Publishers expect the latest hike in paper prices to hold. Opinions vary, however, on how much impact the increase will have on the industry.
Due to a constellation of factors, including a strike at a paper mill in Canada, prices for 100 pounds of No. 5 coated groundwood stock rose about $3, or roughly 5%, on March 1. International Paper and MeadWestvaco were the first to announce price hikes. "Every indication that we have is that all the others will follow suit, and it will stick," said Ron Brockman, production director for Vance Publishing Corp.
The price hike is, of course, troubling to the b-to-b publishing industry, which is finally seeing ad pages starting to bounce back after a severe downturn. What may be even more problematic is that industry observers fear that paper shortages may become a reality later in the year.
"The current market is proof that buyers need to have a relationship with a source of supply," said Verle Sutton, editor and publisher of Forestweb's "Reel Time Report," which covers the paper industry. "If you don't have an ongoing relationship with a reliable source of supply, you won't get the paper you need."
Many b-to-b publishers say the price hike did not surprise them. Tim Fixmer, president of Stamats Business Media, said, "We budgeted for a 6% [paper[ increase across the board. Obviously, we believe it's here to stay." Cameron Bishop, president-CEO of Ascend Media, said his company also anticipated the increase and incorporated it into its budgeting. "It's not a major situation for us," he said.
Roiling the market is a strike that started in December against the UPM Kymmene mill in New Brunswick. Tom Purple, VP at paper broker Websource, estimated that the mill may produce as much as 8% of North America's supply.
"The strike is a major factor," Sutton said.
UPM Kymmene is said to be supplementing the loss of this supply with 20,000 tons of paper a month from overseas, Sutton said. These offshore supplies are providing some stability to the market, although they likely won't prevent the price hike from sticking.
Observers believe the strike has the potential to last well into the second half of the year. The union, Local 689 of the Communications, Energy and Paperworkers, is said to have a robust strike fund, according to Sutton. Additionally, some industry observers speculate that UPM Kymmene has little incentive to get the mill back online, because the strike is moving market conditions in favor of paper producers. Plus, UPM Kymmene is able to maintain part of its market share by selling more paper from its European mills into North America.
The strike is one more factor that is pushing the paper market toward an imbalance where demand outstrips supply. "We had two price increases last year, and this is the third one in at least a year," Purple said.
With the advertising markets recovering, particularly in the consumer magazine sector, publishers are using more paper. Catalog producers are also consuming more paper, and with a postal rate increase looming in 2006, more catalogs are expected to be printed this year, according to a source at Brown Printing.
On the supply side, paper manufacturers have taken many mills offline over the past several years. The strike, too, has cut supplies.
What happens to the supply imbalance when the strike ends is unclear. Rex Hammock, chairman of Hammock Publishing, said his company was prepared for an increase in the cost of paper. It budgeted for a price hike and warned clients that an increase was in the offing.
"Those kinds of situational issues are a nuisance," Hammock said. "Typically, in the long run they don't have a long-term impact."