Demand rise will nudge prices
By Tom Stundza -- Purchasing, 2/12/1998
Office paper has held steady at $820/ton for almost three months, but the mill execs are fidgety. They want higher prices, and appear ready to act before the quarter ends. "Demand for cut-size reprographic bond is strong, North American production is close to effective capacity, and mill inventories are low," says one paper marketer. "In this kind of economic environment, prices have got to rise."In fact, the mills are looking to boost tags back to 1995 levels. That would be 20% higher than it is today. The analysts don't think that will happen. Generally, they suggest 10% in price inflation over the course of the second quarter. That would bring cut-size copy paper to $900/ton by mid-year. According to analyst John Maine at Resource Information Systems Inc., "The bottom line is that prices will continue to rise in 1998, but at a slower pace than previously forecast due to now-expected lower cost inflation."
Some mavens also think price movements will occur in fits and starts. Market maven Chip Dillon at Salomon Smith Barney says that there's just too many suppliers to guarantee a smooth, coordinated price hike. "Uncoated free-sheet paper supply is very fragmented, and there are many decision- makers on optimum price levels," he says. "The probability is that pricing will be unstable."
Some analysts worry that recent currency devaluations in Asia are likely to put a dent in demand there for uncoated free-sheet. Atop that, there is some supply coming on line in the U.S., Scandinavia, and Asia. This might loosen supply, and discourage price inflation. However, most forecasts suggest that world demand growth--led by strong paper markets in the U.S., Canada, and Western Europe--will be well ahead of any supply growth. "Paper price stagnation or downturns usually are caused by excessive inventories or excessive capacity expansions," says analyst Mark Diverio at UBS Securities in New York. "Neither factor appears to be evident for this year."
A look back, and ahead
Instead of rising the predicted 6.5%, demand for all printing and writing papers rose by 8.5%-9% last year, according to the American Forest & Paper Association estimates. By September, mills were operating near full capacity. For the nine-month period, the mills had operated at 97.5%. Consumption rose by 8% to 30.5 million tons. Bob Meyer, vice president and general manager of Weyerhaeuser's Fine Paper Division, notes: "It was a very good and strong market, with strong sales to distributors, commercial accounts, printing operations, and the small-office/home-office segment."
In the largest-volume paper category of uncoated free-sheet (also known as cut-size paper or reprographic bond), consumption set a new record at 14.1 million tons. "As businesses have expanded their use of laser printers, and the soho segment has expanded its use of ink-jet printers, purchases of white paper have been growing very rapidly."
In fact, that 8% growth in office-paper demand eliminated a supply overhang and allowed the mills to elevate fourth-quarter spot prices by 15% above the bargain-basement levels of last year's first quarter. Thus, transaction prices for copy paper moved from $710/ton in January to $820 in December.
Analyst Diverio at UBS Securities says that continuing double-digit demand for personal computers and printers can't do anything but maintain the current wave of demand for business papers. He agrees with the forecasts of 14.5 million tons of uncoated free-sheet use in 1998.
Looking at 1998, Joe Elling, Weyerhaeuser's senior economist, says that "overall printing- and writing-paper demand growth should be reasonably good." He agrees with the analysts who are forecasting a 3%-3.5% growth rate, which would bring U.S. demand up to 31.6 million tons on the high side. Ellings also is bullish on offshore demand growth in Europe and South America. "We're looking for reasonably healthy market growth," he says. And he reckons that demand will drop in Southeast Asia and Japan. "It's hard to know exactly what the world market impact is going to be because of Asia, but it probably won't be much," he says, estimating that any regional capacity expansions there, will be moderate (and geared to Chinese consumption).
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