A Rebounding Economy May Boost Paper Prices

Jan 01, 2004 10:30 PM  By

U.S. mills that produce coated freesheet are operating at just 84% capacity on average, according to Bedford, MA-based forest industry research group RISI — proof that demand for the coated and super-calendered (SC) papers used by most catalogers is still low. But many paper industry insiders expect prices to begin rising by the middle of the year.

“Paper prices remain at a near-record low, with paper producers generally making very slim margins or losing money on a total cost basis,” says RISI vice president John Maine. “The fact that the economy is ticking up is not yet reflected in the end-use market in printing papers.”

As of December 2003, magazine ad pages were flat with year-ago levels, and catalog circulation was up only 2.2% from 2002.

Doc Maiorino, vice president of sales for publication papers for Montreal-based paper manufacturer Domtar, says that catalogers can expect stable prices for the first half of 2004. But he predicts that major mills will announce an increase of $40-$60 per short ton in June or July — contingent of course on the economy. “Catalogers should sit down with their suppliers and put together a plan for all of 2004,” he advises, “and make a commitment accordingly.”

Such a commitment usually comes in the form of a price cap agreement, in which the cataloger agrees to continue to buy from the mill for a specified amount of time, such as six months; in exchange, the mill agrees not to raise prices beyond a certain point. David Goldschmidt, vice president of sales and marketing for the catalog division of New York-based paper brokerage Strategic Paper Group, says a suitable agreement for 2004 might specify that for the remainder of the year, pricing will not increase by more than $2/hundredweight (cwt).

Monroe, MI-based children’s products cataloger Sensational Beginnings has already locked into a price cap agreement with its mill that will ensure pricing through September, says general manager Deborah Wilson. The 15-year-old cataloger, which uses freesheet papers ranging from 40 lb. to 60 lb., expects price increases of 4.5%. “If the economy continues to grow, and magazines and catalogers add end users, we will see an increase due to demand,” Wilson says.

The lagging market prevented the October 2003 price increases announced on coated grade #5 from affecting most catalogers, says Goldschmidt. The mills were trying to raise prices approximately $2/cwt on the average. “What actually happened seemed to average out at around $1/cwt,” he says.

For announced increases to take hold, the major mills must agree to stick to the new asking price. “One mill will announce a price increase, and then usually all the other mills will slowly jump on board,” Goldschmidt explains. If one doesn’t, the increase often doesn’t go into effect. “In October the mills wanted an increase,” he says, “but all of them needed business.”

Competition from European mills

The weaker dollar could also contribute to midyear paper price increases, says Jim Tyrone, senior vice president of sales and marketing for Stamford, CT-based paper manufacturer Mead Westvaco Corp.

“Some of the factors that led to the growth of paper imports are already beginning to reverse themselves: worldwide overcapacity fueled by the growth in capacity in Europe and Asia, and an extremely strong dollar,” says Tyrone. He estimates that 20%-25% of all coated paper used in the U.S. comes from Europe.

In the meantime, Ross-Simons saved 10% in paper costs by switching from a domestic matte stock to a comparable lightweight coated from Europe, says Cindy Marshall, vice president of marketing for the Cranston, RI-based jewelry and gifts cataloger/retailer.

Chicago-based women’s apparel cataloger Barrie Pace is another recent convert to European paper. The company, which previously printed on 79-lb. coated groundwood from a domestic mill, switched five months ago to 87-89-lb. Norcote, a coated groundwood sheet from Norwegian mill Norske Skog.

The switch, says Dee Greenwood, a creative/production consultant for Barrie Pace, saved the cataloger 6% in paper costs and resulted in a 10-point increase in brightness.

“The basis weight is a little higher, but the cost is so much lower that for the first couple of months, it compensated for the cost in postage,” says Greenwood. “For the same amount of money, I got a higher-quality product.”

But Maine is skeptical. For one thing, because most of the major European producers also own North American mills, the prices of European and North American papers aren’t appreciably different. For another, he says, “prices in the U.S. are already below those in Europe, so to imply that European producers would pay extra freight [$50 per ton] to sell at a price that is 10% below a number that is already below prices in their domestic market is a stretch.”