PAPER THIN

Apr 01, 2008 9:30 PM  By

On the pricing front, mills announced yet another $3 per hundredweight (cwt), or $60 per ton, price increase across the whole grade spectrum, effective April 1. This marks the fourth consecutive quarter with an increase in the cost of paper.

Delivery is taking longer. Some mailers are saying that the last-date-to-change (LDC) time-frames have gone from three to four weeks, to six to eight weeks, depending on the paper mill.

That’s if you can get your paper. Mill shutdowns continue to put a crimp in the catalog paper supply. In some cases, mills have simply stopped producing some sheets.

School uniforms cataloger French Toast was in the process of locking in its paper costs for this year’s catalog shortly before this issue went to press.

“In just the last week, prices increased about 3%,” says president Michael Arking. And as for getting the paper stock it needs, “we were told that it might not be available.”

What many industry watchers predicted heading into 2008 has come true: Reduced demand and several mill closures, along with rising energy and manufacturing costs, have rendered paper extremely tight.

“We are very aware that some catalogers are having problems buying paper,” says John Baumann, president of Swiss Colony. The Monroe, WI-based multititle mailer is not, which it credits to regular meetings with its printers and paper suppliers throughout the year, he notes.

“We are very specific as to what we believe our production needs will be, and we try hard to consistently meet our estimates,” Baumann says. “This helps our printers and paper suppliers plan as well. As long as we can hold true to our production schedules, we should be able to get the paper we need.”

But other catalogers, such as gifts and housewares mailer Miles Kimball, have seen a reduction in paper stock options, says marketing manager Ryan Hennig. “The paper stock we used for the majority of our text pages was discontinued in February, forcing us to change stock. We continue to test different paper options as we look to offset the price increases.”

Previously, Hennig says, Oshkosh, WI-based Miles Kimball used a 32-lb. high-bulk stock for text pages. “The high-bulk has the feel of a 34-lb. paper with less weight,” Henning says.

When that became unavailable, the mailer switched to a 34-lb. stock, which was less expensive, but cost more to mail because of the weight. So Miles Kimball is back to testing a standard 32-lb. stock to help offset the cost increases.

As the paper climate continues to drive up costs for catalogers, many may opt for fewer pages this year. French Toast, for one, may have to place more emphasis on the Web within the catalog by prompting readers to visit its site for more, Arking says. But then the merchant is also more of a Web-based company, “with about 80% of our sales coming in through the Internet,” he notes.

Gary Evjen, senior vice president of sales at Deerfield, IL-based Wade Paper Corp., says that some clients have told him they plan to trim paper consumption by 13%-16% during 2008. “Several mill management persons have told me that reduction will still not create a ‘soft’ market, due to all the production taken out during 2007,” he adds.

Indeed, because of the high paper and postage costs, many catalog clients have already made the obvious cuts — in circulation, page counts, and trim size, says Dave Goldschmidt, vice president of marketing, catalog division for Irvine, CA-based paper brokerage Strategic Paper Group.

“The continued paper price increases and now another postage increase have clients looking at all cost-savings paper options as well, such as lower basis weights or grades,” he says.

OUT OF STOCK

Not that other grades are easy to find. The coated groundwood market remains “extremely oversold with, unfortunately, little light at the end of the tunnel,” Goldschmidt says. “Unless we see a significant reduction in demand due to the poor economic conditions, I would not be surprised to see another groundwood price increase mid-year.”

This means little room for price negotiation, and the mills are not extending price protection or caps at this time, he says. “Mills are still missing delivery dates, though it seems to have improved somewhat” in the past six weeks or so.

If the economy worsens and catalogers continue to make reductions, Goldschmidt says, “it will loosen up the paper demand.” This could potentially slow down or halt the mill increases, he explains. “The question then becomes, do the mills shut down more equipment, as they have hinted, to hold their pricing levels?”

Paper mills aren’t afraid to shut down a machine — or an entire mill — “if they believe it will be beneficial to them in the long run,” says Blake Hutchison, director of purchasing for Menomonee Falls, WI-based printer Arandell Corp. “I think there is still more room in the industry to do so,” he says.

Miamisburg, OH-based NewPage Corp. in January announced it would eliminate 444 jobs in Wisconsin as part of its merger with recently acquired Stora Enso North America Corp. The merger, which made NewPage the top producer of coated freesheet paper in North America, includes mill closures and paper machine shutdowns at mills in Wisconsin, Maine, and Ohio.

And it’s unlikely that overseas suppliers will be stepping in to make up for the U.S. shortfall. “There is very little help from Europe as the exchange continues to make exporting to North America less favorable,” Goldschmidt says. “And Asia has yet to provide a competitively priced, quality solution to compete for a groundwood position domestically.”

WHAT TO DO

Ross-Simons, a Cranston, RI-based jewelry and decor merchant, uses a dual vendor strategy to try to stay ahead of potential paper supply problems. “We use two vendors to balance the risk of supply, and our broker is providing the necessary leverage to ensure delivery,” says vice president of marketing Larry Davis. Still, he says, “pricing and looming increases are a problem.”

The most important factor for catalogers, Goldschmidt says, is having an allocation. “Not just for the proper amount of tons, but having them accurately forecast with the mill in the correct month and on the correct grade and basis weight,” he says.

Tim Eliason, vice president of Graphic Communications, agrees: “All grades except coated freesheet and uncoated freesheet are under duress right now, and of course that could change with constant changes in demand and supply.”

The real stories about getting access to tight paper will surface in the third quarter, when mills are overloaded with holiday catalog paper production, Eliason says. “Securing paper then will be contingent on having a defined allocation protected.”

WHAT’S IN STORE

Looking ahead, John Maine, vice president of Bedford, MA-based forest industry research group RISI, predicts some price stabilization in the second half of the year. “Weaker demand will be a big factor, but we are also starting to see some modest response to the higher prices,” he says. “Producers are eking out extra tonnage from existing machines, and in some cases, redirecting export tonnage back into the domestic market.”

Few if any buyers were able to secure long-term fixed-price contracts for 2008, Maine says. As a result, most buyers will be affected by the next round of price increases this month. “Every uptick in price makes the possibility of weaker demand more likely.”

But deliveries have improved in the past 60 days, Wade Paper’s Evjen says. ‘I think some of the panic is gone, and customers are getting the message to order in advance, which in turn helps the mills make timely deliveries.” The unknown in this scenario “is how many small publishers of magazines and catalogs will fold by the beginning of the fourth quarter because they have no money,” Evjen says. “This happened in 1994-95, and I believe it will happen this year.”

It isn’t the actual price of paper, Evjen notes, but the rapidity of the increase that will limit fall production of catalogs.

“I know I sound pessimistic; however, more than a few mill personnel have the same fear as I do,” he says. “Some of us were around during 1995.”