Steady demand, stable prices

Nov 01, 1998 10:30 PM  By

Catalog paper buyers went on a spree last year, buying 9% more paper than they had the year before, far exceeding expectations. The reason? Catalogers had reacted to the price hikes in ’95 by increasing paper purchases and building inventories as a hedge against future hikes. Then in ’96, mailers cut back on purchases, instead using up their inventories. The paper mills lowered prices in an attempt to spur demand; these low paper prices, coupled with the strong economy, encouraged catalogers to buy more paper last year.

But the paper mills aren’t expecting another 9% rise in paper consumption this year. Paper consumption on the part of catalogers is expected to have increased only 4% in 1998, with the overall tonnage consumption estimated to have grown by 110,000 tons between ’97 and ’98. This reflects a normal growth rate in paper use, compared to exceptionally high levels last year.

And a huge jump in paper consumption isn’t expected for 1999, either. According to the quarterly GAPTRAC survey of more than 300 catalog paper buyers, conducted in July by Jaakko Poyry Consulting’s Strategic Futures division, two-thirds of the respondents expect to increase their paper tonnage over the next 12 months, compared to 83% in last year’s survey. That breaks out to 63% of b-to-b catalogers that expect to increase their paper usage in 1998 vs. 78% in 1997; 77% of consumer catalogers this year, compared to 82% last year; and 50% of cataloger/retailers vs. 80% last year.

The postal rate increase slated for January may be causing some catalogers not to increase their book size or circulation. Nonetheless, a significant portion of catalogers do plan to step up paper usage, whetherby increasing run lengths and page counts, or by adding editions. Enhanced database techniques and overall improved catalog sales no doubt play a role in this optimism.

Paper usage by grade Coated papers such as groundwood and freesheet continue to be the most popular paper grades used to produce catalogs. These two grades are expected to account for 71% of the total paper tonnage used for catalog production in 1998; 51% of the paper used by catalogers, or

1.6 million short tons (ST), is expected to be coated groundwood, while 20%, or 642,000ST, will be coated freesheet.

Coated groundwood usage is expected to have increased by almost 33,500ST between 1997 and 1998. Because fewer mailers are expected to increase paper consumption next year than had last year, use of this grade for catalogs may increase by only 10,000ST between 1998 and 1999, before jumping by 32,000ST between 1999 and 2000, to more than 1.65 million short tons.

Offshore sources are expected to supply 9% of the total U.S. coated groundwood demand for this year, with Canadian imports accounting for another 14%. This dependency will continue unless more capacity is added in the U.S.-which is not expected to happen anytime soon-or more catalog houses shift tonnage to substitute grades, such as supercalendered papers like SC-A and SC-A+, and film-coated groundwoods, which are somewhat lighter than traditional coated groundwoods.

Use of coated freesheet-a more expensive grade than coated groundwood-is expected to have increased by less than 19,000ST this year, to 642,000ST, and consumption may even drop slightly next year. But then usage of this grade is likely to jump to nearly 666,000ST in 2000, as additional capacity makes it a better deal. Coated freesheet is traditionally used in the body stock of high-end catalogs, as well as for the covers of many other books. But the price differential between coated freesheet and coated groundwood has narrowed, because more capacity has been added for the freesheet than for coated groundwood. In fact, U.S. production of coated freesheet-up almost 200,000ST between 1997 and 1998-is expected to continue to increase an additional 125,000ST between 1998 and 1999, so it’s likely that prices will fall.

The U.S. produces most of its own supply of coated freesheet. Nonetheless, imports are expected to account for 12% of total demand this year, up from 9.8% last year, and for the next few years as well. Specialized grades such as super-premium coated freesheets, whose price and attractiveness appeal to catalogers, will account for many of the imports.

Catalog consumption of supercalendered (SC) papers, used primarily for long-run gravure-printed pieces with high page counts, is expected to reach more than 550,000ST for this year-a 49,000ST, or nearly 10%, increase over 1997 levels. Now accounting for about 17% of catalog paper usage, use of supercalendared paper is likely to swell by another 29,000ST in 1999, and by 34,000 in 2000, to 616,000ST.

The improved quality of the high-grade SC papers, particularly SC-A+, a new SC-A grade best used for gravure printing, has caused demand to accelerate among catalogers that are evaluating their options to better control costs. These catalogers can expect to benefit from more tonnage, better quality, and slightly lower prices, thanks to investments made by North American SC producers such as Consolidated Paper, which made improvements to its paper machine, and Madison International, which improved the quality of its clay fillers. These domestic producers may have been spurred on by the 1998 start-up of Stora’s SC paper machine in Nova Scotia, which can produce both SC-A (targeting the offset-printing markets) and SC-A+ (targeting the gravure printing markets). Stora’s machine is expected to increase North American production capacities by 385,000ST and gradually reduce offshore imports. But for now, imports will continue to meet 60% of the demand for supercalendered papers. This year, at least 30% of SC papers used will come from Canada, with another 30% from offshore producers.

Accounting for 11% of the paper used for catalog production, uncoated groundwood (excluding SC papers) is the fourth most-important grade. Consumption of these papers for this year is expected to reach about 345,000ST-12,000ST, or nearly 4%, more than last year. Use of uncoated groundwood is expected to hold steady throughout 1999 and increase by only another 7,000ST in 2000, to reach nearly 353,000ST. As a lower-quality printing paper with limited use for four-color reproduction, this grade has to compete with the higher-quality SC grades, but its low price continues to attract cost-conscious buyers.

Imports from Canada meet 59% of total demand for uncoated groundwoods, other than SC papers. U.S. capacity to make this grade is expected to decline slightly in the future, so catalogers that use this grade will continue to depend on foreign-especially Canadian-sources.

Uncoated freesheet papers represent a scant 0.8% of the paper used for catalog production. Consumption of this grade in 1998 is estimated to have dropped from 27,800ST last year to 24,700ST. Over the following two years, demand for this grade among catalogers is expected to increase slightly before declining to below 1998 levels by 2000. Again, the limited four-color reproduction quality offered by these papers limits their use as a body stock for most catalogs. But this grade is often used in special sections of catalogs, including order forms and sale pages.

The U.S. is fairly self-sufficient in the production of uncoated freesheet papers. Then again, several Asian paper suppliers are significantly increasing capacity of these grades, so U.S. paper buyers can expect to see more Asian and Latin American uncoated freesheet papers entering U.S. markets this year, which should lower prices.

The least-popular paper grade among catalogers, newsprint accounts for just 0.5% of total consumption. We estimate that only 17,000ST (or 15,200 metric tons-newsprint is the only grade that’s measured in metric tons) will have been used for catalog production this year, down 9% from 1997. Over the next two years, newsprint use will decline slightly, although we predict a slight increase in 2000 and beyond, as some publishers will seek the least expensive grade. The low print quality of newsprint limits its use to lower-quality catalogs and special sale sections of some catalogs.

As with SC papers, U.S. buyers rely heavily on foreign sources for newsprint. In fact, imports account for 51% of total demand for newsprint, with most of these imports coming from Canada. It is unlikely that any new capacity will be added in North America, since despite some likely short-term increases, the long-term prognosis is a declining market for this grade.

More paper buyers and production managers are recognizing that paper sourcing has become a global market and are starting to investigate opportunities for improving their sourcing and cost controls. Many catalogers find that overseas paper options provide more choices, lower costs, and in some cases, higher quality.

That’s not to say that domestic sourcing will ever lose its importance to the U.S. catalog industry, but today’s mailers have more options and don’t follow traditional buying patterns. Catalogers today are more willing to search for creative and innovative means of improving their business-including their use of print and paper.