Sales growth isn't igniting prices
By Tom Stundza -- Purchasing, 8/12/1999 6:00:00 AM
Office paper buyers can get orders delivered in less than a week these days, at prices as low as they've been since 1993. Mill prices have been stagnate in the $700-$720/ton range for the past nine months. This is surprising, because demand for white papers could set an end-use record this year, but excess supplies have more than offset strong demand.
"There is an imbalance of supply and demand," says a spokesman for International Paper. "Paper produced in the U.S. still isn't being shipped to Asia because the dollar is so strong, so you have a lot of supply, which affects pricing."
Rather than creating a "paperless society," the personal computer has triggered a 4.5% annual average growth in office paper use over the past decade. Market analyst Steve Jing of the wefa Group suggests that "the strength of the overall economy means that white paper demand this year is likely to be even stronger." In fact, through April of this year, consumption is more than 3% higher than last year, and, at its current rate will set a new record for use of 2,600 tons/day.
U.S. demand for uncoated free-sheet papers used in all business and printing applications totaled 14.84 million tons last year. Most market forecasters suggest 1999 demand will be closer to 15.29 million tons. The growth is being spurred in large part by rising use of cut-sized papers. These business papers are bright white papers usually available in standard-size cut sheets (8 1/2 x 11 to 11x17 inches) that are wrapped in reams and packaged in cartons. These white papers are used for office and business printing through such electronic imaging applications as laser and ink-jet printers, high-speed copiers, plain-paper facsimile papers, and on-demand printing systems, as well as personal-computer-generated business forms and stationery.
Cut-size white papers are expected to show the largest growth of any paper grade through 2003 and account for 40% of the paper industry's largest uncoated free-sheet printing and writing papers segment. Demand for the white papers used to make envelopes, forms, and such other items as index cards has been--and looks to remain--static. "The inescapable fact is that cut-size demand will continue to drive total uncoated free-sheet shipments," says analyst Roman Hohl at Simons Consulting Group. That's because office automation and the ubiquitous desktop computer also brought about a huge installed base of copiers and printers that use cut-size papers.
And now, there is a "significant new market" for cut-size papers, Hohl says, pointing to the "small office, home office" (SoHo) segment. He contends that "the rapid proliferation of lower-priced but powerful desktop computers, the widespread availability of the Internet, and the growth of professionals working outside the office" has made SoHo a much larger than expected paper-using segment.
Recent forecasts from International Data Corp. suggest there soon will be more than 6 million small businesses with fewer than a dozen workers and more than 30 million home-based businesses. Add Canada to the mix, and the North American SoHo market soon will be close to 45 million sites. Hohl notes that "the SoHo market segment is growing at an annual rate of 5%, and this guarantees growth in office paper demand even if demand from the large-corporation segment stagnates in coming years from downsizing, restructuring, mergers, and consolidations."
Lately buyers have had to adjust to considerable upheaval among their domestic uncoated free-sheet suppliers. Big players include Hammermill Papers, Willamette Industries, and Champion International. Note, however, that the merger of International Paper and Union Camp created an uncoated free-sheet powerhouse with 3.5 million tons/year of capacity, or 8% of world capacity. Also, Weyerhaeuser became the fifth-largest uncoated free-sheet producer in North America with its acquisition of Bowater's mill in Dryden, Ont. Weyerhaeuser's Fine Paper business alone makes 1.6 million tons of office and printing papers. And major Canadian producer Domtar also grew its capacity with the purchase of E.B. Eddy Ltd.
Susan Ryan Goodman of Fitch IBCA, an international credit rating agency, says mergers and link-ups will continue to alter the North American paper industry landscape. The border between U.S. and Canadian firms is growing more blurry, she says, so "the mature nature of the North American paper markets will force producers to grow through acquisition rather than new construction to improve equity returns." The rating agency's senior director adds: "In order to reduce volatility in the paper sector, companies will focus on consolidation, globalization, and specialization."
Prices reflect excess supply
The universal truth is that the business paper market has been pretty unstable lately, buffeted by excess supply and reduced pricing. "When there's a healthy supply of paper it's going to be difficult for manufacturers to increase prices," says analyst Jing. End-use demand has been heady, but buyers, knowing that mills held plentiful inventory, kept waiting on major new-order placements as they continued to assess the effect that Asian and South American economic problems were having on imports and prices. When they decided to make their paper purchases, buyers--and many merchants--overbought cheap foreign product or domestic papers priced to meet the offshore competition.
The effect has been a dampening of cut-size pricing, which eroded by 12% last year to $700/ton by year's end. "The price declines reflect the supply and demand imbalances created by the increase in imports of white paper because of softness in worldwide markets," says a Willamette Industries market update. "There has been increased competition in the U.S. white paper market because products that were supposed to be headed for Asia still are coming into the U.S. market," says a Weyerhaeuser spokesman. "Also, there has been an increase in imports from Asia."
Even though North American mills have taken downtime over the past six months to reduce mill inventories, stocks at the merchant level especially are up, so market inventories actually were 10% higher early this summer than a year ago. Small wonder that while consumption is up, prices have recovered by just less than 3%. Pricing on cut-size office paper (20-lb bond) rose about $20/ton at the start of the second quarter to $720, and has flattened at that level despite attempts by mills to get them into the $740-$760 range. "With imports readily available at discounted prices, we do not expect domestic producers to be able to fully capitalize on the improving market conditions by aggressively pushing price hikes," suggests analyst Jing at the wefa Group.
Jeffrey Gaynor at Standard & Poor's DRI believes the "North American pulp and paper industry is on the cusp of price recovery." And rising pulp costs should lead to higher printing paper prices, agrees Morgan Stanley Dean Witter analyst Matt Berler. The key question is "when?" An analysis by independent analyst Bruce Kirk suggests that "prices will improve gradually into 2000," but acknowledges that 1999 average tags will be "well below" 1998 levels. Kirk says: "With import tonnage likely to be readily available at discounted prices, we expect that domestic producers will have a difficult time making aggressive price hikes stick this year."
Tim O'Neill, chief economist for the Bank of Montreal, expects demand to pick up, but also isn't sure when prices will improve. Only about 650,000 tons/year of new or debottlenecked printing and writing paper capacity was opened last year in the U.S., boosting total U.S. and Canadian capacity to 14.86 million tons.
Economist O'Neill points out that excess supply is due to imports. Foreign supply is expected to continue to be 12% of the market, if not more, as offshore paper from Asia and South America still is being sold to office supply retailers at lower prices than North America papermakers have proposed. Unlike North America, there is considerable new capacity being built overseas, including installation of 15 new paper machines in the economically challenged Asia/Pacific Rim region. From 1998 forward, about 4.2 million tons of capacity outside North America is being added, bringing near-term supply to 42.9 million tons.
Also adding to surplus supplies are currency devaluations in Asia and Brazil, which have increased global competition in pulp and paper markets, notes independent paper consultant Jim McNutt. He notes that foreign companies with established export sales, low manufacturing costs, and low U.S. dollar debt have been shipping tons of paper offshore.
Making the supply/demand situation even worse for suppliers is the fact that world paper markets are approaching a "zero inflation psyche" due to the Asian financial and Latin American economic crises, according to Martin Glass, senior partner with emge Paper Industry Consultants of the U.K. He says, at a recent industry conference, that 1999 will be a year of continued global oversupply as a result of deflated demand in Asia and South America, and growth in capacity in less-developed nations.
Envelope hikes won't stick
Meanwhile, the U.S. business paper market saw a midyear price increase on forms bond grades, but a push-back of a proposed hike for envelope converting grades. Neither of these grades is especially import-sensitive; rather, each tends to reflect demand and supply conditions.
Major business paper manufacturers such as International Paper, Champion International, Boise Cascade, Fort James, and Willamette Industries got a forms bond hike of $40/ton in June. It was the second increase of the year, following one earlier of $60/ton. The latest increase brought the new transaction price range for 20-lb stock tab to $640-$660/ton, according to buyers.
However, a planned increase on envelope grades that was set for June apparently has fizzled. Market sources say a couple of major manufacturers declined to increase their prices, putting the rest of the proposed $60/ton increase in jeopardy. The increase may be tried again in late summer, and one manufacturer has suggested to customers the next increase might be $40/ton. But for the moment, benchmark envelope grades, 20- and 24-lb white wove, are selling at $600-$620/ton.
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