It’s an odd time for the paper market. Real demand for paper should be down—maybe way down. After all, folio sizes are reduced across the magazine industry, ad pages are down, there are fewer new magazines being launched, and readers and advertisers are migrating to the Internet.
But magazine company forecasts suggest that demand will “far exceed production capacity in the third quarter,” according to Tom Pankow, general manager of procurement strategy for Midland Paper, who gave an analysis of the market at a presentation in Chicago last week before the members of the Integrated Media Consortium—a small-publishers’ buying co-op.
So, what’s going on? You can’t have declining demand and increased demand at the same time. The answer, Pankow says, is hoarding on the part of magazine publishers due to the rising cost of paper.
The paper industry is implementing its fifth price increase in the last 13 months as of July 1 shipments, with increases at about $50 to $60 per ton, depending on grade. These increases will push most magazine grades to 10-year highs, though still below the historic levels of 1995. (See accompanying chart [0].)
Prior to the July increase, two things were happening:
- End users, meaning magazine companies, continued to push demand in the first four months of 2008, primarily due to reluctance to use inventory when another paper price increase was probable. Once that price increase was announced and they grew confident that the next price increase wouldn't come until the third quarter, order volume fell dramatically.
- The forecasts of increased usage in the second half are companies in effect hedging their bets against more cost increases and shortages that developed from more conservative forecasting in 2007.
“The projected increase in demand in H2-08 is really a ‘hangover’ from the significantly strong forecasts submitted to producers by most end users as a result of problems encountered in the second half of 2007, when supply was insufficient to meet demand,” Pankow says. “In other words, most end users overstated their forecasts of paper needed in 2008 in a ruse to ensure that they would not be short-supplied, as was the case in 2007. Producers are still holding onto these forecasts as they look at machine bookings, especially for Q3, which is traditionally the strongest shipping period for nearly all grades of paper. The reality of the Q3 situation is that there will likely be a fairly significant inventory drawdown as end users attempt to exert pressure on producers to reduce prices.”
Meanwhile, in an additional anomaly, the amount of paper inventory carried by printers and the amount of paper actually consumed is at its most divergent levels in at least five years. (See accompanying chart [0].) Pankow says printer inventory levels have ballooned primarily in response to rising prices. “It can be less costly to pay for storage and interest payments than to pay the next price increase,” he says. “A secondary cause of increasing inventories is last minute reductions in actual print demands in response to ever-increasing costs and a weakening economy. Fewer ad pages are only part of the story—consider that for every lost ad page, a typical magazine also loses a page of edit.”
Click here [0] for a complete copy of Pankow's report.