Slackening demand curbs prices

Oct 01, 2005 9:30 PM  By

An end to labor issues at two paper mills, along with reduced demand, will result in flat to slightly lower paper prices heading into next year, experts say. The strike at Helsinki-based UPM-Kymmene Group’s lightweight coated-paper mill in Mirimichi, Canada, which began in December and ended in August, and the labor disagreement between the Finnish Forest Industries Federation (FFIF) and the Finnish Paperworkers Union, which lasted from May until June, had led to reduced paper inventories and price hikes on groundwood #4 and #5 grades.

“I’m thinking we’re going to see pricing flat in the groundwood market,” says David Goldschmidt, vice president of sales and marketing, catalog division for Newport, CA-based paper brokerage Strategic Paper Group. “Things are still kind of tight, but after we get past the busy catalog season, I feel like the rest of this year and 2006 will be pretty flat.” He predicts that groundwood prices will stabilize by late November, when most catalogers have completed their holiday print runs.

Prices for coated freesheet, including #1, #2, and #3 grades, may even come down at the beginning of next year, if not this fall, says Goldschmidt. The North American mills are still struggling to sustain their April 1 coated freesheet increase of $3 per hundredweight (cwt), he says. The across-the-board spikes in pricing during the past year, combined with the postal rate increase expected in 2006, has caused many mailers to swap coated paper for less-expensive, lighterweight groundwood, thereby keeping demand for those grades higher than that for coated papers.

“I’m expecting paper prices to stabilize, and probably remain fairly stable, hopefully through the fourth quarter, and they could conceivably go down slightly after the holiday rush,” says Joseph Tsang, vice president, creative services for high-tech gifts merchant Sharper Image Corp. The San Francisco-based company, which uses 80-lb. coated #3 for its catalog covers and 34-lb. coated rotogravure sheets for the inside pages, has a “cap and collar” agreement on paper through the end of 2006, meaning that its prices can increase or decrease only by an already established amount.

Even lead times for coated grades are starting to improve, says Michael Dato, vice president of purchasing for Harwood Heights, IL-based printing company F.C.L. Graphics. Last year at this time, companies needed to place orders four to eight weeks in advance to procure coated freesheet grades #1, #2, and #3; today these papers require a lead time of only two to three weeks.

Paper companies typically announce price increases each February, no matter the state of the market, so that they can try to make up for price declines that may have taken place after the prime fall/holiday season, says Dato. But next year they may not be able to risk raising prices of the coated grades. Dato says that if demand has increased and supply tightened by the end of November, paper companies will be willing to negotiate price cuts with catalogers.

Paper manufacturers “always bank on a strong catalog season,” Dato says, “so if they end up with inventory sitting on the floor, they will start cutting one another on pricing.” By the end of the year, he believes, mailers may be able to negotiate pricing $1/cwt-$3/cwt lower than what they are currently paying.

Companies should indeed be optimistic about pricing for the fourth quarter and early next year, agrees John Maine, vice president of Bedford, MA-based forest industry research group RISI: “Coated-paper prices are at their peak of this cycle and are likely to be headed down in late 2005 and/or 2006. Demand is good, but not good enough to absorb all of this capacity coming back into the market.”

New York-based Redcats USA, which prints the Chadwick’s, Lerner, and BrylaneHome catalogs, among other titles, is looking forward to a stable or improved paper market for the fourth quarter and next year, says chief marketing officer Mark Friedman. The company uses coated #3 and #4 papers for its covers and coated #5 and supercalendared-A (SC-A) sheets for the inside pages. Since increases the mills pushed through during the past year were able to stick largely due to the labor problems that just ended, Friedman agrees paper prices should begin to weaken.