Clear or cloudy horizon?

Pulp & Paper, Aug 2005 by Cook, Chris, Mies, Will, Rudder, Greg, Smith, Bryan, Vasconcellos, Sandra

UNCOATED FREESHEET

Matching supply with demand

Despite the growth in the economy, U.S. uncoated freesheet demand has been in the doldrums this year.

"U.S. demand has been flat for almost three years, stuck at 13.4 million tons, plus or minus 1%," said Kevin Mason, analyst with Equity Research Associates.

For all of 2005, it looks like U.S. uncoated freesheet demand will be down at least 1% compared with demand in 2004. Through May, demand was off 2.6% from a year ago, although some of the first half weakness may have been due to customers reducing inventory following last year's rapid run-up in prices.

But the main problem for uncoated freesheet demand has been electronic substitution (e-mail and online bill paying, for example, replacing letters, forms, and envelopes), and more recently growing competition from high brightness mechanical grades.

As a result, there no longer appears to be a close correlation between business activity and office paper demand.

"Not only is white-collar employment stagnant, but the use of business paper per white-collar employee is declining for the first time in history, " noted John Maine of RISI.

Cut-size copy paper shipments, the largest and healthiest end-use market segment, were down 0.6% through May, with growth in home office use offsetting some of the decline. Most other key grades showed even larger declines in shipments, with offset paper down 4.5%, envelope paper off 6.8%, and form bond down 3.1% from a year ago, according to the American Forest & Paper Assn.

Producers have been trying hard to keep supply in balance with diminishing demand. So far this year, producers have shut down a half dozen high cost machines with combined capacity of about 638,000 tons (or about 4.1% of total North American capacity). Market leader International Paper Co. alone has shut down three machines with 430,000 tpy capacity in Jay, Maine; Pensacola, Fla.; and Bastrop, La. The closures have helped commodity producers hold on to most of their hard-won price increases from last year averaging close to $150/ton on cut-size copy paper and offset rolls.

Producers then announced a $60/ton price increase on commodity grades in March, but most of the latest increase had eroded away by June.

One merchant expects producers to "lob in another price increase in August or September with any sign of a pickup in demand."

Meanwhile, smaller, nonintegrated value-added producers have not been able to raise prices much to offset soaring costs, resulting in machine closures (Riverside Paper and Badger Paper), layoffs, and bankruptcies (Valentine Paper).

"Right now in the paper industry, these are the most challenging times in anyonejs memory," a Finch, Pruyn & Co. official told a local newspaper in making a layoff announcement.

NEWSPRINT

Capacity shuts aid producers

It has been a down year for North American newsprint producers mainly because newsprint consumption by U.S. daily newspapers declined by 4.4% in the first five months of this year. Circulation at U.S. dailies declined from 59.8 million in 1993 to 55.2 million in 2003, according to the Newspaper Assn. of America (NAA). The number of U.S. dailies during that period dropped to 1,456 from 1,556.