Pricing: So Far, So Stable

As expected, paper prices have been stable so far this year. But observers offer differing opinions as to when prices will rise, and by how much.

“Our basic assessment that prices will be going up substantially this year because of tighter markets has not changed,” says John Maine, vice president of Bedford, MA-based forest industry research group RISI.

According to the 44th Annual Capacity Survey of the Washington-based American Forest & Paper Association, domestic mill capacity has declined for the past three years: 1.9% in 2001, another 1.3% in 2002, and 0.4% last year. Decreased capacity means decreased supply, and higher prices.

At the same time, the declining value of the dollar means less supply from European-based mills. “They’re not particularly offering any exceptional deals,” says George Marsh, vice president of corporate purchasing for Austin, TX-based Hess Management Co., a management consulting services provider to Brimfield, OH-based Press of Ohio and D.B. Hess Co., which has presses in Woodstock and Dekalb, IL. “The weak dollar makes it expensive to ship paper.”

Questionable election effect

Increased advertising associated with the Olympics and the presidential election this year will also play a part in driving up paper demand and pricing. “When we have the Olympics and political elections in the same year, those are traditionally very good years for paper consumption,” says Allen Byrd, vice president of sales and marketing for Montreal-based paper manufacturer Tembec. “In general, I think advertising in magazines is basically projected to be up 5.5%-6%, and I think that the Olympics and election could contribute to that increased consumption.”

In 2000, the last year that had both an Olympics and a presidential election, Marsh says, the prices of coated groundwood #5, coated freesheet, and super-calendared (SCA) paper rose 6%-8%.

Not everyone agrees that the two events will significantly increase paper demand — or prices, for that matter. “The Olympics and election may add a small amount of extra demand,” Maine says, “but typically, most of the spending on advertising for these events benefits broadcast media.”

Bob Scipione, a paper buyer for Waseca, MN-based printer Brown Printing Co., agrees: “In the past election years normally meant a lot more paper consumed, and prices would go up, but I just do not see it happening this year.”

Nor does Paul Clancy, vice president of business development for Stora Enso North America, a division of the Helsinki-based paper manufacturer, expect major declines in capacity for the papers most catalogers use, such as coated groundwood and coated freesheet — the so-called printing and writing grades. “Overall, printing and writing paper capacity will remain quite stable,” he predicts, “with slight declines in coated groundwood and maybe a modest increase in coated freesheets.”

Nowhere to go but up

Nonetheless, because paper prices have been so low for so long, Scipione expects them to rise 5%-7% by the end of the year. “There is a slight chance for second- and third-quarter increases, but a much better chance for the fourth quarter,” he says.

For his part, Hess Management’s Marsh thinks that the major mills will announce prices increase of $20-$40 per short ton (ST) during the second or third quarters. “But given the slow economic recovery and that demand is still relatively slow, they will be fortunate if they can hold [half] of that increase,” he adds. During the third quarter, when catalogers are buying paper for their holiday books, he expects pricing on lightweight coated papers to rise 5%-8%. During the fourth quarter, however, he thinks prices may return to their current level.

Some catalog mailers are skeptical that any price hikes will stick. “I think paper capacity has gone down with the consolidations of mills,” says Rosemary Sirico, production director for Edison, NJ-based footwear catalog Aerosoles. “I think the paper market is soft. The paper companies are going to try to push through increases, but with less demand, how can they push it through?”

Nonetheless, many in the industry, such as Brown Printing’s Scipione, advise catalogers to “purchase and ship their paper early to avoid the price increases. If you have the ability to lock in a long-term paper deal, that would work out better for you.”

Marsh says that it’s particularly crucial for those that use at least 500 ST of paper a year to lock in price caps with their suppliers. He suggests negotiating an agreement that the price will not go up more than 3% for one year from the date the contract is signed.

Such agreements are less critical for catalogers that purchase less paper, Marsh adds. “There are adequate mills out there that still have tonnage available on a continuing basis. But you have to have a decent paper purchaser that knows who those mills are.”

And Tembec’s Byrd says that catalogers printing on the more popular bright coated groundwood papers, such as coated groundwood #5, need to get a formal assurance from their paper supplier that should capacity diminish, the paper they need will be available.

Anthropologie Direct, a division of Philadelphia-based cataloger/retailer Urban Outfitters, has locked in its paper prices each year for the past three years, says managing director Michael Robinson. The upscale women’s apparel and home decor catalog prints its covers on a 70-lb. domestic matte paper and its body pages on a 44-lb. European matte stock. “The weakness of the dollar is a concern, which is why we’re glad to have locked down our pricing early,” Robinson says.

“We could probably rush out there dashing around the spot market, but there’s a cost to us of doing that,” Robinson continues. He wants the catalog to maintain a consistent look, which flitting from mill to mill could jeopardize.

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