Annual Paper Forecast: Down but Not Out

In these pages last year, we predicted that the January 2001 postal hike and a potential economic slowdown would lead to only a modest increase in paper demand among catalogers this year. Whereas catalog paper usage had increased 4.5% between 1999 and 2000, we predicted that between 2000 and 2001 it would inch up just 1.7%.

Well, we were right in saying that the economy would dampen paper demand. But we underestimated how much. While the catalog industry used more than 3.5 million short tons (ST) of paper in 2000, it looks like that by the end of this year it will have used just 3.4 million ST — a decrease of 3.8%.

Feeling down

Our estimates are based on Jaakko Pöyry Consulting’s quarterly GAPTRAC interviews of 300-400 paper and print buyers from a cross-section of markets, including catalogs. As you might expect given the economy, most of the catalog paper buyers and production managers interviewed in July and August expected to modify their paper usage somewhat. But how and to what degree varied among consumer catalogers, business-to-business mailers, and cataloger/retailers.

For instance, 92% of the cataloger/retailers surveyed did not expect to change their paper grade. Nor did 87% of the b-to-bers. But among the consumer catalogers surveyed, one-third said they might be switching paper grades in the near future.

Of the consumer and b-to-b respondents that might change their paper grade, all of them expected to downgrade — again, no surprise here. But the few cataloger/retailers that were considering a change were looking at upgrading slightly to improve their image.

In terms of print run lengths, 25% of the consumer catalog respondents expected to increase their runs, down just slightly from 29% last year. B-to-bers and cataloger/retailers were far more pessimistic. While 30% of the b-to-bers last year expected to increase run lengths, this year only 13% did. Likewise, last year 18% of the cataloger/retailers expected to increase their runs, but only 8% did this year. What’s more, the majority of the cataloger/retailers — 58% — anticipated reductions averaging 9%-10%.

But a significant portion of both consumer and b-to-b respondents were planning to reduce page counts: 50% of the former and 37% of the latter. Then again, 8% of the consumer catalogers anticipated increasing page counts, by as much as 30%. Thirteen percent of the b-to-bers also expected to boost page counts in the foreseeable future.

At least 25% of the consumer marketers, 17% of the cataloger/retailers, and 12% of the b-to-b catalogers planned to reduce the number of mailings, or events. And though 13% of the b-to-bers and 8% of the cataloger/retailers expected to increase the number of events, not one consumer cataloger surveyed did.

Overall, 63% of survey participants expected their companies to use less paper during the next 12 months than they had the previous year. In comparing consumption this year against last year, 62% of the b-to-b catalogers anticipated their paper tonnage for 2001 would be down an average of 9%-10% from 2000, due to reduced page counts, lower basis weights, smaller page sizes, and better target marketing.

Of the consumer catalog respondents, 42% expected tonnage to be down this year from last, by an average of 13%-14% — though in this case, it was primarily due to fewer titles being mailed and inventories being carried forward as well as lower basis weights. And a whopping 83% of cataloger/retailers expected reduced tonnage, with drops averaging 10%-11%, due largely to cuts in trim size, reduced page counts and run lengths, and more finely honed targeting.

Given all that pessimism, you might not expect paper usage to increase next year either. But we are predicting a 3.3% rise in catalog paper demand next year, and a 4.7% increase the year after that.

For one thing, the state of the economy is not necessarily creating fear in the marketplace. Sure, the mood is hardly one of growth and prosperity, but there are no indications that the current economic malaise will continue for years. And once the economy begins to pick up, mailers will certainly increase paper usage.

What’s more, while the Internet continues to grow as a medium for communication and placing orders, recent studies indicate that printed catalogs are still more cost-effective than the Web in gaining new customers. (Witness the demise of the Internet pure-plays and the use of catalogs as online-traffic drivers.)

Grade by grade

In terms of specific paper grades, coated papers are expected to account for 76% of the total paper tonnage used to produce catalogs this year. Of the 2.58 million ST of coated paper expected to be used by catalogers this year, nearly 78%, or more than 2 million ST, will be coated groundwood.

But coated groundwood usage is expected to drop by 30,000 ST, or 1.5%, from 2000. The decrease is only temporary, however. Between this year and next, demand is projected to increase 3.6%, or 72,000 ST. Between 2002 and 2003, it’s expected to rise another 5.3%, or 110,000 ST.

As in the past, the U.S. catalog industry will rely on imports to fill the gap between domestic capacities and total demand for coated groundwood. Imports will provide 22% of the total coated groundwood demand in the U.S. Offshore sources are expected to supply 9% of the total 2001 U.S. coated groundwood purchases, compared with 10% last year. And Canadian imports will represent 13% of the total U.S. coated groundwood purchases, compared to 14% last year.

Use of coated freesheet — the second most popular paper grade among catalogers — is expected to decline even more significantly than that of coated groundwood. By the end of the year, catalogers will have used roughly 82,000 fewer ST of coated freesheet than last year, a decline of 12.4%. In comparison, between 1999 and 2000, usage had increased 17,000 ST.

But coated freesheet consumption will rebound during the next few years. Catalogers are expected to use 25,000 more ST next year, for an increase of 4.3%. The following year, coated freesheet usage is projected to increase another 39,000 ST, or 6.4%.

The U.S. is largely self-sufficient in terms of coated freesheet paper supplies. But U.S. production capacities will decline by about 125,000 ST between 2000 and 2001, with imports expected to account for 18% of total demand this year, up from 15% last year. Stateside mills will rev up production next year, however, supplying another 132,000 ST of the paper.

The third most popular paper grade for catalog production, supercalendered (or SC) papers are used largely for long-run gravure-printed pieces, especially those with high page counts. Consumption of SC papers is expected to dip just 1.2% this year, to almost 575,000 ST. Next year its usage is projected to increase by 21,300 ST, or 3.7%, and by 19,800, or 3.3%, in 2003.

Use of such grades as SC-A+, SC-A, SC-B, SC-C, and SNC (soft-nip calendered) has increased rapidly during the past few years. These papers provide additional options for lowering or better-controlling paper costs for four-color process printing. North American mills have responded to this need by increasing capacity for these grades, as well by improving the quality of the papers produced. Nonetheless, demand continues to greatly exceed domestic capacity, so catalogers are expected to remain heavily dependent on imports from Canada and abroad for high-quality SC papers.

Uncoated groundwood (excluding SC papers) will account for nearly 5% of the paper used by catalogers this year, down from 7% last year. Whereas last year catalogers used nearly 180,000 ST of uncoated groundwood, this year they’ll use an estimated 167,000 ST — a decrease of 7.1%. Demand is expected to further dip slightly next year, by 0.8%, then increase a scant 0.1% in 2003. Uncoated groundwoods are under considerable competitive pressure from both the less-expensive newsprint grades and from the improved SC grades.

As with SC papers, U.S. mailers rely heavily on imports for uncoated groundwoods. Total imports in 2001 are expected to represent 72% of total demand for this grade, with Canadian imports likely to account for 83% of those imports.

Accounting for just more than 1% of the paper used by catalogers this year is uncoated freesheet. Demand for the paper declined 3.8% this year and is expected to drop another 4% next year and 3.5% in 2003, as catalogers continue to shift to the various SC grades. Again, because of the better four-color reproduction quality of SC and coated papers, few catalogers use uncoated freesheet as a body stock. Yes, mailers do use this grade in special sections, including order forms — but there is also a growing practice among catalogers to print ordering information on the same paper stock used to produce the catalog bodies, since a growing number of orders are being placed over the phone or via the Internet, rather than through the mail.

The U.S. is fairly self-sufficient when it comes to uncoated freesheet papers. Most of the imports — nearly three-quarters — come from Canada.

The low print quality of newsprint limits its use to lower-quality catalogs or special “sale” sections. The grade will account for less than 1% of all paper used by catalogers this year. Mailers will have used slightly more than 34,000 ST of newsprint this year, down 3.9% from 2000. Its use will continue to decline (by 6.2% in 2002, and 7.8% in 2003).

U.S. paper buyers depend heavily on foreign sources for newsprint. Of the 47% of U.S. newsprint demand that is met by foreign mills, 96% comes from Canada. As far as the future U.S. capacity to produce newsprint, this will continue to drop as demand declines and industry consolidation in North America sees older mills and machines removed from service.

Eric Edelmann is a senior consultant with Jaakko Pöyry Consulting in Tarrytown, NY.

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