty of the upcoming holiday season will play a role in paper consumption as well. “We don’t know what type of season the retailers will experience at this time,” Evjen says. “People without jobs are not likely to be aggressive consumers this holiday season.”
Indeed, says Dan Walsh, vice president of catalog/publication papers at distributor Bradner Smith & Co., “what we’re all waiting for is the economy to really improve, rather than take a small step up and another back.” Consumer confidence won’t pick up until the national unemployment situation improves, he says.
Walsh believes inventory levels are low; by November, he expects mills will begin building it up again as the market demand for paper experiences seasonal slowness.
Goldschmidt says if operating rates remain high into 2011, the mills will certainly attempt to push another price increase through in order to return to profitable status, since many are still reporting losses.
The financial stability of several of the large mills remains a major concern. If further capacity comes out of the system, Goldschmidt predicts paper pricing and supply could be affected overnight.
“Further mill/machine shutdowns and closures are a definite possibility if demand does not increase,” Goldschmidt says. “If not, shutdowns may be necessary to balance supply with demand.”
Evjen expects some more temporary mill capacity closures during the first quarter of 2011, along with several permanent closures throughout 2011. “The mills cannot control demand to boost up prices, but they can control supply.”
And they will, he predicts. “This past year we’ve seen an increasing willingness for the paper manufacturing industry to shut down equipment and entire mills with the goal of reducing supply and propping up prices. These closures have been happening for years,” Evjen notes, “but in 2010 they finally started to be felt.”
Demand was up only a bit from 2009, but the mills were able to be successful with three price increases. “The trend to rationalize their manufacturing equipment will continue, so prices could hold steady,” Walsh says.
On the other hand, he adds, with an exigent postal increase expected, catalogers will likely respond by mailing less. And because of the rapid-fire paper price increases in 2010, catalogers will turn to other, cheaper means to market their products. “The give and take of supply and demand will be interesting to witness in 2011,” Walsh says.