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Offshore Paper Usage--Mixed Emotions on the Rise

September 1998

Welcome to this special (fictional) edition of the game show "Jeopardy," where the contestants are printers, paper manufacturers, paper merchants and industry experts.

The category is "Global Competition and World Markets." The question: "Is offshore paper usage affecting domestic demand?"

But wait. This is a special bonus round. There's an economic crisis in Asia. The high hopes of European paper suppliers to sell their grades in Asian markets have backfired. Tons of paper, including coated free sheet, are headed for American shores.

So contestants, get ready. Here's your chance to score big with a special bonus-round question: "What are we to do with all this paper?"

"We'll take it!" says one printing contestant, grinning from ear to ear.

BUZZZZ. Game ends. Please stay tuned tomorrow to find out what the world paper market turns.

But buyer beware! Don't burn your bridges with domestic mills and merchants. What happens if tomorrow's paper supply is low and demand is high? Allocation policies could take hold, and severing ties with existing suppliers could prove costly.

And such is the nature of the game.

As brothers in business, paper suppliers and buyers are intricately interdependent. Both need each other to survive. Both are also trying to make a profit in their respective businesses. And those profits generally come from the other's pocket.

However, rules of the supply-and-demand game are apt to change when an economic situation arises, like the one taking place in Asia. No wonder our "Jeopardy" contestants have such mixed opinions.

Expert Opinions
Industry experts argue about the effects of the crisis. Some argue there's no crisis at all.

Some printers are buying offshore paper because of the lower prices. Some have never bought offshore stocks at all. Others are waiting for a significant fall.

The following is a brief, but telling, survey of what some of the nation's largest printers are experiencing during this highly interesting fiscal third quarter.

"Yes, tons of paper are coming in from offshore. And, yes, paper prices are dropping," says the purchasing manager of one of the nation's leading printing conglomerates, who wishes to remain unnamed (to maintain strong relationships with domestic paper suppliers). "There's a high volume of paper. Same quality, lower price. That's great value, a great enticement to buy."

Which is exactly what this major purchaser of paper (approximately 450,000 tons per year) was doing at the time this interview was conducted—buying paper from European suppliers at below-U.S. prices.

When a printer, or any business, is offered a good value, that's an opportunity that should not be denied, the anonymous buyer emphasizes.

"We're now in a worldwide, competitive market," continues the purchasing manager. "Domestic suppliers have to be much more astute that our supply base is global, and it's the right of any company to be as cost-effective as it can to receive maximum price reductions."

But with the voice of both purchasing experience and power, this major buyer warns: "If you give your business to offshore suppliers, your relationship with domestic suppliers will most likely become tarnished," which could come back to haunt the buyer if the global market dries up, and he or she has to turn to domestic suppliers again.

And that consideration is often factored into a paper purchaser's strategy.

As R.R. Donnelley & Sons' vice president of supply-chain strategy, Brian Kullman says he's definitely seeing an influx of offshore paper. Kullman is also reading trade statistics, like those published by the American Forest & Paper Association, "which clearly report an increase in offshore imports," he says, noting that Donnelley is not buying any more offshore paper than it normally would.

"We're working with our North American suppliers to keep pricing competitive with offshore paper," Kullman explains. "We see these suppliers as the best strategic source for coated free sheet."

Most of the paper purchasing managers interviewed by Printing Impressions feel the same way. They see that supply is up and prices are down, but when it comes to foreign stocks, most claim they're hardly buying any at all.

"Yes, we're seeing a plentiful supply of European coated free sheet with prices falling by 9 to 10 percent, compared to peak prices earlier this year," says Chris Grond, Quad/Graphics' purchasing manager. "But we're not buying any more—or less—than we normally would, which is about 5 percent."

Noting the flurry of market transactions, now being made at below-market prices, Grond claims he's still not buying. "Even if prices continue to fall," he says, "our domestic suppliers will respond and adjust accordingly."

Vern Langsdorf, plant manager at Japs-Olson, is in total agreement.

"If domestic mills were to dry up, we might consider using foreign paper," says Langsdorf. "But until that happens, there's no need to buy offshore. There's lots of availability here."

Besides, Langsdorf says he's tried European coated free sheet and doesn't think it's up to par with American counterparts. "It's generally more flimsy and doesn't have the opacity of domestic paper," he contends. "Why buy elsewhere when there's supply and quality right here?"

Good question. Bob Allen, manager of purchasing for Banta Corp., Kansas City (formerly the Clarke Div.), poses the same question. "Prices have been OK, quality is good, and our customers are used to the product. Why change to an offshore supplier? Banta is a dedicated domestic paper user, at least so far. We haven't felt it necessary to go foreign."

Buy Low
However, Allen admits offshore paper usage might be on the horizon—possibly for Banta, and for other printers nationwide.

"Imports are up, exports are low, so prices are definitely falling," says Allen. "It was extremely unusual for paper prices to fall in July, even when markets are soft. There's usually a strengthening of paper prices in the second half of the year.

"What we need to do is get rid of our inventories as fast as we can, then buy when prices are lower still."

"Foreign paper reps are meeting with U.S. printers," adds Allen. "It's inevitable that we [the printing industry] will be using foreign paper eventually, especially if prices continue to drop and the demand is still low."

Does that constitute a "maybe so" answer? Yes? No? To find out, please stay tuned tomorrow, when our contestants return for Round 2 and another chance to win in the high-stakes paper-supply game.

The Paper Players
Views and News From Experts,
Merchants and Manufacturers

"I'm reading all kinds of reports: 'Offshore paper coming in at record levels,' but customers [U.S. printers] stay away from those kinds of offerings. They realize that the market can change over-night. They can't depend on the availability coming from foreign markets.

"Besides, there's more to this than price. With domestic suppliers, there are the value-added services, the long-term relationships. And, of course, there's allocation. Paper buyers who use foreign suppliers may be hit with allocations when the market changes."

—Rob Sterling, director, The Sterling Group, a business unit under xpedx

"Looking ahead, as the paper industry continues to become more global in scope, we do see some moderating influences on the markets, such as the growing presence of imports in this country stemming from announced capacity additions worldwide. The volume of paper imported from Asia and Europe increased in the first half of 1998 and will likely continue to grow over the next five to six months.

"Much of this increase is due to the strong U.S. currency which, along with consistently high import duties, has also affected U.S. exports to Asia and Europe."

—James A. Buzzard, vice president/assistant division manager, Westvaco Fine Paper

"We're not seeing any visible signs of significant price decreases, at least not any that would make buyers switch from their domestic suppliers. If prices dipped low enough for there to be a concern, U.S. suppliers would follow suit. But I don't see any evidence of that happening now."

—Bruce Janis, president, Management Science for the Publishing and Graphic Arts

"The forecast for the second half of '98 is bleak. Pulp prices are the market's driver/indicator, and prices are down from June to July. And there's no reason for that forecast to change. 1999 is going to be miserable.

"Wall Street analysts say recovery will take until the year 2000 at least. It will take China that long to get back on its feet.

"The Asian financial crisis gives us three components to consider. First: the Asian paper that would normally be sold in Asia, which, since not being sold, is finding its way here. Second: the European paper that was supposed to be sold in Asia, which is now coming here. Third: the exports that were to be sold in Asia, which are now staying here.

"Together, those three components are building up supply in the U.S., along with heavy supplies still in printers' inventories. There's an overabundance of paper in this country."

—John J. Buckley, president, National Paper Trade Association


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