Quarterly Paper Update: Prices likely to rise again

The cost of catalog paper will increase in the third quarter, according to industry watchers. Most of the major paper mills in the U.S. and Canada have announced an increase of $1.50 per hundredweight (cwt) that is scheduled to take effect July 1.

But it may take until early to mid-August to be fully implemented, says Gary Evjen, senior vice president of sales at Wade Paper Corp. Some think increased paper demand for the upcoming catalog season “will make this [increase] a slam dunk, but order books are still pretty empty.”

A second increase in July so quickly after the April paper price hike “is too much too soon for a publication paper market that is struggling and likely to decline again this year,” says John Maine, vice president of forest industry research group RISI.

Nonetheless, he says, “cost pressures are very real, and some mills are on the verge of bankruptcy, so there is definitely pressure to keep prices on an upward track.” The next actual increase in paper prices to larger magazine and catalog publishers will probably be in the $30 to $40 range, Maine says. These will not be implemented in actual transactions until September — when demand will be approaching a seasonal peak — not in July as announced, he adds.

Getting squeezed by rising costs

Paul Buohl, manager of estimating and purchasing for direct marketing production consulting firm EU Services, says mills have tried to implement price increases only when the raw materials costs warrant an increase.

And with the huge debt load facing several of the larger mills and the increasing costs of raw materials, transit and chemicals, “they must be concerned about achieving the best profit margin possible,” Evjen adds. “They will take downtime when appropriate.”

Further mill shutdowns are always likely, Maine agrees, since profitability is “low to nonexistent” at some mills. Additional pressures from fiber costs (pulp and recovered fiber for recycled mills), exchange rates, energy or environmental expenses “could tip the balance in favor of closure at any time.” At this point, Maine says, “the industry does not need any further closures to balance supply and demand, as operating rates are expected to be high in the second half of 2011.” But if demand should unexpectedly plummet, such that mills start to take significant downtime again, he notes, “then we would look for further shuts to be announced.”

Paper inventories normally peak in July, Maine adds, and then “move down as we progress through the busy printing season. In general, inventories remain under control and are fairly low.”

But Evjen believes there will be an increase in inventory levels at the mills during July and early August. “Mill lead times are lean, and they want to keep the paper machines operating,” he notes. “Everyone is hoping the catalog season is going to be robust.”

Demand is key

The fate of the announced July price hike depends on the course of demand, Maine says. “If demand comes back from its April slump and keeps mills busy for the rest of the year, as RISI is predicting, then the $30/ton increase (on top of the $40/ton increase in April) will go through fairly quickly — and we could even see yet another small increase in the fall.”

Should paper demand turn out to be much weaker than expected, Maine says, “buyers will start canceling orders and producers will be hard pressed to push prices any higher.”

The mills will continue to control supply and demand balance, Evjen says. “There is a finite demand for paper, and dropping the selling price is not going to create more revenue for the mills.”

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