Paper prices rise 5% as supplies tighten; but new paper machines could balance increased demand for coated paper

Folio: The Magazine for Magazine Management, Nov, 1987

Paper prices rise 5% as supplies tighten

Lightweight coated groundwood prices leaped just over 5 percent early last month as paper mills took advantage of a midsummer spurt in demand and subsequent tight supplies. Following close on a July 1 increase, the latest hike means that prices for coated No. 5 basis weights, commonly used by magazines, have shot up nearly 15 percent from May's list price lows.

As of October 1, the price of 40-lb. coated No. 5 rose $40 per ton to $780 per ton. In early August, prices for No. 4 and No. 3 coated free sheet (which together account for about 6.3 percent of magazine paper use) took a similar jump.

Paper buyers, stunned by the rapid succession of increases, say they expect prices to hold through the winter months, but to increase again as early as the second quarter, when the 1988 Olympics and elections will stimulate demand. Noting, too, that magazine advertising is "inching its way back up,' Alan Kavasch, senior vice president at paper merchant Lindenmeyr Central, says, "There's no reason why we couldn't have another increase if demand holds. The paper companies have got to get [increases] when they can.'

An encouraging sign for publishers, however, is that projections last spring called for significant coatedpaper overcapacity in 1988. This is because several new paper machines are coming on line. That capacity should, at least, balance increased demand and hold down price increases, according to sources.

"We used to view the Pine Bluff mill as the one that was going to muddy the waters and throw capacity out of balance,' says Richard Brown, vice president, publication paper sales for paper merchant Alling and Cory. "But now the situation is, "what are we going to do without it?''

Panic in the paper market

At this point, however, paper mills are struggling to rebuild price levels after more than 18 months of decline, say paper merchants and buyers at major magazines. Soft demand led to deep, industry-wide price discounting--even as pulp prices reportedly rose dramatically.

Tight supply resulted in the October increase, says Brown. What's more, labor and production problems, low consumer inventories, threatened strikes, paper shortages and continued foreign competition all hurt the coatedpaper market.

Since midsummer many mills have sold coated groundwood papers on allocation, even turning away new customers. This came about, sources say, because of a rash of seasonal catalog paper buys, which sent a ripple of panic through publication paper buyers. Many had let inventories dwindle during the soft-price period, holding out for even lower prices before placing further orders. Rumors of price increases, followed by actual price hikes, sent many scurrying to rebuild inventories, which strangled supply.

For a number of reasons, says Brown, the mills are failing to bring up supply. Persistent manufacturing problems and maintenance shutdowns are plaguing some major facilities, while other mills, including International Paper and Bowater, have had trouble getting new machines to run at capacity on schedule.

Uncertain labor climate

An uncertain labor climate complicates matters. A strike at International Paper's Androscoggin plant led to operating slowdowns that may have caused some publishers and printers to accelerate orders, says Brown. At press time, similar labor problems were hitting other mills at IP and Hammermill Paper Company. At best, Brown said in September, mill production is currently at about 80 percent of full capacity.

Problems could increase at other mills, Joel Reiss, director of materials, Newsweek, noted in September. National labor unions, he said, had sought to exert the bulk of their influence in negotiations on IP contracts, scheduled to expire in September. Those settlements could have a major impact on negotiations at Crown Zellerbach, Fraser and Midtec. Although many coated-paper mills have already agreed to contracts, a worst-case scenario, says Brown, could bring chaos.

"If not for that potential,' adds Kavasch, "demand would not be so high.'

Foreign supply still rising

Supply uncertainty has also increased foreign-paper demand. According to Norman Wiener, Walker Wiener Associates, sales of high quality foreign coated papers rose to 4.5 percent of U.S. consumption in the first five months of 1987--despite the dollar's fall. In some instances, foreign supply filled in for cuts in shipments by domestic suppliers. Brown, however, sees the overall trend moving away from expensive foreign sources, which shifts an additional supply burden to domestic suppliers.

Also straining supply is the fact that the price of newsprint and supercalendered paper has been gaining on coated No. 4 and No. 5--encouraging some publishers to upgrade to the lower-grade coated groundwoods.

Supply shortages have been difficult for buyers, but, for the most part, not detrimental. Tight allocation, however, has made it tough for Reiss and others to maintain a "prudent' inventory level. Reiss notes, too, that the biggest blow was dealt to publishers and printers who had allowed inventories to dwindle below a 30-day supply. Some are now forced to borrow from other publishers and printers.