Paper prices on upswing

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Producers see reduced capacity, lower inventory as opportunity to reverse slide The paper industry has suffered quarter after seemingly endless quarter of falling or flat prices, consolidation and machine shutdowns. Since mid-2007, the coated-paper industry in North America has seen the elimination of 2.7 million tons of production capacity, according to William Lufkin, a former executive at R.R. Donnelley & Sons and president of Lufkin Strategic Procurement. But things have finally started to turn around for papermakers in one important area: Prices have started to go up. In April, mills implemented an increase of about $1.50 per hundredweight. “But that didn't stick with too many publishers, particularly the bigger ones, because they had negotiated price lock-ins for the first half of the year,” Lufkin said. Things, however, are looking up for papermakers in the second half, Lufkin said late last month, predicting a hike of $3 per hundredweight. “That $1.50 was a signal more than anything else that things are starting to recover and we're going to pull this price up,” he said. Publishers, too, expect papermakers to fare better. “I believe the magazine paper market is poised to do very well over the next few months,” said Michael Cohen, director of manufacturing and distribution purchasing at Reed Business Information. “Consumption in the U.S. is rising modestly. Mills are keeping a tight rein on capacity, allowing them to implement and actually realize price increases.” Gerry Chisholm, senior VP-sales at Gould Paper, attributed the upward pressure on prices to machine shutdowns at the Kruger and Domtar mills in the second quarter, “along with a big reduction in printer, mill and end-user inventories.” Lufkin recommended that publishers that purchase paper through their printers continue to do so in the near term. “Stay under the protection of your printer, but challenge the magnitude of any increases and ask for them to be documented,” he said. He also advised publishers about to enter into a new contract to insert a clause that allows them to give 90 or 120 days notice and get out of it. Chisholm said paper buyers should lock in the longest contract possible with the paper supplier “while always making sure they have a guarantee of supply.” Of course, conditions can change quickly in the paper industry. “One of the wild cards is continued economic turbulence—this time in Europe,” Cohen said. “If the economic crisis in Greece extends to other countries and triggers a second global recession, then I'd expect prices to decrease due to lack of demand.” Cohen also noted that recent earthquakes in Chile caused a pulp shortage that “resulted in market tightness in Europe and China.” “It looks like the paper-making industry has got a good handle on managing supply now, and some uncontrollable events factored in to their advantage,” he said. Chisholm said he expects another price increase in October and wouldn't be surprised if yet another follows in January. “The mills will continue to raise prices quarterly as long as they can,” he said. Papermakers are trying to make up ground after losing money for some time. The largest coated-paper manufacturer in North America, NewPage, recently announced that its profit dropped 62% in the first quarter despite higher sales. Last month, NewPage President-CEO E. Thomas Curley and Chairman Mark Suwyn announced their resignations from the company. “When the momentum changes from the one side to the other, the mills will try to capitalize on it,” Lufkin said, adding that even then papermakers still face something of a no-win situation. “The higher the prices go, the more publishers will start pushing digital products and taking more paper out of the system,” he said. “I wouldn't want to be a young person in the paper industry right now.” M
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