Paper Outlook 2007
Characterizing the paper market as "flat" might be an understatement. Factors that have pestered publishers in 2006, and had an impact on paper usage, will carry forward into 2007 with gathering intensity. Marketers are continuing their march to the Web, and while some publishers have been more successful than others in recapturing that revenue online, the impact is nevertheless felt in pages, and, ultimately, paper usage. On top of that, publishers are bracing for yet another postal increase with the usual cause-and-effect reaction of further tweaking basis weights and/or grades to lessen the sting of the postal hit;which some publishers are predicting will be a multi-year problem. Lastly, as paper vendors contend with flat demand, they're attempting to broaden their offerings in lightweight coated products to mirror publishers' desire to decrease weight without an appreciable difference in appearance.
"We definitely see a weak year next year for demand," says John Maine, vice president of Resource Information Systems (RISI), an information and research provider for the forest products industry. "GDP growth will be about one percent lower, with a weaker economy."
That's following a flat 2006 for the North American market, which itself followed a two percent drop in demand in 2005, a year that also saw a 15 percent price hike. Demand for coated paper specifically will be down in 2007, but for the paper market overall, that could be buoyed by a slight increase in demand in other general printing areas. "We expect coated paper demand to be weak in 2007," says Maine. "Demand will be down about one percent. It could be down more;two to three percent." If it does decline by three percent, says Maine, it will likely be offset by increases in other areas, such as general commercial printing, which will keep the overall decline to about one percent.
So what's behind the numbers? A one-two punch of flat print advertising and a pending postal hike that will be double the increase already levied in 2006. The current rate case is proposing an 11.4 percent increase on periodicals mailing. "I would say that we have on paper tried to respond to the postal increase in 2007 with actions in 2006," says Guy Gleysteen, vice president, paper and digital development at Time Inc. "Looking forward with the postal increase coming sometime in the first half of 2007, it seems to us that other publishers are likely to make basis weight changes even more than they did in 2006." For his part, Gleysteen has adjusted some of Time Inc.'s titles down with a 2lb basis weight change, going from 32lb to 30lb.
That 2lb basis weight reduction will have its greatest impact in shipping, notes Maine. "If you go from 32 to 30 basis weight you're going to use six percent less paper per ton. But the paper is going to cost you about four percent more. You'll save a little more on tonnage but you'll save the most on postage and distribution since it takes up less space and weighs less," he says.
"We see a trend toward lighter basis weights," says Sharad Agarwal, product manager, coated groundwood at Verso Paper, a paper supplier in the coated freesheet, groundwood and supercalendered grades that was sold by International Paper to CMP Holdings in August for $1.4 billion. "When you have lighter basis weights you ship fewer tons."
This contributes to a perpetual emphasis on asset, or machine, efficiency. "Since this is a cost-competitive and capital-intensive industry, Verso continues to direct attention to machine efficiency," says Agarwal. That means paying closer attention to down-time for maintenance or making grade changes.
Indeed, that efficiency focus has been, and will continue to be, an ongoing strategy. "In order for the paper companies to be a viable investment option for their shareholders, they've got to continue to become more efficient and get the simple supply and demand balance in line," says Peter Wilson, vice president, paper procurement and supply chain at Quebecor World.
Maine notes the restart of Stora Enso's Port Hawkesbury mill in Nova Scotia, which produces 360,000 tons of supercalendered (SCA) product. The mill came back online in September following a 10-month strike-induced shutdown during which Stora Enso was losing five million euros, or $6.3 million, each month. "The supply side is quite interesting, most important of which is the restart of Port Hawkesbury. They will be looking to sell this additional tonnage to magazines, catalogs and retailers, trying to entice them to switch from lightweight coated to supercalendered. It's a cheaper substitute for LWC papers;10 to 20 percent cheaper," says Maine.
A grade change, however, by going from, say, #5 coated mechanical to a SCA grade is not in the cards for Gleysteen. "SCA grade papers start to compete more effectively at heavier basis weights, particularly at 38lb and above. However, when you run lighter basis weights, the show-through, lack of bulk and flimsiness of the paper all become more exaggerated. As a publisher with many titles on lighter weights, we are in the position of seeing exactly those less favorable characteristics."
Marie Myers, senior vice president, manufacturing, at CMP Technology, has investigated the feasibility of the supercalendered product, but so far has not gone forward with a grade change. "We're also looking at SCA because the projected savings would be about eight percent, and it's also running better on the press at the printer. Years ago, the printers didn't like printing on this paper. They charged slowdowns and penalties that would be equal to any savings. Some of them still feel that way about SCA Plus. However, after doing testing at the plants, one of the brands seems to run better than the others. They still charge a premium for the ink, but all the other charges went away."
Yet, Myers seems skeptical of the promises of SCA. "It is a much lower quality than a #5 groundwood. However, depending on the groundwood you are using, the brightness of the sheet could almost equal it. Where you see the difference is in the feel and the sheen of the paper. The SCA has sheen, but it is not as glossy looking. I'm not seeing a hot pursuit of publishers switching to SCA."
Myers has been more fortunate at CMP. She notes that paper usage is down because pages are down, but pricing has been more favorable. A forecast for 2007 was not in yet, but Myers says she's used seven percent less paper in 2006 than 2005. "I did budget an increase, but after talking to some of my paper people, that's not going to happen. I actually went down this year on pricing for our coated groundwood," she says, and adds that her suppliers are able to feed her a savings every once and a while, "$1 to a hundred-weight from time to time."
The Rise of Digital
Mike Morgan, vice president of publication services at Vance Publishing, says that, along with the postal hike, advertisers are continuing their detours to the Web. "Some of our advertisers went from three full-page ads to one," he says. "We are offering [Web] opportunities and it's our goal to allow them to expand their market and audience through Web advertising."
The consumer advertising market is in a similar situation. Data on the first three quarters of 2006 released by Publishers Information Bureau indicates a meager 0.7 percent increase in ad pages over the same period in 2005. Frustrating any chance of meaningful performance is the automotive category, which saw a 2,000-page decline January through September, a 12.7 percent dip.
However, Morgan has taken matters into his own hands by giving Vance more control over its paper purchasing. After more than 15 years of printer-supplied paper, Morgan's going direct. "We were very comfortable having a printer supply it," says Morgan, "but it's easy to lose track with what's happening in the paper market that way."
The extra negotiating power Morgan gets by going direct should net Vance measurable savings on paper expenses. "It brings us back in synch with controlling our costs," he says. "It's a move that we think is necessary and obviously in part to combat the postal increase."
Lisa Earlywine, director, production operations at World Publications, has also recently taken the direct to supplier route. Previously, Earlywine supplied 50 percent of World's paper to her printer. By second half of 2006 she boosted that to 80 percent. "Now we can be more aggressive on pricing and negotiation," she says. By changing the ratio, Earlywine expects to save about four percent through reduced costs.
For now, Earlywine is holding off any basis weight changes;a decision made in light of the competition. "We felt that for the titles that have serious competition it was important to maintain quality," she says. The majority of World's titles are between 45 and 47.3lb basis weights.
Also in preparation for the postal increase, Earlywine negotiated a better consumption deal with her printer. "When you have a print contract you have agreed that you're going to use a certain amount of paper to print the magazine. If you go under, you split the savings with the printer. If you go over, the printer eats the cost," she says.
While a printer will rarely go over in poundage, it is to their advantage to set the pounds higher, even if they're not going to use it, which creates a buffer zone between actual usage and overage. Earlywine was able to negotiate a two percent reduction in consumption.
An added benefit of increasing World's paper supply to the printer is the ability to more closely monitor consumption. "If you buy all your paper from the printer, you don't get to see the actual consumption. But if you're supplying your own paper the printer has to show you actual consumption," says Earlywine.
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