Purchasing of office papers has been on the skids for more than a year, and weak demand reduced market prices in the first half of 2002. While paper executives, market mavens and buyers project white paper purchasing will resume significant growth in the next two years as the overall economy strengthens, purchasing and price recovery in the second half of this year remains very much in doubt.

Although some mills are trying to boost third-quarter transaction prices, market economist Tom Runiewicz at the DRI-WEFA Cost Information Service in Washington D.C., believes sales volume and transaction prices will stay flat until first quarter 2003. "Now is the time to purchase office paper products," he says. "Locking in prices with longer-term contracts makes sense, since we see prices lower now than at any time ahead for the next two to three years."

Demand will remain somewhat weak through 2002, suggests analyst John Maine at Resource Information Systems Inc. (RISI) in Bedford, Mass., although he reckons the white paper market actually bottomed in the second quarter and will show some demand and price improvement in the second half.

"The overall economic recovery has yet to gain traction in the printing and writing papers segment," agrees analyst Peter Ruschmeier at Lehman Brothers Inc. in New York. "Still, there has been an ongoing trend of consolidation and rationalization in the paper industry, which has taken out 10% of the nation's free-sheet capacity," he says. "So, with nearly all paper commodities at or near cash-cost levels, the next big directional move in prices next year is up."

Often referred to as white papers, office papers and copier papers, the product line is known formally as uncoated free-sheet paper. In the U.S., the largest single end use of the various uncoated free-sheet grades is office reprographics, which account for one-third of total purchases. These papers are used in high-speed copiers, laser printers, color copiers, inkjet printers and plain-paper fax machines. Cut-size paper also is the feedstock for business forms, carbonless papers and envelopes, some commercial printing and stationery bond.

Despite controlled production by manufacturers of these writing papers since 2001, prices have plummeted because demand has been slowed by recession in the service economy, especially by collapse of the dot.com segment. In fact, purchases of uncoated free-sheet papers dropped 7% in 2001 and continued to slide in first quarter 2002. Most analysts now see 2002 as a no-growth year in purchasing. Note that market inventories started the year at 300,000 tons, equivalent to just nine days worth of supply, according to a report by RISI . "With consumer inventories starting the year already low, it appears the drop in first-quarter demand was due to a decline in consumption rather than further reduction in consumer inventories," says analyst Ruschmeier at Lehman Brothers.

Analysts such as Don Roberts at CIBC World Markets in Toronto suggest that "since demand for uncoated free-sheet generally follows business cycles, consumption will rebound in coming months and grow at an annual rate of 3-4% in 2003 and beyond." He also proposes: "There will be a relatively sharp rebound in uncoated free-sheet prices when demand recovers." However, even the most bullish forecasts put 2003 use at 15.25 million tons, about where it was in 2000, after two years at 14.25 million tons.

Market prices for bellwether grade, 20-lb cut-size No. 4 bond paper, peaked in this cycle at end-2000 at $860/ton. Prices have been falling ever since. By the end of 2001, tags were at $750/ton and they had fallen to $660/ton by May of this year. This has knocked out early forecasts (including PURCHASING's) that had 2002 prices in the $720-$740 range. However, despite weak demand and spot pricing, some of the uncoated free-sheet producers are trying to reduce discounting for third-quarter sales.

The four largest uncoated free-sheet producers in North America—International Paper, Weyerhaeuser, Domtar, and Boise Cascade—proposed a $40/ton increase on uncoated free-sheet papers in April that has not yet stuck. Some buyers believe the proposed price increase, which would bring market prices to $700/ton, might be a fruitless attempt to recoup lost revenues because there still isn't any improvement in demand. Buyers surveyed in May generally believe prices will stay flat at least until the fourth quarter.

Analyst Maine at RISI suggests it will be December before cut-size office paper is selling at $700-$735/ton.Analysts think producers will continue to do a good job of matching production to demand to prevent a buildup of price-depressing inventories.