Paper Outlook 2011
Initially, paper prices could drop again, but watch out for the second half.
What a difference a year makes in the graphic paper market! Last October, lead times were so short paper was available almost “on demand.“ Mills became customer centric, willing to make almost any grade and basis weight they had the capability to produce. And pricing? It was moving down with such regularity it was almost “price de jour.” For magazine publishers and their production departments, last year was the good old days as far as paper was concerned, which was fortunate since ad rates were declining as fast as paper prices.
Contrast that scenario with October 2010 and much has changed. Lead times are stretched out, if paper is available at all. Mills are strictly making the paper that they want to make, i.e., what they’re profitable producing, and we’ve had three rapid-fire price increases since April, amounting to $7.50 in hikes, or about a 20 percent increase. Adding to these increases is another “silent” increase, which has just been announced by paper manufacturers. Effective in October/November, mills are changing the payment terms for paper by halving the discount for prompt payment of invoices to 1 percent. Although a single percentage point may not sound like much, don’t “discount” the severity of this change, the first of its kind. Even if as a publisher you are not discounting your bills, your paper broker is, and this change will result in a loss of hundreds of thousands or even millions of dollars annually. Since the broker relies on these discounts when establishing a profit margin, this change will affect everyone to some extent. Larger publishers will be affected most severely.
In 2009, many predicted change would have to take place in 2010, mostly due to mill consolidations, but no one thought the shift would be so volatile. Where will we be next year? Will the changes in the paper market be as sweeping? What trends will develop? Let’s take a walk down the paper trail to see what could occur.
Paramount to both sides of the aisle—paper producers and magazine publishers—is pricing. Input costs for the mills are somewhat of a determining factor, but far more important and influential is supply and demand. In 2010 we learned why the word “supply” comes first in this phrase, because it certainly wasn’t robust demand that supported the three price increases. A steady effort over at least a decade has led the mills to constrict supply by shutting down old or inefficient equipment and in several cases closing entire paper mills. The constrictions are too numerous to name, but they’ve crossed all grade lines and mills, and in 2010 these closures were finally felt in the market by shrinking the supply of paper enough to command three price increases.
Pricing in 2011 will be determined again by supply and demand, and the demand will certainly depend on the US economy, which at this point looks anything but promising. Because of this and other influential factors addressed below, pricing will begin to soften and additional price increases for most paper grades are unlikely. This doesn’t portend that the mills won’t attempt an increase, but the economic factors to sustain any attempt will not exist until the economy begins to grow again.
Catalogers, Not Magazines, Driving Growth
Paper manufacturers’ operating rates have been in the high 90 percent range, indicating that they are genuinely full. Unfortunately, not much of this increased business can be attributed to magazines growth. Instead, most of the muted but heightened growth has been the result of catalogers coming back this year with increased page counts and higher circulation, fueled by early indications that the economy was starting to roll again.
But with more recent predictions from some that the recession could take a double-dip, catalogers will become more conservative in their approach and not mail as much in early 2011. Adding weight to this conservative approach is the impending exigent postal increase proposed by the USPS and the further consolidation of the printing industry, both leading to higher prices for publishers and catalogers alike. The paper demand increases that came in 2010 from direct marketers will not likely be seen in the early part of 2011, leading to an uptick in supply of paper and lowering prices.
Also leading to decreasing demand for paper is the ever rising encroachment of electronic media. Online bill pay, the Kindle, the Internet, mobile Web, social media, and many other forms of electronic media will continue to result in less paper used and needed.
Europe to Drive the Supply Side
On the supply side, we are likely to see an increased presence of paper supplied by Europe. Years ago, European paper makers had made themselves at home in the States, taking advantage of the strong dollar. However, as Europe developed a single monetary unit that gained strength over the dollar, offshore mills pulled back, preferring to sell in their own back yard. With the troubles in Greece leading to European economic woes, the euro has lost ground to the dollar, making it again advantageous for producers to invade our shores. This of course will increase the supply of paper and force domestic manufacturers to be competitive on pricing. Before committing to long-term commitments with an offshore supplier it would be wise to consider that things can change swiftly, and that the spigot of paper coming from Europe can turn off as quickly as it was turned on.
Paper manufacturers cannot, of course, control demand, but they’ve shown that they have the fortitude to control supply, even if it means shrinking themselves. So with the decreased demand and the increased offshore supply, they will not sit idly by, continuing to let pricing slip. Most of the paper supply that has been taken out up until now has been older equipment at less efficient mills. Further supply constrictions will be harder to justify by the mills because it will have to be newer equipment, but since most of the mills are now controlled by capital investment firms, they will do it in an effort to get back to supply-demand parity, and ultimately, profitability. This is for the longer-term, though. In the short run, paper mills will begin to negotiate prices again, in an effort to keep or even gain market-share.
Mills will also once again become customer-focused, willing to make basis weights and grades that in a tight market they’d be unwilling to produce. This is true of any industry. As demand for the product falters, the industry will come up with new ways to woo the customer. Think airline clubs offering daily rates, or Levi’s making custom jeans.
Be mindful not to tie yourself long-term to a mill making a grade that’s not in their sweet-spot. A mill willing to produce a 50 pound #4 grade in a soft market may immediately pull this product as the market heats up. It’s okay to be opportunistic and get low pricing on a product now, but be aware it may not be there long-term.
Of special concern is heavyweight #4 and #5 paper—typically used for magazine covers. With mill consolidations, only two producers—AbitibiBowater and Evergreen—now like to make these grades and basis weights. If you’re currently utilizing one or both of these mills, be mindful that a temporary switch to another mill may have to be short term.
In an effort to cut costs, magazine publishers have and will continue to downgrade their paper product by grade and weight. A magazine whose text had previously been produced on a 38 pound #5 grade may have moved to a 32 pound. Or a magazine on 32 pound #5 may have or consider moving to a 33 pound SCA. Lower basis weights and grades continue to gain acceptability to control costs.
Many of these moves by publishers took place this year as paper prices rose so swiftly. Once a downgrade occurs, a future upgrade is extremely unlikely to occur. Why? No matter how low a price gets for a higher quality paper, an equal price shift happens on the lower grades. If one makes a move to downgrade and saves 10 percent in the process, it will also take an equal percentage to upgrade again, a cost most publishers find too hard to justify.
Dan Walsh is vice president of publication papers for Chicago-based Bradner Smith & Company.