Coated freesheet up another 5%

Apr 01, 2006 10:30 PM  By

Another quarter, another paper price increase. Five major North American producers of coated freesheet — Domtar, International Paper, New Page, Sappi Fine Papers, and Stora Enso North America — announced a 5% price increase for April. This equates to an additional $2.50 per hundredweight (cwt), or $50 per ton.

The mills blamed rising costs of raw materials and energy for the price increase. “Coated paper manufacturers have been losing money due to skyrocketing energy costs and price pressure from imports,” says Michael Wade, director of sales and marketing at Deerfield, IL-based distributor Wade Paper Corp. “This may be the first time that a cost-based increase actually holds. It will be difficult for the mills to enforce this increase if their order books do not improve. Historically, cost-driven increases have not been successful.”

In fact, supply has outstripped demand for the past year. “One significant issue that has kept the market oversupplied in North America,” says John Maine, vice president of the Bedford, MA-based forest industry research group RISI, “is a rise in supply in Asian and European imports.”

Then, too, other elements of print advertising, such as postage and ink, have gotten more expensive as well, leading some marketers to shift their ad funds to cheaper media. “The cost of printed documents continues to increase as far as postage and paper, while the cost of online advertising and online catalogs decline,” Maine says. “If that trend continues, you’ll see more resources refocused from the most expensive media outlets to less expensive ones.”

But several recent mill closures are helping to reduce paper supply and tighten the market. UPM-Kymmene Group’s mill in Miramichi, New Brunswick, shut down for three months beginning Feb. 1, just after Cascades closed its Thunder Bay, Ontario, facility permanently. Weyerhaeuser had closed several mills a few months earlier, in late October, while damage from Hurricane Rita in September forced Pasadena Paper Co. to permanently close its coated-freesheet mill in Pasadena, TX. And Domtar had announced in late November that it plans to permanently shut its Cornwall, Ontario, mill and parts of its Ottawa mill.

And Wade expects more closures. “We will continue to see mill closures until there is more balance between demand and capacity,” he says, “and/or until pricing can be increased.”

The continuing weakness of the U.S. dollar could also lead to more mill closures, at least in Canada, Maine adds.

The supply-and-demand song-and-dance

Maine expects the cost of uncoated freesheet to increase this quarter as well, by $2/cwt-$3/cwt. Buyer inventory has remained low, he says, and “some of the increase in demand we’re seeing right now is buyers trying to increase inventory levels in order to deal with longer buying lead times.”

Current lead times for purchases are running five to six weeks at most mills, says Rick Dethloff, director of purchasing for Menomonee Falls, WI-based printer Arandell Corp., but following the price increases those times could be reduced to two to three weeks.

Dethloff expects the second-quarter increases to hold for at least five or six weeks. “The second quarter usually sees a falling off of catalog and commercial print orders because of seasonal demand, so the mills could also see a decrease in their backlogs,” says Dethloff. “There may be some mill price discounting to gain orders in the second quarter, but probably not any official announcement of price reductions. I would expect another round of increases for the third quarter, and demand will dictate any fourth-quarter increases.”

But just as the mill closures have helped to reduce supply, the price hikes could result in a reduction in demand. Dethloff says too many increases in the price of paper in an industry trying to absorb recent postal, energy, and fuel surcharges “could leave their toll on the number of catalog pages printed.”

So far, Dethloff adds, January’s 5.4% postal rate increase hasn’t led many catalogers to cut back dramatically on mailings. “We haven’t seen a change within our own catalog customers since the postage increase,” he says. “Most have been accepting of this change and are moving ahead with their campaigns and purchasing their paper.”

But James L. Padgitt, president of Mount Pleasant, SC-based catalog consultancy Direct Marketing Insights, says the April paper price increases coupled with January’s postal increase are “likely to decrease overall 2006 demand for catalog papers.”

A possible sale — and then what?

Talk of a pending sale within the paper industry is making prognostication even more difficult than usual. Several sources say that the coated-paper division of Stamford, CT-based International Paper (IP) is on the market.

“The big question is what happens to IP coated,” says David Goldschmidt, vice president of marketing, catalog division for Newport, CA-based paper brokerage Strategic Paper Group. “Rumors say it will be sold in the next couple of months. [UPM-Kymmene opening up] Miramichi again on May 1 will loosen things up a bit, but the IP coated division is a big deal.”

If International Paper does sell its coated division, more mill closures may result. “Most likely if they’re bought, they could shut down some major mills,” predicts Wade. International Paper has five coated mills — two in Maine and one each in Arkansas, Minnesota, and Michigan.

“As more capacity is taken out of the market, buyers will have fewer options available to them,” Wade continues. “The mills are in a difficult spot. Their order books aren’t long enough to force a price increase, but they’re forced to in order to survive.”

RISI’s Maine sums up the situation this way: “Price increases will be modest and limited to only certain grades of paper, but they will generally continue on an upward path for the foreseeable future due to limited growth in worldwide supply. It’s the usual Catch-22 for the industry: Price relief will come when prices get high enough to encourage renewed investment in new capacity.”