PAPER PRICE INCREASES: …and paper’s up

Prices hikes, even shortages ahead

Ready to pay up to 33% more for your paper? After the October 1999 increase of $60/ton for coated groundwood, industry experts expect a similar increase in April. That would raise prices to roughly $880/ton, about 17% more than the $760/ton catalogers paid in September 1999. Moreover, additional increases expected in July and October could bring the price of coated groundwood to $1,000/ton or higher. And if that isn’t bad enough, some predict that by the third quarter of the year, mailers may see a shortage of coated groundwood supplies to boot.

According to Catalog Age’s Annual Paper Forecast (October 1999 issue), 57% of the paper used for catalogs is coated groundwood. The second-most popular paper, coated freesheet (19% of the paper used by catalogers, according to the Forecast), hasn’t been spared, either. Prices rose $4/hundredweight in January to about $48 (or $960/ton).

Although one paper manufacturer, speaking under condition of anonymity, says “coated freesheet may have had its day, and will probably settle into the $43-$46/hundredweight range,” others expect further increases.

“Another coated freesheet increase on April 1 is remotely possible,” says Verle Sutton, a paper broker and editor of Reel Time, a Schaumburg, IL-based newsletter that covers paper trends. “But the next increase probably won’t occur until July,” because major producer Champion Paper has already announced that its prices will remain unchanged until then.

Blame it on demand

The price increases, which follow 18 months of declining paper prices, reflect an increase in pulp prices and other manufacturing costs. “A year ago, pulp cost less than $500/ton; now it’s almost $600, and it makes up about 60% of these papers,” an anonymous manufacturer explains. “Remember that energy costs have almost tripled for mills that burn oil, and labor costs are rising, too.”

But production costs are only part of the reason for the rising prices. Increased demand – due in part to the thriving economy, which has boosted ad pages in magazines and has prompted some catalogers to increase circulation and pages – may be the more significant factor.

“An increase in production of coated matte for the magazine industry has mills producing near maximum capacity in the first quarter, which is ordinarily a low-demand period,” says a prominent paper broker, who also requested anonymity. “And catalog demand shows no sign of letting up, especially in light of the proposed January 2001 postage increase.”

Some expect that by the second half of the year, demand may even exceed capacity, making price less of a concern than obtaining enough paper, period. “When the third-quarter spike in demand comes as catalogers print their holiday catalogs, smaller mailers better have a strong relationship with their broker or mill, or it will be tough to buy paper at any price,” says a paper broker.

Sutton agrees that a coated groundwood shortage is a legitimate concern in the coming months. In January, he recalculated Reel Time’s estimates of 2000 paper consumption, originally projected to dip 2% from 1999 levels, to equal 1999 consumption. “The only reason I did not raise my consumption estimate further, to 3% over 1999 levels, is that there is no more paper available,” he says.

A paucity of coated groundwood and coated freesheet would probably force catalogers to switch grades, most likely to the cheaper supercalendered-A (SC-A). But a prominent paper manufacturer expects SC-A prices, which rose in October, to rise with other grades this year.

No changes planned – for now

When asked for his reaction to the paper price increases, Jack Laidlaw, creative director at Braintree, MA-based education supplies cataloger J.L. Hammett, is stoic. “I’ve seen the increases, but we’ve never been overly concerned about paper prices, because it’s something we can’t do anything about.”

At the San Francisco Music Box and Gift Co. (SFMB), Janet Thompson, vice president of marketing and communications, says foresight on the part of the cataloger’s broker is insulating SFMB from rising paper prices. “We were locked in to our price some time ago. We’re feeling really smug about it now,” she says. But additional price hikes could force the company to change its paper selection, says creative director Jack Dodd. “We’re not going to sacrifice our quality to a mild increase, but if it’s extreme, we’ll have to consider it.”

Like many other catalogers, SFMB is more concerned with next January’s proposed postal rate hike, and if postage appears likely to soar, Thompson says the mailer would prospect heavily in the fourth quarter, regardless of paper prices.

One paper broker believes paper prices won’t remain high for very long. Paper buying tends to run in 18-month cycles: Buyers purchase more than they need when they believe prices are climbing, eventually stockpiling enough to reduce demand. Once demand ebbs, prices remain flat or decrease, and mill inventories build up. Then, as the paper buyers begin depleting their stockpiles, they begin buying more, enabling the mills to reduce inventories and raisie prices again. This current cycle, says the paper broker, began in mid-1999. “Our indicators are that the paper market will flatten by the end of 2000 or early in 2001.”

Not so fast, says Reel Time’s Sutton. Because demand has been strong for quite some time now, “inventories at mills have been depleted, paper consumers’ inventories are down, and until demand falls, inventories won’t build up again. As long as inventories don’t build, there isn’t any pressure on mills to reduce prices.” Therefore, this particular cycle may run longer than the typical 18 months.

Even so, one cataloger, who requested anonymity, believes the increases will ultimately squelch demand and hurt the paper industry. “In 1994-1995 [when paper prices soared 60%], we were forced to survive on less paper. But there was no viable Internet option then. This time they’ll force us to migrate more of our marketing onto the Web, and when that happens, the business they lose will be gone forever.”