Time to lock in supply agreements?

As we roll into 2007, paper prices are holding steady or in some cases being discounted. But with mill inventories significantly down for this time of year, sources say catalogers should try to sign supply agreements to carry them through the year.

In particular, freesheet paper prices seem to be holding, says Dave Goldschmidt, vice president of marketing, catalog division for Newport, CA-based paper brokerage Strategic Paper Group, “though we are seeing the groundwood market loosen up a bit, and pricing will remain flat to slightly down,” he says. “I expect that mill and pipeline inventory will inch up slowly.” The restart of Stora Enso’s mill in Port Hawkesbury, Nova Scotia, which produces supercalendered (SC) groundwood grades, coupled with a decrease in demand, “gives the appearance that there is too much groundwood capacity,” Goldschmidt says.

Rick Dethloff, director of purchasing for Menomonee Falls, WI-based printer Arandell Corp., doesn’t expect any price increases until the second quarter at the earliest. In cases of overcapacity, “mills would probably opt to take down machines rather than offer deep discounts,” he says. “Purchases will be made per job and with paper readily available.”

European capacity to slip

But while there may be an excess of groundwood on the market, many expect undercapacity, not overcapacity, to become a problem later this year. “The European market is scheduled to see 1.6 million tons of coated-paper capacity removed by the end of 2007,” says Michael Wade, director of sales and marketing at Deerfield, IL-based distributor Wade Paper Corp., because of inefficiencies at certain mills coupled with an anticipated decline in demand in Europe.

Goldschmidt says that Helsinki-based UPM-Kymmene Group, Wisconsin Rapids, WI-based Stora Enso North America, and Helsinki-based Myllykoski are expected to shut down about 1.3 million tons of lightweight coated and SC capacity from the third quarter of 2006 through the third quarter of 2007.

“This could have a significant effect on the North American market,” Wade says. “This should be a signal for end users to lock into supply agreements for 2007, as the spot market could see [price] increases should supply be limited.”

The pending postal rate case could mitigate a decline in paper production, however. An average postage rate increase of 8.5% for standard mail is expected to be implemented in May. Don Landis, vice president of postal affairs for Arandell, says the past six postal rate hikes led to declines in catalog mail volume, “though the January 2006 increase was not as noticeable because the increase was less dramatic than originally proposed. That said, the May 2007 rate hike could have a significant impact on catalog circulation if it is as drastic as currently proposed.”

But Wade isn’t so sure that catalogers will be drastically reducing their circulation or their page counts. “Many changes can occur between now and the finalized rate changes,” he says. “Although [the postal rate case] is definitely a large concern for mailers, I have not seen any major changes from catalogers at this time.”

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