The paper industry over the last several years has focused intently on a program of "rightsizing" in an effort to control price volatility, Paul F. Cumisky, director of cooperative supply chain for Quebecor World, told a meeting of association publishers this week.
Speaking at a Quebecor World seminar in Bethesda, Maryland, Monday, Cumisky said that the paper-industry right-size strategy includes efforts to eliminate excess capacity, improve the operating rate on the most efficient machines, reduce costs and reduce the amount of surplus high-cost, low-price choice in the marketplace. The results are compelling: Cumisky presented price charts for a series of papers, including three coated grades, supercalendered paper and newsprint, that show high levels of price volatility in the past, but a consistent price flattening throughout 2005.
To do that, paper companies have reduced capacity by shutting machines and closing mills;in the process reducing the number of suppliers by 33 percent, and in effect, installing a ﾑnew culture, new rules’ reality on magazine publishers. "The paper industry makes more money by selling less paper," Cumisky said. "That’s the new reality."
Cumisky said there were 27 coated paper supplier options in 1997, with the top five representing 56 percent of the market. Today, he said, the top five (and soon to be the top four, with the expected divestment of International Paper’s coated-paper unit) control 75 percent of the market.
What’s more, he said, many of the traditional papermakers;including Mead, Westvaco, Boise Cascade, Blandin, Consolidated and soon, International Paper;have left the more volatile coated paper market. "They can’t make money," Cumisky said. In the place of the traditional domestic suppliers are new giants such as Stora Enso, Sappi and UPM, he said.
This trend is likely to continue, Cumisky said, as prices recover from their all-time lows and mill shutdowns and consolidation continues through this year and next. Where historically, relationships between paper makers and their customers were based on rapport, goodwill and contribution to the bottom line, today, contribution to the bottom line is the only thing that matters. "Paper mills will rightsize capacity to effect favorable operating rates and market prices," he said. "They will standardize around certain grades and basis weights to increase profits and reduce costs."
Publishers, for their part, need to explore their alternatives, he said. These may include the creation of buying co-ops, strategies to make the supply chain more efficient, and careful evaluation of supplier-partners as the mix of mill owners is likely to change.
Cumisky closed with a quote from Charles Darwin: "It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change."