If you waited until now to buy paper for your catalog, you might be in trouble. Prices have gone up, thanks mostly to mill closures and consolidation in the industry.
“We are definitely feeling the pinch from increased paper costs” on top of this year’s postage hike, says Alanna Vallee, director of catalog marketing for jewelry and gifts merchant Ross-Simons. “Our costs are 7% higher than they were at this time last year for comparable paper.”
Ross-Simons is doing its best to “lock in” paper prices where possible to try and combat the volatility in the market, “as well as get holiday paper delivered early in anticipation of future increases,” she says.
But how long can a cataloger “lock in” a price? “No one will guarantee anything more than three to six months in this climate,” Vallee says.
And given the mill closures and temporary shutdowns, it pays to do do some research before setting out. “If a [paper] plant goes offline, you want to know if this manufacturer has another plant available to accommodate you.”
What’s more, buying paper now also involves knowledge of different manufacturers and their quality. “How economical can we be and what creatively works for us,” Vallee says. “You try to lock in prices and use more forward thinking involving labor laws in Canada. You have to understand the economy of the whole market.”
And those decisions factor heavily when ordering paper prior to each catalog drop during the year.
Supply and demand
Indeed, since June 2006 prices for coated freesheet paper have increased 6%-7%. Coated freesheet is “mainly used for covers and by the higher-end companies like Saks, Coach, and Nordstrom,” says David Goldschmidt, vice president of marketing, catalog division for paper brokerage Strategic Paper Group. Coated groundwood is more popular among catalogers, and prices for that grade have actually dipped 2%-3% in the past year since there wasn’t a tight market for it.
Demand is weak in the coated groundwood market, says Chris Kendziora, paper purchasing manager for Royle Printing Co. It’s a “little firmer” for coated freesheet, and firmer in uncoated freesheet.
“With current demand and seasonal markets, the price increase of July 1 will probably fade over the next six months,” Kendziora speculates. “But demand will need to increase in 2008 for a price increase to be possible then.”
Still, several paper companies have announced price increases of $3 per hundredweight and some others a 7% hike for coated freesheet.
“Lack of demand and therefore low operating rates are causing continued mill losses,” Goldschmidt explains. “The mill closures were really the catalyst for the price hikes.” (For specifics on mill closings, see “Mills cuting down capacity,” page 18.)
Consolidation in the paper industry is another factor. For example, a deal was recently announced that will create the third largest public paper and forest products company in North America: Montreal-based Abitibi Consolidated and Greenville, SC-based Bowater agreed to in an all-stock merger of equals. The entity, AbitibiBowater, will have annual revenue of approximately $7.9 billion.
Domtar in March merged with Weyerhaeuser Co.’s fine paper business and related assets, creating the largest manufacturer and marketer of uncoated freesheet paper in North America and the second largest in the world.
And Neenah Paper in March bought Fox Valley Corp., owner of Fox River Paper, a U.S. producer of premium papers.
In fact, says Kendziora, “there are current rumblings that two major mills are in talks to merge,” though he would not name them. “Shutting high cost, older paper machines is a must for the industry to get healthy. Consolidation will bring about these changes.”
If you’re printing and mailing a catalog, you have to decide on and purchase the paper for the job. Sourcing paper typically means either purchasing it from a printer; using a paper broker who negotiates with paper mills on the mailer’s behalf; or buying it directly from a paper mill.
The rule of thumb here as to who does what is small, medium, large. In other words, small catalogers are most likely to buy paper from the printer; merchants in the midsize range might opt to use paper brokers, and only mailers running large volumes have the clout to buy directly from a paper mill.
Printers do the legwork when they’re buying paper for you, but you’ll pay a markup for their services. By most estimates the printer’s markup is from 2% to 5%. Brokers are good at negotiating and sourcing various grades of paper, and they also handle the administrative functions involved.
Does that mean you’ll get the best pricing? Not necessarily — you need to be purchasing by the truckload to be eligible for this kind of arrangement. And some experts say it’s not always cheaper to buy mill direct. (For more see “The Paper Chase,” March 2006 issue).
Paper typically accounts for 50% to 60% of a printing project’s cost, Kendziora says. When shopping, keep in mind the look you are trying to establish. For instance, do you want heavy, glossy paper to convey an upscale image, or can you get away with lighter stock?
If you want to find the best deal, be flexible within the parameters of your selections, he adds. You may have to sacrifice some desired paper brightness or thickness to find a stock that’s in line with your cost objectives.
As catalogers prepare for the fall/holiday season, observers expect some “tightening” among paper companies that should stabilize pricing.
What do they mean by that? “Stopping the big up and down swings we have been seeing,” Goldschmidt says. But it could also lead to potentially higher prices for clients if supply falls.
Michael Wade, vice president of business development at Wade Paper Corp., says the paper industry is cyclical in nature. “Traditionally, the fall/holiday season is the time of year when paper tightens up. Generally, mills look forward to this time because they can expect some price stabilization in down markets and increases in healthy markets.”
But, he says, the postal increase has manufacturers concerned. “There have been indications that end-users will be looking to cut back on orders and look to other ways to communicate their market offerings. It is very difficult to predict where, or if, the market will balance out.”
Producers want — and in some cases need — another increase to continue operating, Wade says. But if the demand is down in the second half, “prices will eventually follow, and you could see more closures/consolidation,” he notes.
Since several mills are taking capacity off-line, “the impact that the postal increase will have on the paper industry is hard to predict,” Goldschmidt says. “These mills were not running at full capacity and the market was somewhat soft before these shutdowns, and I do not believe we will see the net effect for a couple of months when we are past the busy fall/holiday catalog season, until these machines are completely off-line.”
Further mill consolidation is inevitable, Goldschmidt continues.
“The paper mills are hoping to be able to improve their operating rates and start making money on a consistent basis,” he says. “There was simply too much capacity in the system based upon the current paper demand.”
Recycling comes around again
Catalogers take a lot of flak from environmental groups, and to some extent, the general public for killing trees. While many would like to print their books on recycled stock, few have committed to it, largely because it costs more than virgin stock. But some say interest in recycled paper has been heating up.
“Recycled paper and chain-of-custody certification are definitely becoming more important to companies,” says David Goldschmidt, vice president of marketing, catalog division for paper brokerage Strategic Paper Group. “We are seeing the demand for FSC (Forest Stewardship Council) — certified paper growing beyond available resources. We are also seeing more companies asking for recycled grades of paper. There is typically a $1 to $1.50 per hundredweight (cwt) upcharge for every 10% of post consumer waste.”
In a chain of custody deal, wood fiber moves from a certified forest to a certified pulp mill to a certified paper manufacturer to a certified printer. But Michael Wade of Wade Paper Corp. notes that this can be time consuming, “and catalogers need to confirm that their printer and paper supplier are not only certified, but that they have product available for their requirements.”
The recycling issue has been expanded and more broadly includes environmental certification now, “which encompasses more than just recycled content, but also includes forest stewardship,” says John Maine, vice president of forest industry research group RISI. “It is a huge issue that more paper buyers are paying attention to — particularly the environmentally conscious outdoor catalogs.”
Mills cutting down capacity
September 2007 UPM-Kymmene Group’s mill in Miramichi, New Brunswick, is to shut down its lightweight coated paper facility for nine to 12 months; capacity: 495,000 tons
August 2007 Fraser Papers eliminating coated papers from its Madawaska, ME, mill; capacity: 90,000 tons
July 2007 Tembec Coated Paper Group closed its coated paper mill in St. Francisville, LA; capacity: 310,000 tons
Early 2007 NewPage Corp. closed its Luke, MD, mill (capacity: 100,000 tons) and shut down its Rumford, ME, mill for three months (for a net reduction of 25,000 tons)
Early 2007 Bowater closes Benton Harbor, MI, mill; capacity: 85,000 tons
2006 Domtar closes machines and mills in Ottowa, Ontario, Cornwall Ontario, and Vancouver; capacity: 170,000 tons
2006 Cascades Corp. eliminates 170,000 tons at Thunder Bay, Ontario mill
PAPER RESOURCE GUIDE
Not a comprehensive guide, but a selection of mills and brokers that sell paper to catalogers
BOWATER COATED & SPECIALTY PAPERS
803-981-8770; www.bowater.com; grades include #4 web coated, #4 coated gravure, #5 web coated
CASCADES FINE PAPERS GROUP
203-541-8000; www.ipaper.com; grades include only uncoated
514-343-3100; www.kruger.com; grades include #5 coated offset, #5 coated gravure
www.myllykoski.com; grades include #4 coated groundwood, #5 coated groundwood
NEW PAGE CORP.
937-495-3586; www.newpagecorp.com; grades include #4 web coated
604-654-4000; www.norskecanada.com; grades include #5 coated offset
SAPPI FINE PAPER
617-423-5400; www.sappi.com; grades include #4 web coated
STORA ENSO NORTH AMERICA
800-322-7377; www.storaenso.com; grades include #3 web coated groundwood, #4 coated offset, #4 web coated groundwood
UPM NORTH AMERICA
803-802-7500; www.weyerhaeuser.com; grades include #5 coated groundwood, #5 coated groundwood chlorine free
BRADNER SMITH & CO.
BULKLEY DUNTON PUB. GROUP
DOMTAR DISTRIBUTION GROUP
STRATEGIC PAPER GROUP
WADE PAPER CORP.
To keep up with catalog paper trends, look for our quarterly paper updates. Our next article about the state of paper and prices will appear in the October issue.