Paper Market Forecast: 2001

Folio: The Magazine for Magazine Management, Oct, 2000 by Mark McCready

Despite uncertainties in the paper market, a steady supply and reasonable prices should help publishers stabilize their bottom lines.

In 1995 and 1996, when paper prices were at their peak, many consultants, pundits and futurists predicted that everyone would be reading magazines and newspapers on computer screens and that the print publication would be dead by the end of the century. So much for predictions that the Web will replace printed magazines and eliminate the need for paper entirely.

On the contrary, a recent, quarterly GAPTRAC survey conducted by Jaakko Poyry Consulting of more than 400 printing/writing paper buyers found paper consumption at very healthy levels. A full 64 percent of magazine executives interviewed intend to increase their paper consumption during the next 12 months compared to the last 12 months. Almost two-thirds of consumer magazine respondents plan to increase paper consumption, and 61 percent of business-to-business magazines queried expect to use more paper in the next year.

The demand/capacity balance

Coated groundwood paper remains the overwhelming grade of choice among magazine publishers, accounting for 71 percent of the paper used this year. Magazine demand for this grade grew 36,000 tons last year, but usage may jump by 59,000 tons in 2000 and another 45,000 tons in 2001 because of strong advertising growth.

However, even though magazine, catalog and commercial print demand is rising, U.S. coated groundwood capacity is decreasing. Last year, three machines were shut down, reducing capacity by 130,000 tons. At the same time, new capacity additions worldwide remain minimal compared to total world consumption. The only new major capacity scheduled for 2000 is a machine by Haindi in Augsburg, Germany, in the third quarter. However, it will add only 60,000 tons to the marketplace this year, and almost all of that additional paper is ticketed for European consumption.

One way for magazine publishers and other coated groundwood users to fill the gap between U.S. capacity and rising demand could be imports. In 2000, consumption of imported coated groundwood is forecast to equal almost 27 percent of demand, which constitutes a 15 percent gain over 1999. Canadian and offshore paper represent 16 and 11 percent of this total demand, respectively. And American dependency on imports will continue unless more capacity is added in the United States, or magazines shift to other grades.

Coated freesheet is the second most important grade for magazines, accounting for 17 percent of paper usage. Experts predict demand for coated freesheet to increase 2.7 percent, or 17,000 tons, this year. The United States remains largely self-sufficient in coated freesheet, having added considerable capacity in recent years to meet the shift to coated freesheet from uncoated offset. A strong dollar and the marketing strategies of offshore producers will likely increase imports more than 20 percent this year after a 25 percent gain last year. The good news for publishers is that imports will help create a competitive pricing environment for this grade.

Pricing: The bottom line

When evaluating future market scenarios for individual paper grades, it is important to remember that paper grades do not exist in isolation vis-a-vis competing grades, but rather operate in constant interaction, with each grade gravitating toward the average of the printing/writing paper industry.

Currently, the coated groundwood market is comfortably snug and is expected to remain that way at least through the end of the year. Given its supply-demand situation, operating rates will average in the 94 to 95 percent range, with a seasonal peak of 98 percent in the late third and earlier fourth quarters. Although obtaining paper can be difficult on short notice, turnaround times are reasonable at three to six weeks for making orders. True mill backlogs are approximately two to four weeks.

Demand pressure should mount in the fourth quarter. (Catalogers are expected to enter larger than normal orders for a big holiday mailing push ahead of next year's postal increase, and magazines will place seasonally large orders.) Fortunately, the coated freesheet market is stable and offers opportunities for shrewd buyers. Coated free is readily available with lead times at about a week, which is shorter now than in the second quarter. Mill inventories are on the high side and imports are up about 30 percent in the second quarter.

With coated free in ample supply, heavy discounting and some price weaknesses are expected as the year progresses. Implementation of a $40/ton coated free web price hike in July is under pressure because of excess coated free capacity, as well as buyers moving to coated groundwood and lower-priced imports. Although demand will probably heat up in the fourth quarter, the combination of domestic supply, large inventories and strong imports will most likely restrain attempts at a fourth quarter coated free price increase.

On the other hand, coated groundwood price increases of $40-$60/ton will probably be announced October 1. They may be selectively implemented on a case-by-case basis, and ultimately, the full increase might not stick. It will probably settle in the $20-$30/ton range. Still, paper prices represent an excellent value. When viewed in inflation-adjusted constant dollars, even with an increase, publishers will pay about the same amount for 40-lb. coated groundwood #5 as they did in early 1989!