Demand rebounds from four-year weakness
Tom Stundza -- Purchasing, 6/17/2004 2:00:00 AM
The mavens say there's an 80% chance that office white paper will cost $820/ton by midsummer. That's 15.5% more than it cost in January, but not all paper buyers are convinced it will happen. Only half of the buyers answering PURCHASING's May survey foresaw price inflation that strong for paper products. That's because most paper markets still don't seem to be able to enjoy the expanding economic growth.
"The general economy obviously is moving up," says the purchasing vice president for a large papermaking company. "There have been price increases for virtually every commodity. But, despite severe price compression (i.e., loss of margin), the paper industry is very slow to respond. There's significant overcapacity for most paper products."
But apparently not for white copy paper, which had inflated to a range of $760/ton to $770/ton in May, depending on the producer, and another price hike is coming up. Reason: Production of uncoated free sheet isn't keeping up with orders these days. So paper mill executives say now is the time to recoup rising cost of raw materials. In fact, the cut size copy paper market shifted to extreme tightness in late March when mills began placing customers on allocation and imposing temporary moratoriums on new business in response to the sudden surge in orders.
Uncoated free sheet is used for office and business printing (copiers, computer printers, facsimiles), business forms and envelopes, on-demand publishing (mostly text reports and trade books), commercial printing and writing (stationery). The average U.S. price for these office printing and writing papers will rise about 20% until the market price peaks around $852 in mid-2005, forecasts John Maine, printing and writing papers analyst at market researcher Resource Information Systems Inc. in Bedford, Mass.
"The past few months have brought signs of recovery to worldwide printing and writing paper markets. Asian demand is finally growing faster than capacity, and prices are going up. European producers are reporting a demand surge, while U.S. prices are moving up rapidly in response to stronger demand and higher costs. Meanwhile, world capacity growth is in low gear as a natural response to the poor market conditions of the past three years."
So why are buyers pessimistic about a steep price run-up? "Sales conditions in printing and writing papers remained tough in the first quarter," reports Alston "Pete" Correll, chief executive of Georgia-Pacific. "Industrywide, first quarter shipments of printing and writing papers increased 4.7% over the year-earlier volume, but salestags dropped by 9.5%. So buyers didn't see much pricing activity until late in the quarter and, even then, they expected implementation to be erratic."
"Overall average pricing for the first quarter was down from the first quarter of last year," agrees John Faraci, chief executive of International Paper. "However, in March, we began to see the impact of previously announced price increases in uncoated free sheet." Actually, the first announced $60/ton price increase caught merchants and end users by surprise, setting off a scramble to buy paper before the hikes became effective. Interestingly, the recent supply shortage—and second price hike—was triggered by that buying surge. "Since we're seeing a continued pick-up in demand," says Faraci, "average price realizations in the second quarter should be higher."
Correll is hoping that gains in office employment will boost sales of copier paper during the remainder of the year. And although new-price implementation has been somewhat slow, he foresees improvement in copier-paper pricing during the second quarter. With stronger economic growth and improvement in office employment, uncoated free-sheet demand is expected to grow nearly 2% in 2004. New York-based analyst Stephen Atkinson at BMO Nesbitt Burns, and Goldman Sachs analyst Richard Skidmore, project a cyclical recovery in all white paper pricing.
"There have been declining paper imports and there has been severe paper mill consolidation to eliminate inefficient capacity," Skidmore says. "Now, the producers are managing current supplies, as evidenced by the lowest in-plant stockpiles in several years." So the Wall Street analyst believes the entire white paper market is in the early stages of demand recovery. These experts predict paper prices will increase because raw materials costs are rising. U.S. prices tracked by PurchasingData.com for chemical and wood pulp, the raw materials from which paper is made, already have increased by 10% since December, and further increases have been announced. Energy costs have risen as well. Atop that, low-priced imports have declined as the dollar has strengthened.
The market prices of cut size office paper and offset rolls did begin to rise in March, just about the time some capacity shutdowns were rebalancing supply. So with the sudden tightening in the market, producers Boise Cascade, International Paper, Domtar, Georgia-Pacific, Weyerhaeuser and others quickly announced a second round of price increases: $50/ton on cut-size copy paper; $40/ton on offset rolls, trade book and opaque grades, and $20/ton on offset sheets.
Some paper buying groups have price guarantees from their suppliers that may delay increases through August or September. However, most merchants and end users likely will feel the increases long before that. Upshot: Atkinson and Skidmore reckon that July will bring about an $820/ton market price for uncoated white, bond No. 4, 83-bright, cut into sheets.
Demand is up but supply is down
The uncoated free-sheet market tumbled in line with the U.S. manufacturing economy when it began hitting the skids in early 2000. North American white paper producers appeared to have difficulty keeping supply in balance with a 14% drop in demand through 2003. The industry's annual producer survey in mid-2003 showed uncoated free sheet capacity down just 9% from its peak in 2000. So, prices began to erode sharply from spring through the end of the year. The price of bellwether 50-lb offset rolls dropped from $670/ton in the spring of 2003 to around $570/ton at year-end with even lower spot discounts for big-tonnage buyers.
Adding downward pressure to offset and uncoated free sheet prices was swing tonnage being dumped onto the market from machines that normally produce coated free sheet, carbonless and specialty grades. The discounting then rippled out to cut size free sheet, which fell from $780/ton to $710/ton, and into such higher-value grades as envelope, reply card and forms bond.
When prices dropped below cash-cost levels for smaller free-sheet mills last autumn, several producers began shutting down older, inefficient machines, taking 500,000 tons of annual capacity out of service permanently. Meanwhile, customers and merchants grew accustomed to the continuing oversupply of paper at low prices so they allowed inventories to reach low levels. Then, the price increase announcement triggered a wave of pre-price increase buying at a time when underlying demand was improving. U.S. uncoated free-sheet shipments in February jumped 9.4% from a year ago earlier, according to American Forest & Paper Association data, and then increased again by 4.9% in March.
This sudden surge in demand follows a long four-year decline. With last year's 1.3% drop in demand to 12.3 million tons, the U.S. uncoated free-sheet market has declined by nearly 10% or 1.7 million tons since its peak of 14.1 million tons in 1999. Reason: A slow pickup in white-collar unemployment in the current recovery and competition from electronic communication, which has caused slippage in annual demand for envelope, forms bond, carbonless, tablet, text and cover papers.
The early-2004 wave of orders for free sheet and offset swamped the mills which began placing customers on allocation and announcing temporary moratoriums to rebalance their order books. The surge in demand caused the shipment-to-capacity ratio for North American uncoated paper mills to jump to 95% in February from the mid-80s in previous months. This caused a springtime 2004 shortage of supply, something that rarely occurs in the paper market. "You can count on one hand the number of times the industry has been in this kind of tight supply/demand situation," remarked a 30-year paper business veteran.
Nevertheless, some merchants expect that the bubble caused by the second price increase could burst in the seasonally slow summer months as supply begins to catch up with short-term demand. However, end-use buyers don't think price hikes can be held off indefinitely. Rex Ciavola, senior vice president, global creative services and production at Office Depot, Delray Beach, Fla., told attendees at the recent 2004 Catalog Conference that paper demand will go up and supply will fall slightly as 2004 becomes 2005. Upshot: "Paper prices will go up in the fourth quarter, and stay up there."
Free sheet paper's cyclical peak was $1,220/ton in the autumn of 1995, followed by a cyclical low of $700/ton in the winter of 1998. Since then, analyst Maine says "The North American market has seen two periods of tight markets, once in late 1997 and again in late 1999/early 2000." However, PurchasingData.com statistics show that cut size free sheet paper has bumped along between $710 and $890, averaging $783/ton, for the past 51/3 years. So, the mid-2004 forecasted peak of $852/ton would be almost 9% higher than that average.
Still, Maine cautions that "the U.S. market is vulnerable to another price spike similar to 1995" but adds that only if more machines are closed, the lowered capacity is used at a rate exceeding 98%, demand grows by better than 10% annually and average pulp prices exceed $1,000/ton (compared with $605 in May).
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