With the fall mailing season under way, paper prices appear to be holding steady — a relief for catalogers after a series of increases earlier this year. Good news, right? But don’t get too complacent.
Yes, paper prices will likely hold during the balance of 2006 for both freesheet and lightweight coated groundwood grades, say several sources. “However, there is a chance that a few mills might attempt an increase,” says Rick Dethloff, director of purchasing for Menomonee Falls, WI-based printer Arandell Corp., “and the market might then support that increase because of budget restrictions and additional cost burdens in other areas.”
For commonly used catalog papers, demand usually rises during the fourth quarter while supply usually declines. Compounding matters, the peak catalog mailing season follows the peak textbook production season, which Dethloff says “occupies large amounts of industry capacity.”
Already, says David Goldschmidt, vice president of marketing, catalog division for Newport, CA-based paper brokerage Strategic Paper Group, supply is “getting tighter” among certain mills.
For instance, supplies of grade #3 paper at Memphis, TN-based Verso Paper Holdings, which bought International Paper’s coated and supercalendered (SC) papers business earlier this year, are declining, Goldschmidt notes. And Helsinki-based UPM-Kymmene Group increased pricing on Finesse — a #3 coated freesheet — by $2/hundredweight (cwt) for new orders effective Sept. 1. “Europe is tightening up, so this helps explain the Finesse increase,” Goldschmidt says.
But during the summer, supply of some grades had outstripped demand. The seasonal increase in catalog pages, says John Maine, vice president of Bedford, MA-based forest industry research group RISI, will “soak up some of the extra tons that have been floating around the spot market at steep discounts.” In effect, the increase in demand will act as a market correction, which is why “most contract or program prices will not move this fall,” he says. What’s more, most producers, including offshore suppliers, had raised prices during the previous quarter and will likely not push for another increase this fall.
“The biggest change in paper availability over the next quarter will be the likely restart of the large 400,000-ton SC machine at Stora Enso’s Port Hawkesbury mill in Nova Scotia,” Maine continues. The machine will go online too late to be a significant factor this year, but “it will open the market up substantially in 2007,” he says.
But as more consumer catalogers delay their major mailings until later in the holiday season, the likelihood of end-of-year paper price hikes may increase. The uptick in demand for coated paper seems to happen “later and later every year,” says Michael Wade, director of sales and marketing at Deerfield, IL-based distributor Wade Paper Corp. “I’m not sure if this is due to shorter production timelines, or if mailers are sending out holiday books later in the year.”
Most mills are currently running paper for specific needs and not for increasing inventory at the mill or printer levels, Wade says: “Almost all orders currently being placed for catalogs are purchased for a specific catalog run. Commercial printers are likely to satisfy some orders with inventory either from the mill or their own warehouse.” But if demand for paper continues to increase longer or later than anticipated, says Wade, “we could see price increase announcements in October.”
Looking ahead to 2007
Conversely, prices could hold steady into 2007, largely because of the postal rate increases expected to go into effect midyear. The January 2006 increase in postal rates didn’t have much effect on paper prices, says RISI’s Maine, because the increase was a relatively modest 5.4%. Catalogers “fared much better than expected,” he says. “They have expanded circulation despite expectations that higher costs for paper and postage would cause some contraction. There has been some reduction in pagination and basis weights, but overall catalogs are doing well. Magazines have been the weak market for 2006, but more because of a lack of ad growth than any impact from postal rates.”
But the postage increase scheduled for next year is more likely to reduce demand. “I hate to sound the alarm again after crying wolf and being wrong for 2006,” Maine says. “But we are facing a much sharper postal rate hike in 2007. Magazines will pay about 12% more for postage, and catalogs will pay about 9%-10% more, starting most likely in April of next year. The other key element is that the economy will also be slowing, so we could be facing a drop in paper usage by catalogs and magazines in 2007.” The one faintly bright spot is that this could keep paper prices steady or even lead to price cuts.