Coated free-sheet to benefit from tight market for mechanical grades

Pulp & Paper, Mar 2005

ANALYSIS OF COATED FREE-SHEET

MARKET STRUCTURE. Coated free sheet (woodfree) papers are made from less than 10% mechanical (groundwood) pulp and have a coating weight of at least 2 Ib on either side (with at least 50% of the coating consisting of pigment).

About half of U.S. coated paper production is free-sheet grades (CFS) and the rest is mechanical (CM). CFS paper is classified into grade Nos. 1-5 and comes in a variety of finishes. The main CFS grades are No. 1 (brightness 85-87 and higher), No. 2 (83-84 brightness), and No. 3 (80-82 brightness). Basis weights are typically in the 50- to 70-lb range and higher.

No. 1 and No. 2 grades are used for annual reports and high-quality advertising and are most commonly sold as sheets. No. 3 grades are typically are used for catalogs, direct mail, and magazines. CGW is mainly used in No. 4 and No. 5 publication grades, but a small amount of CFS is also used. About 65% CFS in the U.S. is shipped to commercial printers, with magazines accounting for 9% and books 7.4% of total shipments.

Most CFS is coated on both sides (C2S), but some is coated on one side (CIS) for labels and packaging. CIS shipments in 2004 totaled almost 325,000 tons or about 7% of total shipments.

SUPPLY/DEMAND BALANCE. The U.S. coat ed free-sheet market picked up strongly in 2004 helped by a recovery in magazine catalog mailings and magazine advertising.

U.S. shipments of 4.5 million tons in 2004 were up 7.4% from the previous year but were still nearly 12% below their peak in 1999. U.S. coated free-sheet mills ran at 92% of capacity in 2004, up from 87% the previous year.

Demand for coated free-sheet rose 7.2% to 5.4 million tons, reflecting a continuing high level of imports from Europe and Asia despite the decline of the dollar. Imports rose 7.7% and accounted for 27.4% of total U.S. consumption, reaching a new high and more than doubling in market share in the past six years. Imports from Asia have shown the fastest growth and captured more than 35% of the sheet-fed CFS market.

PRICES. The import pressure combined with the downturn of the U.S. advertising market and some loss of market share to coated mechanical grades caused coated paper prices to drop to historic cyclical lows in constant dollar terms before recovering in 2004. Producers last year were successful in pushing through two price increases totaling $120/ton by the end of the year.

This brought the price of No. 3 (60-lb) coated free-sheet back to $870/ton from a low of around $750/ton but still below cyclical peaks of more than $l,000/ton reached in the 1990s.

The highly depressed pricing caused U.S. capacity for CFS to decline by 14% to 4.8 million tons in 2003 from the peak reached in 2000 and the lowest level since 1993, according to American Forest & Paper Assn. However, capacity rose 1.7% in 2004 and is forecast to increase 1.1% in 2005 reflecting conversion of a machine at Stora Enso's Kimberly, Wis., mill from mainly coated mechanical to CFS production and an expansion at Appleton Coated Papers' Combined Locks, Wis., mill which will eventually take capacity to 425,000 tpy.

OUTLOOK. U.S. coated free-sheet demand is forecast to rise 2.5% in 2005 but shipments are projected to increase 2.2% due to further growth in imports. Utilization rates are expected to climb another point to 93% in 2005. Demand for CFS is expected to be helped by the tight market for coated mechanical grades, where effective utilization rates are expected to reach close to 100% due to a prolonged strike at UPM's Miramichi, N.B., mill.

As a result, producers have announced another $60/ton price on web grades for March, but may have more difficulty making the full increase stick on coated free-sheet than coated mechanical due to greater availability of underlying supply.