Squeeze on paper capacity

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Production budgets took another hit in early June when three paper mills shut down in the span of six days.

With the closure of UPM-Kymmene's Miramichi mill in New Brunswick, Canada; Tembec's St. Francisville, La., facilities; and Fraser's Madawaska, Me., mill, almost 900,000 tons of coated free-sheet and coated mechanical paper capacity have been removed from the market, which has now lost more than a million tons of capacity this year, according to Pulp & Paper Week.

"Right on the heels of the postal increases, this is a tough pill to swallow," said Nick Mlachak, director of operations for the Financial Services Group at Summit Business Media.

"I think it will have a fairly significant impact on the market," said Michael Cohen, director of manufacturing and distribution purchasing for Reed Business Information, who added that reducing capacity is a step mills have to take to cope with changes in demand. "Over the past two years, we've seen mills make fairly significant steps, but the expected financial results have been blunted by rising raw material and energy costs."

The ink was barely dry on the paper-mill closing announcements before other paper mills announced price increases that averaged around $3 per hundredweight.

One b-to-b production executive, who asked not to be identified, said the planned increase might not hold: "Due to the economy and the USPS rate increases, there are so many publishers and catalogers reducing runs, folio and frequency that the mill closings might not even put supply in jeopardy." Ultimately, the executive said, the increases might drive publishers further toward reductions in consumption.

Mlachak said paper brokers and publishers that use large volumes of paper may be insulated from any increase. "If you work with a broker and you have established a `cap,' then the impact won't be as great," he said. "For instance, some mills are talking about increases of $3 per hundredweight. If you have negotiated a cap of $2, then your impact has been reduced by 33%."

Keith Hammerbeck, director of manufacturing services for Advanstar Communications, said the mill closures would likely increase prices slightly now and up the chances for a "reasonable yearly increase for the near future. It will depend upon how many more closures there will be."

Cohen said the closings would tighten markets in Europe as well. "We expect some of the lost North American capacity to be filled by Finnish and European mills," he said. "Canada remains the big question mark: What is the future of their paper-manufacturing industry?"

The tariffs and duties imposed on Asian free sheet imports have largely ended that option, Cohen said.

Much paper is used in the third quarter in back-to-school sales materials and holiday catalogs, said Dedra Smith, president of printing consultant Printmark West. These closings will provide much more pressure to force prices upward, she said.

As for how the hikes will affect Reed, Cohen said, "The price increases will force us to re-examine basis weight, grades and press runs for any offsetting savings opportunities and will no doubt encourage us to drive more business to the Web."

Tom Fogarty, VP-production at Ascend Media, said he wasn't surprised by the closures but rather by the fact that they all happened in such a short period of time. "There has been some excess capacity in the marketplace, and this is just a tightening of that capacity," he said.

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