The rise and fall and moderate rise of paper

Folio: The Magazine for Magazine Management, Nov 15, 1997 by Eric Charlesworth

YES, PRICES WILL CONTINUE TO CLIMB INTO MID-1998, BUT THEY WILL BE EMINENTLY MANAGEABLE IF ALL INVOLVED KEEP THEIR WITS ABOUT THEM.

The expression "once bitten, twice shy" might well describe the mindset of paper buyers and suppliers as prices have again been inching up. In July, producers increased prices on most grades by roughly 5 percent--and another groundwood increase is expected by year-end. But with the wild escalation of prices of two years ago still in mind, wary publishers and printers are responding with a more controlled approach.

"There was definitely a lesson learned. Buyers are showing a certain restraint [with inventory] ... and the mills are taking more responsibility so as not to repeat what happened," says one paper buyer. The reference is to the unprecedented period from June 1994 to October 1995 when prices for some coated grades skyrocketed more than 50 percent--largely because buyers tried to stay ahead of rising prices by filling warehouses with paper, thus turning what had been a stable marketplace into a frenetic seller's market. Suppliers responded by jacking up prices, which then quickly plummeted as users began digging into those deep inventories, turning the 1996 papermarket into one of the softest in years.

It took a year for those prices to revert nearly all the way back to where they started. This year, coated prices have been climbing at a more moderate pace; since January, they've risen, on average, about 10 percent. And this year it has been a boost in true, rather than apparent, demand (unlike in 1994) that has contributed to rising paper prices. Don Kummerfeld, president of the Magazine Publishers of America, notes, "Ad pages are strong this year so consumption is up." Through August, they were up 5.3 percent for this year compared to 1996, according to Publishers Information Bureau figures.

A growing number of titles are also contributing. About 1,000 magazines will have launched by the end of the year, according to Samir Husni, professor of journalism at the University of Mississippi and author of Samir Husni's Guide to New Consumer Magazines. Slight gains in circulation for more established magazines have also helped spur paper demand. According to the September "Capell's Circulation Report," 54 percent of titles measured by the Audit Bureau of Circulations have higher circulations this year than in 1996.

"Discounts have been reduced, but they are still quite deep," observes one paper company executive. And that seems borne out by the benchmarks. According to Pulp & Paper Weekly, in mid-September, 40-lb #5 offset web publication-grade was selling for between $900 and $950 per short ton The 60-lb. #3 freesheet was selling for $960 $ 1,000 per short ton. Those prices are still about 25 percent below what they were during the 1995 price peak.

At least some publishers are taking it upon themselves to keep the amount of stock in check. "We have been very conscious of inventory levels," says David Orlin, Conde Nast's director of manufacturing and distribution. "Ever since we made a correction in 1996, we've held the same amount of inventory." According to the Magazine Publishers of America's 1997 "Paper Outlook," 64.6 percent of users had fewer than 60 days of inventory on hand (when measured January 31). Additionally, the percentage of magazine publishers that are stockpiling over three months' worth of paper has declined from 22.1 percent in last year's report to 10.8 percent this year.

Track it, don't stack it

But more essential to a stable marketplace than self-imposed moderation of product inventories may be the monitoring of them. The best way to prevent the so-called "false demand bias" is finding a reliable way to track end-user inventory. Hence, the Alexandria, Virginia-based Graphics Communication Association (GCA)--which has a membership of printers, publishers and paper companies--has taken on the task. In July, eight major printing companies (with 44 plants among them) began providing inventory data anonymously to the GCA's Paper Inventory Database on a monthly basis. The new data make it easier for both sides to judge true demand levels.

Brian Kullman, vice president of materials procurement at R.R. Donnelley & Sons Company (a participant to the database) believes that the program will help minimize speculation and preserve price moderation during future market cycles. All publishers, he urges, should "put pressure on their printers to contribute their data." The project is being administered with cooperation from the U.S. and Canadian paper industries, and follows the model of the American Forest & Paper Association's system for tracking mills' output.

"The key is helping get better information out there so it is easier for both sides to make their decisions," explains Alan Kotok, vice president of management technologies at GCA.

The price is relatively nice

All indicators point to modest price hikes well into next year. Most notably, mills that produce coated freesheet will be greatly expanding product capacity. "There are going to be a lot of alternatives out there," for publishers who want to comparison shop, says Orlin. The projected increase in freesheet supply should more than offset the fact that long-term demand for freesheet is rising at a much faster rate than demand for coated groundwood. According to the MPA, this year saw a 4 percent increase groundwood demand while freesheet demand grew more than 10 percent. The MPA projects no new call for groundwood in 1998, while freesheet demand will continue to grow by about 5 percent. (The disparity is due primarily to the boom in specialty titles and catalogs that use freesheet, as opposed to the mass-consumer titles that favor groundwood.)