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PAPER OUTLOOK -- Paper Trails Economy

January 2004
BY MARK SMITH

Technology Editor

Paper costs can account for as much as 60 percent or more of a typical commercial printing job. For that reason, the fortunes of both industries are inextricably linked. But it is not a one-to-one relationship.

Paper pricing and availability can swing in cycles that don't mirror printing business activity, either in timing or degree. Printers are insulated from the impact of rising paper prices, at least to some extent, because the material is more or less a pass-through cost.

In recent years, both industry segments have been enduring a dramatic drop in pricing power. Paper companies have responded by taking sometimes dramatic steps to try to bring production capacity and inventories more in line with demand. Combined with industry consolidation and other business trends, these actions have been seen as supporting price increases.

Paper makers have tried floating increases for a variety of grades, but they've generally had trouble getting the higher prices to stick. This has led to a "crying wolf" scenario, but there's still a sense that sooner or later the predictions have to be right.

"I've become a little gun shy to take any news about paper to my clients until it happens," comments Tim Poole, president of Dome Printing in Sacramento, CA. "I've been burned over the last couple years in going to clients and saying, 'Paper prices are going to start rising, and we need to be more cautious that inventories will get tighter.' Just about every time, paper prices subsequently went down and inventories became more available."

Back to the '80s

Dome Printing does more than $20 million in annual sales, about 70 percent of which is web offset printing and the rest sheetfed. Across the board, Poole says the company has been buying paper at mid-1980s pricing levels.

"While I don't see the situation changing readily, I can forecast that sometime during 2004 there will be a significant paper price increase. As paper mills have depleted their inventories and reduced capacity, they will be in a position to drive paper prices back up," the printing exec says. "And yet, we haven't heard any discussion of price increases for at least four months. If anything, we've seen increased competitive pressure in the marketplace."

Since paper should be a pass-through cost, Poole says he is more concerned about market stability than the actual level of pricing. The trend that could be more worrisome for printers is paper companies putting increased pressure on their distributors to carry more inventory while discouraging direct mill shipments, he adds.
 

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