In what’s been a tough year for catalogers, there’s been at least one bright spot: relatively low paper prices. But as the paper mills and suppliers try to stimulate demand by lowering production and inventory, mailers could see higher paper prices by the end of the year.
Without question, the paper market has softened with steady price declines throughout the past year, though prices stabilized in May, acccording to John Maine, vice president of pulp and paper for Bedford, MA-based forecasting firm RISI. The paper mills have been taking measures, such as closing mills and shutting down machines, to reduce inventory and stimulate demand. Since April alone, mill closures accounted for a reduction in 380,000 tons, primarily at MeadWestvaco mills in Ohio, Maryland, and Pennsylvania, and at Potlach’s Brainerd, MN, location.
In fact, a significant amount of capacity has been taken out of the market in the past two years, says Cheryl Ahto, vice president/manager of publication papers, eastern region for paper brokerage Bradner Smith & Co. “When demand picks up, product availability may tighten more quickly than some expect,” she says.
To some extent, RISI’s Maine expects history to repeat itself. “In the early ’90s, paper prices were not as low as they are now, but they were notably low. When prices rebounded in ’95, they shot up extremely fast,” he recalls. “I don’t think that the magnitude of that swing is possible again in this cycle, due to postal hikes keeping magazine and catalog circulation in check — but there will definitely be some sort of swing.”
Financial analysts are also banking on an imminent rise in paper prices. In a May 5 article on the financial Website TheStreet.com, columnist Odette Galli called the paper market a “cyclical sector” that gets “cheapest during a recession and therefore rebounds the strongest when the economy recovers.”
Galli highlights the strong stock performance of International Paper (up 8% since last year) and Boise Cascade and Domtar (both up 12% from last year). For the paper suppliers, she paints a rosy picture of supply-and-demand down the road, especially in such segments as uncoated freesheet.
A question of timing
Even the most cockeyed optimist realizes that paper prices will, eventually, rise — after all, what goes down must come up. The question is when will prices increase.
“While everyone knows that the market can shift, I don’t see anyone preparing for [paper cost hikes] now,” says Janie Downey, a catalog production consultant with Cumberland, ME-based Publish Experts. In her conversations with managers of paper mills, they talk about controlling inventories through closings and layoffs, but also about how cutting back has done little to affect current pricing.
Although consumer spending indicates that an economic recovery is under way, Bradner Smith’s Ahto doesn’t expect paper prices to rise significantly throughout the rest of the year. Catalog consumption notwithstanding, the magazine industry is the largest consumer of capacity of coated groundwood, and magazine advertising has sunk to a low.
“Significant reductions in magazine circulation and advertising pages are key contributors to weak demand in the coated groundwood market segment, specifically in the #5 grade category,” Ahto says. She also expects demand for coated freesheet — like coated groundwood, a popular grade among catalogers — to remain weak through the end of the year.
Yet RISI figures show that demand is increasing over last year — which admittedly was low in terms of demand. Within North America, it projects consumption of nearly 6.2 million tons of coated freesheet, an increase of nearly 6% over last year. For coated groundwood, it estimates demand will reach 5.9 million tons, up slightly more than 1% from last year. And for uncoated groundwood, Risi projects a 5% rise in demand, to 6.2 million tons.
What’s more, pulp prices have already started to rise, and Ahto admits that it’s “an indicator that paper prices may in fact start to climb in the months ahead.”
According to Paper Age magazine’s Pix Pulp Benchmark Indexes, pulp prices hit a low on April 9. On that date, the price per metric ton for long-fiber northern bleached softwood kraft pulp was $433.20; for short-fiber beech hardened kraft pulp (or birch pulp), $406.33. By May 14, softwood pulp was up to $452.12, while hardwood pulp reached $452.92 per metric ton.
“The one sure sign I usually look to on paper pricing is what’s happening to pulp pricing,” Downey says, “and that’s firming up a bit.”
Maine disagrees with Downey, however. While he concedes that many times the paper and pulp markets follow the same pricing curve — since many of the same factors drive both markets — he insists that there is no causal relationship between the two.
Locking in now
Whether paper prices follow the rising trend of pulp pricing or hold steady into 2003, catalogers who have stayed away from spot buying — ordering paper as needed to try to get the best price — should not be affected this year, says Coy Clement of East Greenwich, RI-based catalog consultancy ClementDirect.
“I advise catalogers to put in their paper orders in advance,” Clement says. “Right now catalogers should have made purchasing decisions for their fall and holiday books and be close to ordering for post-holiday sale books and early spring editions.”
In that spirit of planning ahead, some catalogers are looking into signing long-term contracts with their paper suppliers that would allow them to lock into the current low prices for a year.
Jean O. Giesmann, director of creative services for Madison, VA-based Plow & Hearth, is one mailer considering that option. “This is the softest market in years, and prices have remained stable since last holiday season,” says Giesmann, whose catalog sells products for country living. “It is important to negotiate when the market is this soft — but you should remain loyal to your suppliers and look into signing contracts with them. And if you are loyal, suppliers tend to warn you of any impending market changes.”
Carl Erickson, vice president of marketing for Beverly, MA-based apparel catalog Appleseed’s, is also looking into locking in paper prices — although he’s not convinced that prices will rise anytime soon. Appleseed’s buys its paper directly from International Paper.
Multititle gifts mailer Potpourri Collection is already locked into a contract through the rest of the calendar year. Nonetheless, “I don’t think you will see any price hikes through the end of the year,” says Jack Rosenfeld, president of the Medfield, MA-based company.
Potpourri buys its paper from both printers and brokers, “and I have heard talk about prices going up, but I have not seen that happening at all,” Rosenfeld says.
In fact, Rosenfeld doesn’t expect paper prices to increase until well into next year at the earliest. Rebounding paper prices are “dependent on the [print] advertising market — and I don’t think there is going to be enough of a rebound there to influence paper prices early in 2003.”