More pickup for price hikes

Unlike the current housing market of high inventory and falling prices, paper supply is going down and prices are heading up. Several mill closures and reduced demand are two key reasons why the cost of paper is escalating.

Dave Norman, director of purchasing for Menomonee Falls, WI-based printer Arandell Corp., says UPM-Kymmene Group announced on Aug. 20 a $3 per hundredweight (cwt) price increase on all coated products. And David Goldschmidt, vice president of marketing, catalog division for Irvine, CA-based paper brokerage Strategic Paper Group, expects that increase to spread. “Prices will be going up for sure,” he says. “I expect, due to the extremely tight groundwood market, that the other mills will quickly support this” with increases for both groundwood and freesheet papers.

John Maine, vice president of Bedford, MA-based forest industry research group RISI, says the market did a “complete about-face” in June after the announcement of several mill capacity closures. “We now have 1.1 million tons of coated paper capacity closing in 2007 in North America, on top of the half million tons that shut last year. Furthermore, capacity is also getting shuttered in Europe — 1.0 million tons of coated and SC capacity is being shut in Europe this year, in addition to the similar amount closed last year.”

What’s causing these paper mill closures? “The primary drivers of these shuts are a strong Euro and Canadian dollar, and sharply higher costs for fiber (pulp and pulpwood),” Maine says. “Asian supply to North America will also drop about 300,000 tons owing to the implementation of stiff tariffs on suppliers in China and Indonesia and some suppliers in Korea.”

Harry E. Gould, chairman/president of New York-based paper brokerage Gould Paper Corp., says paper prices will continue to rise for the remainder of the year. “The strength of the Canadian dollar, the continuing increase in the price of pulp, the imposition of duties on Asian freesheet imports, the current forestry strike in British Columbia, the attractiveness of the strong Euro and pound benefiting U.S. exports, and the continuing reduction in supply all put pressure on prices to go up,” he explains.

What’s more, “there could even be another increase in the beginning of December,” Gould adds. “The mistakes made in 1995, when the mills attempted to raise prices every six weeks, appear to be approaching déjà vu all over again.”

Despite weak demand in 2007 — coated demand is expected to fall 5%-6% this year — markets will stay tight due to these supply restrictions, Maine says. “We show North American operating rates staying at close to 100% through 2008.”

As a result of the May postal rate hike, Goldschmidt says a few of his company’s clients have cut circulation plans, “but I do not believe we have seen the true impact of the postal increase as of yet.” Going forward, he says, “I am sure we will see grade, size, and basis weight changes going forward though, especially with the rising paper pricing.”

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