QUARTERLY PAPER UPDATE: Prices flat for now

After a few quarters of rising paper prices, catalogers may be getting a break. Provided overall mill capacity stays the same, several experts expect that paper prices will remain flat for the rest of this year.

The paper market has been “a bit soft through summer,” says David Goldschmidt, vice president of marketing, catalog division, for paper brokerage Strategic Paper Group, “but it will tighten up again as we get into the busy fall/holiday catalog season — as it does every year.”

But Goldschmidt warns that “any significant capacity reduction or announced mill downtime could certainly change the balance and lead to higher operating rates and further price increases.”

Paul Buohl, manager of estimating and purchasing for direct marketing production consulting firm EU Services, also thinks paper prices will remain stable for the rest of the year, “unless we see a spike in demand or a spike in raw materials costs.”

John Maine, vice president of forest research group RISI, says the price of paper in the fourth quarter is a “big question” due to the economic uncertainty and the slow start to the big catalog printing season.

“Some mills are starting to take downtime due to lack of orders, which is unheard of this time of year, so if demand does not improve, we could see some backsliding on the recent price hikes, but most likely not until November,” Maine says.

There could still be some permanent mill closures, Maine says. “We’re expecting shuts in Europe, which could also affect supply to North America.”

The UPM/Myllykoski merger, first announced late last year, will likely prompt some consolidation, he notes. “And with the Euro as strong as it is, and U.S. prices low relative to Europe in some cases, the European mills will cut their least profitable business first — and that may be some of the exports to the U.S.”

Mills in trouble

It doesn’t help that NewPage Group filed for Chapter 11 bankruptcy on Sept. 7. The company had recently announced the shutdown of its Port Hawkesbury mill in Nova Scotia, Canada, “based on current market and economic conditions.” According to the Chapter 11 filing, NewPage Port Hawkesbury Corp. is trying to sell the Port Hawkesbury mill.

Strategic Paper’s Goldschmidt is one of many industry watchers monitoring the financial condition of several domestic mills that continue to lose money. He’s also keeping tabs on several of the Canadian mills that are struggling. “The unfavorable exchange rates between the U.S. and Canada, along with high utility and shipping costs, are hurting these Canadian-based mills.”

The permanent shutdown of Manistique Papers in August and the indefinite shutdown of NewPage’s mill at Port Hawkesbury should tighten up inventory and may lengthen lead times, says Steve Silver, president/CEO of FutureMark Paper Co.

But the paper companies aren’t creating scarcity to profit off the backs of customers, he notes, they’re in serious trouble. “This isn’t like the oil companies reducing production to bolster prices,” Silver contends. “Paper companies are struggling, and even at the current price levels, many of them are unprofitable.”

Demand still down

The depressed demand for paper isn’t helping matters. And a surge in demand doesn’t seem likely. Consumers and companies are reluctant to spend money, Silver says.

He believes the American public has been “scared unnecessarily into fueling what could become a double-dip recession.” If that’s what retailers and advertisers anticipate as well, he says, “they’ll cut back on catalogs, ad pages, circulars and direct mail pieces — all of which use lots of paper.”

Declining demand requires corresponding reductions in production capacity, Silver says. And for the large paper companies with many mills, “production reductions impact their cost structure and they can’t benefit from the same economies of scale.”

RISI’s Maine expects more temporary mill shutdowns and/or closures this year if paper demand stays weak. If that’s the case, he says companies will take downtime at their high-cost mills. “Several of the high-cost mills are still cash negative because prices have not kept pace with costs over the past several years,” he says.

Despite the slower economy and weaker demand, the mills have been able to maintain pricing levels, Goldschmidt says, and have captured most of the last two price increases. “The last two increases were less driven by demand and more driven by the tremendous cost pressures the mills continue to face.”

A paper price increase that is not demand driven typically has a difficult time holding, Goldschmidt notes.“But so far these increases have held up as the mills appear to be more disciplined.”

A DYSFUNCTIONAL PAPER MARKET

Given the rising input costs for fiber, chemicals and energy this year, paper mills simply can’t afford to sell paper for less and stay solvent, says Steve Silver, president/CEO of FutureMark Paper Co. What’s more, he says some mills are not solvent at current prices, and some of the least efficient mills have already shut down this year. “This is reducing industry capacity, and could create an imbalance in the coming month or two that pushes prices up slightly,” Silver says.

Market conditions for paper are “simply dysfunctional,” according to Silver, because demand is declining, input costs are up dramatically and some of the largest producers are too highly leveraged. What’s more, he says, the Chinese government seems to have decided that this is an industry that it’s willing to heavily invest in and maybe dominate.

No one has been able to justify building a new paper mill in North America for quite some time, Silver says, “and I don’t think the ROI is going to improve any time soon.”

Being the biggest player used to be the way to dominate a market, “but I’m not sure that works anymore — especially in paper,” he says. “Now, it seems having a unique niche is the best way to ensure profits and survival.” — JT