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PAPER Market Forecast -- Outlook Turns Bearish

June 2004

Technology Editor

The end had to come sooner or later. Everyone knew the buyer's market for printing stocks simply couldn't last forever. Eventually, the adjustments made in papermaking capacity by suppliers and increasing demand fueled by the economic recovery had to bring price increases that stick.

Paper companies have announced or already implemented price hikes for most grades, and another round of increases may be in the offing before the end of the year. There's little reason to hope for a repeat of 2003, when increases were floated, but never fully implemented or were subsequently rolled back. Perhaps the clearest sign that market conditions have changed is the talk from some paper suppliers of instating allocation programs.

Before considering the evidence that supports the forecast of rising prices, there's a potentially more troubling wrinkle to the story that should be pointed out.

"It is highly unlikely that printers will be able to pass any increases in their costs onto clients," contends Andrew Paparozzi, vice president and chief economist at the National Association of Printing Leadership in Paramus, NJ. "That's because costs—including paper prices, labor and the like—are beginning to rise before we are seeing any rebound in pricing power."

Excess capacity and other competitive issues are keeping pressure on printing prices, even as demand and production volumes begin to grow, Paparozzi says. The current competitive environment will amplify the impact of any rise in costs, since extremely tight margins mean even modest increases can become very troublesome, he adds.

No Pass-along Increases

The economist believes printers will face a hard sell if they try to make the argument that, "My costs are going up, so I have to raise my prices." Even if they're shown a line-item increase on an invoice, he doesn't believe print customers will be receptive to price hikes for any reason.

Printers may have better luck if they prepare clients for the increases ahead of their implementation, Paparozzi suggests. However, he believes finding ways to offset rising costs may be the only effective response. "Printers need to continue improving their productivity and efficiency, even as business accelerates," the economist advises.

Paparozzi believes paper price increases will have staying power in the second half of the year because of the positive changes in the economy and business conditions. "In terms of the economy, what we're seeing is a rapid broadening of the expansion," he says. "A lot of sectors are now contributing to growth."

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