Paper Update: Higher Postage Could Mean Lower Paper Costs

Historically the second quarter has been the weakest for paper mills and printers alike, says Dave Norman, director of purchasing for Menomonee Falls, WI-based printer Arandell Corp. And this year’s second quarter seems to be in line with history. No significant hikes or reductions in price or demand are in sight.

One positive effect of next month’s postal rate increases, in fact, is that it will likely keep paper demand, and prices, down for the year. John Maine, vice president of Bedford, MA-based forest industry research group RISI, anticipates that “costs will be down roughly 6%-7% in 2007 for most coated mechanical and supercalendered papers but will be roughly flat year-over-year for the coated freesheet grades in rolls.”

One manufacturer, Stora Enso, officially announced price increases for its postconsumer-recycled grades, Norman says, but this “may be an attempt to recover some of the anticipated second-quarter price slippage on their other grades.” He adds that because of high inventory, “coated freesheet mills are expected to offer spot pricing to maintain business.”

With mill capacity relatively high and prices relatively low, some manufacturers will take downtime to reduce supply and boost demand. No capacity closures are currently planned in North America, Maine says. But as prices approach cash-cost levels — costs associated with making paper — “we could see announced closures later this year if prices keep going down,” Maine says.

Michael Wade, vice president of business development at Deerfield, IL-based distributor Wade Paper Corp., confirms that “manufacturers are reporting that they are currently at, or near, cash costs and have been taking machines down as opposed to further discounts.”

Indeed, European mills have already announced closures. “European producers are shuttering 340,000 tons of capacity in 2007, after closing 650,000 tons in 2006,” Maine says. “They will be reducing the tonnage shipped to North America in 2007.” At the same time, the increased tonnage from China is not materializing as fast as predicted due to weak demand and low prices here. As a result, says Maine, “we could see a tighter market develop in the second half of 2007, leading to price [increases] in late 2007 and 2008.”

That depends, however, on how much catalogers cut back on circulation and page counts to counter the double-digit increases in the postage costs for Standard Mail. Many catalogers are expected to try to reduce costs by shifting grades and using lower basis weights as well. Until it’s clear which tactics catalogers will take to compensate for the postal rate hikes, few are willing to make definitive statements regarding paper demand and pricing trends for even as soon as the second half of the year.

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