Rousing Commodity Uncoated

Coming off of 2003's lagging market for commodity uncoated papers, large rolls of 60-lb. paper for offset printing used in forms production and long-run commercial printing (e.g. direct mail) remain readily available at large discounts to list prices. Commodity cut-sheets, like copy papers, experienced a 10% drop in prices after several attempts to raise prices based on a firm pulp market, its former pricing ally.

The only bright spots in uncoated papers are digital applications and color, which managed to hold prices rather firm, yet expanded capacity and inventories.

The demand for uncoated freesheet paper in the U.S. was flat in 2003. Overall shipments were down 1.5%, with North American production off by 1%. U.S. consumption kept up the 11 million-ton pace it restarted in 2000.

Imports rose nominally—primarily from Brazil and Asia, with some specialties from Europe—but are now inching closer towards a million tons. Meanwhile, exports picked up a bit, particularly to Latin America, as the U.S. dollar fell. Mill slowdowns and announced closures have set capacity back 15%, or two million tons, since 2000.

A recovering economy usually ignites demand for uncoated freesheet papers, but several factors are weighing heavily against any sustained bounceback. These include stagnant white-collar job growth, falling government employment (especially at state and local levels), shifts in technology to electronic forms of payment and account status (statements), and continued postal rate cost pressures affecting the direct mail and catalog businesses.

The hot markets are digital applications, demographic targeting (with language), photographic base, and technology-specific (laser and ink-jet) cut sheets. Unfortunately, many of these markets are becoming attractive to coated paper producers or mills that have equipment to apply surface treatments to suit specific end users.

Areas of sustained growth are colors, special finishes, card stocks, and envelopes. Recycled grades also are available, but with less fanfare than in the past.

Poor profitability has hit the retailing end of paper producers the hardest. Mills cannot seem to break through in branding at the retail level against the OEMs (Eastman Kodak, Hewlett-Packard, Xerox), and many have left the field. Office supply stores are only carrying those grades, Hammermill and its cousin Great White (from International Paper, or IP), and a plethora of specialty products from Wausau, Boise Cascade, and converted products (Ampad, Southworth).

Most mills have opted for partnerships with stores on branding (MaxBrite and Staples), or backed distributors (WillCopy from Weyerhaeuser, and Domtar Copy) for big orders. Another bright spot is the Internet-based Forest Express joint marketing arrangement, which has experienced steady growth of late.

The commodity end of uncoated papers is very precarious at present. Buyers of uncoated commodity papers are likely to have pricing power throughout most of this decade, especially those in the soft markets of direct mail and forms production. There is so much capacity for offset rolls today, and probably many more tons available in the future from places like Brazil and Indonesia.

Even former coated mills and large specialty groundwood-based mills are offering price advantages in roll offset applications for commercial printing runs.

On the mill side, so little is left to cut in production that baselining machine time may be all that is left for years to come. Buyers should take extra precautions such as testing incoming raw materials, since mills are apt to replace more costly chemicals and fiber with the cheapest materials available in order to remain at breakeven levels.

Still confronted with increased costs in chemicals, energy, labor, and fiber, mills may try to dry the paper less, increase filler materials, slim the basis weight, and treat surfaces with cheaper starches and little or no binders, which makes print head blinding, dusting, and picking a real issue on longer runs with inexperienced crews or cheaper inks.

Buyers should be testing basis weight, internal (or Scott) bond, and moisture. They also should be preparing ink proofs to assure that paper is suitable for its printing applications.

Price is not going to be a problem. Merger mania seems to be over, with Domtar, IP, and Weyerhaeuser staking their claims (Georgia-Pacific maintains a smaller position). But those mills are being pressured by imports that have tremendous pulp cost advantages, and may in the future convert those pulping assets to commodity papers (like copy and offset rolls).

This "jobless" recovery and the threat of yet another postal rate increase also will keep order books light.

Boise, a long-time struggler in these markets, sat out the merger binge and took a different tack by acquiring OfficeMax for $1.2 billion. Boise's Office Solutions arm had generated nearly all of the parent's profits since its inception. The company decided to put its chips into the converting and distribution markets rather than sell mills or get into bidding wars.

Using its massive timber and production assets as leverage, the company expands its distribution reach from merchant to retailer, possibly securing a long-term future for its specialty paper grades.

Domtar strengthened its portfolio with the addition of Domtar Opaque to the company's Plainfield line. Support via increased stocking at various distribution points and technical service are part of the release. Domtar created a promotion for its Business Papers Group (Microprint line), and continues marketing with environmental themes (with WWF) and popular books (Harry Potter).

Hammermill has set up a promotion for printers to join an alliance that provides technical assistance and pricing discounts. It also recently released its Color Copy Gloss line.

Mohawk also recently introduced an offering, Color Copy.

Finally, Weyerhaeuser is re-releasing Cougar Opaque with an improved 96 brightness and a guarantee on 60- and 70-lb. laser ink finishes.