MAGAZINES;PUBLISHERS GET ECON 101 LESSON;RISING COST OF PAPER MERELY REFLECTS SUPPLY AND DEMAND, MILL

By Published on .

As magazine publishers figure their business forecasts for the next few years, the question they must ask is not merely whether paper prices will go up. It's how high will they go?

Many paper-industry experts agree the outlook for next year is for higher paper prices. However, most say the increases may be at a somewhat slower pace.

In the last five quarterly periods, the business has seen five price jumps. Prices are now 60% higher than in mid-1994, when the current wave of increases began.

"The paper companies might start talking about one [price hike] for January, but the date they are realistically looking at could be April 1," says Kathryn McAuley, a paper analyst with Brown Brothers Harriman.

Publisher complaints to their paper suppliers may in fact have helped to slow the rate of increases-but only slightly.

"The paper mills are a little concerned that they don't want to kill the goose that laid the golden egg," says Sherman Chao, a paper industry analyst at Merrill Lynch. But he says he doesn't expect price rollbacks or a return to hefty discounts off list price for major users.

The business segment "where markets are the tightest" is coated groundwood paper, the main grade used by magazines and catalogs, he says.

Despite all the groaning from magazine publishers about the sky-high prices, paper mills seem to have only limited sympathy.

Paper mill executives say they lost money through the early '90s magazine ad recession, when falling demand left them with a glut of unsold paper from numerous new mills that came on stream in the late 1980s.

Champion International, the nation's biggest producer of coated groundwood, has been aggressively leading the charge for higher prices.

Last year it posted a net profit of $63 million on revenue of $5.31 billion, but that came on the heels of losses of $156 million in 1993 and $440 million in 1992.

"The price is set by the marketplace," says Mary Green, director of corporate communications. "If the supply is limited and demand goes up, guess what happens to price? It goes up."

Through the first nine months this year, Champion posted net income of $554.3 million on revenue of $4.49 billion, reversing the net loss of $39 million on revenue of $3.03 billion a year earlier.

Today's prices are only barely ahead of where they were in the early '90s when the prolonged industry slump began hitting paper producers, says Ms. Green.

"The prices returned to peak only very recently," says Ms. Green. "Given inflation through that time, they are not way above the prices of the last peak five years ago."

"Prices for lightweight coated and supercalendered papers may be at or approaching a plateau, but we're not sure at this time. Pricing is a function of supply and demand," says G.M. "Buck" Evans, VP at Consolidated, the nation's second largest supplier of coated groundwood paper.

Still, as Ms. McAuley points out, "It's not price gouging as far as the coated groundwood market is concerned. The price for pulp [the raw material that mills must purchase] is at an all-time high and the demand is tighter today than it was five years ago."

With the magazine business expected to improve, the demand for paper should grow even higher. Most publishers predict 1995's end-of-year totals will shatter the ad page record, set last year. In addition, business for 1996 so far looks upbeat.

"The only thing that would cause prices to ease is softening of demand," says John Maine, a paper-industry consultant at Resource Information Systems.

That alternative, though, is an undesirable option for publishers: lower paper demand would indicate a slackening ad business.

"If there is a soft advertising market in 1996, there might be some relief" on paper prices, says Steve Florio, president of Conde Nast Publications. "But that's not going to do us much good."

The federal government, however, might bring some help. The Department of Justice "is looking at the possibility of anti-competitive practices in the newsprint industry," says a spokesman.

So far the probe is focusing only on newsprint grade paper and not the coated stock favored by magazines. However, a similar price probe in Europe this spring included that coated stock.

In this article:
Most Popular