Paper Price Stability
Last year's mega-consolidations and e-commerce forays created a hopeful market for a battered industry.
By Michael J. Ducey, Paper Columnist -- graphic arts online, 1/1/2001
In many ways, the year 2000 turned the paper industry upside down. In just about every major market segment-newsprint, coated paper, uncoated paper, and packaging-half of the names comprising the competitive worldwide pulp and paper industry have disappeared. Downstream operations like distribution and converting also have been concentrated from many hands to just a few.
What does it mean? Prices for publication-grade papers (web) and commercial printing grades (sheet) are both up between 6% and 10% since a first-quarter 2000 increase, and prices have held steady. This is an interesting situation, as production is likely to fall by 1% while consumption flattens and import volume increases slightly.
During the 1990s, this economic condition would have meant price meltdown. Today, managers are simply curtailing production and thinning inventory. The result is price stability.
Capacity cuts
Rationalization of acquired assets began quickly after consolidation measures were taken. Stora Enso closed smaller, less productive machines shortly after its acquisition of Consolidated Papers, Inc. International Paper (IP) shut down profit-losing machines in its own portfolio and those of Champion Paper following a protracted battle with UPM-Kymmene of Finland. Plainwell and Belgravia, two smaller printing paper entrepreneurs, also narrowed production. Georgia-Pacific and Crown Vantage Inc. have announced closures as well.
A similar scenario played out in the newsprint industry-when Abitibi finished its merger with Stone-Consolidated and Donahue, and after Norske Skog took over Fletcher Challenge-as well as in the packaging industry following the merger of Stone and Smurfit and several smaller events.
Financials drive the industry
The reason behind these events in all cases is simple: the market cannot support smaller, less efficient machines in a cut-throat pricing environment. Companies no longer pump out the volume and let the financials be damned in order to maintain or gain market share. The financials are driving the industry, as the paper business attempts to re-gain favor with Wall Street after a decade of decay.
In short, the industry was not offering a return equal to or greater than its cost of capital, and it was punished.
By cutting production and concentrating power, the hope is to return to steady profitability and provide new incentive for shareholders to increase their positions in paper stocks.
Pressures are mounting
Reduction in capacity may not be over. IP is still trying to sell some of its Champion assets, mostly in the specialty areas. Financial pressures are mounting for some of the smaller producers as well. Additionally, European companies are still lurking in the shadows for opportunities, though there are few left. An economic slowdown would also force increased downtime, sales, and closures.
Overall capacity is forecast to remain flat or decline in just about every market sector. Coated paper dipped a bit between 2000 and 2001, but may increase slightly with new retrofits currently underway by Sappi and expected from Bowater and Consolidated Papers.
Capital spending in the industry actually rose 15% to over $8 billion after several years of decline.
European companies remain fully committed to the publication and commercial printing markets, with the start-up of six new world-class machines in lightweight coated (LWC) grades, supercalendered (SC) papers, and newsprint.
New LWC machines are starting up in Switzerland (Perlen Paper) and Germany (Haindl Paper). UPM, which lost its bid for Champion but made a bundle on the stock, started up an LWC machine in Finland last year and bought battered Repap of Canada. Yet another LWC machine will start up in Italy late next year.
Two new SC machines are up and running in Germany by Myllykoski (owner of Madison Paper, which is adding capacity in Maine) and Haindl (see SC sidebar for more information in this market). Two new newsprint machines in France (NSI) and Germany (Palm) also are producing today.
The capacity expansion equals about a million tons of LWC paper, 500,000 tons of SC paper, and 600,000 tons of newsprint, with some net reduction for retirement of older assets. Without very strong economic growth in Europe, pressure on pricing will start anew in early 2002.
Price directions
What influence will imports and slower consumption have on the new U.S. paper industry structure?
Most sheet prices began over $80/cwt., and most grades remain at this level. The industry is likely to announce a price increase in the first quarter, but this is mostly symbolic given the consumption reduction. Paper makers will defend this level to customers not under contract; discounts will be available to those who can guarantee a volume over at least a six-month period.
The publication markets are more sensitive. Coated freesheet rolls also started the year off strong at $60/cwt. and higher. In addition, coated groundwood prices kept above the $60/cwt. mark, and rotogravure grades were fairly tight and touched $70/cwt. Prices were up 6% or better throughout the year across all web grades.
Imports fail to affect prices
Imports did not influence the market enough to erode prices. GAM previously reported that according to the U.S. Department of Commerce, paper imports jumped over 25% in value, but in tons, the imports were slightly slower than in previous years.
Europe experienced strong economic growth throughout 2000, which kept most of the new tons at home. The large decrease in the value of the euro, near 25%, was too much temptation for some producers to ship to the U.S. and collect in dollars. Prices in Europe for coated freesheet and uncoated freesheet bounced back strongly (15% to 30%) in 2000, though new capacity is likely to soften the web markets.
Recovering markets in the East (with the exception of Russia) and strong economic conditions in every country-especially the big markets in the U.K., France, and Germany-should keep prices buoyant into 2001.
Transportation costs are causing concern as well, with energy prices some 50% to 300% higher than in 1999. Freight rates for all products are up strongly, and most companies have instituted freight surcharges on less-than-truckload and full loads. Freight equalization is back in vogue, and order consolidation is a must. To make matters worse, there is a tremendous shortage of drivers.
Buyers can negotiate these freight increases, but only over volume contracting.
Influential economy
Most economists are predicting an economic slowdown in the U.S., which certainly should influence the paper markets. Some major drivers seen in 2000-political elections, the Olympics, and movement among dot-com companies-are all absent from the market in 2001.
Further, IPO activity and profitability in corporate America, especially among technology companies, are in decline as well, and demand for printing papers within these sectors will fall. E-commerce could boost shipments to new consumers, but some cannibalization and false starts already have been experienced in this market.
The harbingers of the U.S. economy-automobile, housing, and manufacturing sales-are all falling in demand; these sectors have influence in advertising and commercial printing through brochures, sales materials, and mail. Bright market spots shine in home improvement, education and training, service industry growth, and leisure and retirement.
Question of the year
The big question in 2001 in terms of pricing of coated and SC papers will be imports. The million or so new coated tons could end up here, destroying the goal of price and production stability. If the economy in Europe falls apart, the discounting will be "on" and paper imports will skyrocket. If Russia pulls out of its turmoil and the Internet economy gathers steam, the new tons will stay at home.
Several companies have retired assets, and cross-border trade is now fairly ubiquitous, leaving the market in balance before the new tons.
Two of the biggest European companies, Stora Enso and UPM, are producers in North America. Both companies' strategies, presumably, are to see returns on their investments, and their courses of action could swing the market into chaos or keep it in balance. Americans have no recourse because of their inability to ship to Europe or other parts of the world (as a result of the strong dollar), and can only withdraw tonnage and lose market share.
Amid all of the movement of late in the corporate world, paper manufacturers created new products to offer consumers both quality improvements as well as cost reductions.
For example, IP and Stora are still working out branding harmony, while UPM is likely to expand brands from its Blandin mill in Minnesota to its new Repap grades. Here, cost savings and streamlined inventory certainly are achievable goals, which will serve to help both producer and consumer alike.
Potlatch continues its fanfare with the McCoy grade line. New swatchbooks using bright colors for its matte, gloss, and velvet grades were published last summer. Matte cover and 100-lb. text grades demonstrated bright white potential. The company's 100-lb. Silk grade showed the annual report comparison to other competitors. Potlatch continued its magazine series, with Peek (heavy graphic impact) and @issue (diverse text and graphics mix).
Sappi began a new magazine series called IE, the successor to its Warren Standard. The sample publication seeks to educate consumers with its premier theme on varnishing techniques. Sappi printed new swatchbooks for its Strobe and Lustro lines. Strobe's samples included perforations and black and metallic silver finishing.
Art and photography
Domtar's coated grades were shown in its continuing master photography series called Bravo and a magazine entitled Contract, in which the firm's 60-lb. and 100-lb. Luna grades take modern art and photography themes in black-and-white and color with grace and style for the art-inspired designer.
Westvaco recently released a new swatchbook for its Sterling Ultra line, and updated its comparison guide as well. The company also is exploring the on-line world with a series of partners, absent their papermaking competitors.
The new year promises to offer fewer names, but increased focus on flexibility. With the expectation of less demand, buyers will be pursued with a more simple approach in product choices and application options.
