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Paper Outlook--Prices Are Going Soft

January 1999

C. Stephenson Gillispie Jr., chairman, president and CEO of Cadmus Communications, concurs that prices will remain flat—or even decline—given the influx of paper from Europe and Asia. His company is following key indicators to evaluate the long-term market impact.

"We'll watch for a decline in imports from Europe, since Europe is sending supplies to Asia that, in turn, are being sent to the United States," Gillispie points out. "And, we'll closely follow the strategies of domestic mills to see if they shut down machines to reduce inventory."

What's bad news for the Asian economy, says William K. Traub, vice president of marketing for Brown Printing, is a sigh of relief for paper purchasers.

"Part of it is that the Asian economy is in terrible shape. Ad pages are up overall, but off slightly from the original forecast, and some catalog mailings are down," Traub remarks. "You know the paper market is soft when there are price reductions in the fall.

"On the bright side," he adds, "lower paper costs are going to help offset the postal increases."

Brian Kullman, vice president of paper services for R.R. Donnelley & Sons, became aware that the market was softening last summer, which is unusual, given it's a time when demand is generally headed toward a seasonal peak.

"It's not due to a lack of demand or unusual publisher inventory levels. The issue is imports," Kullman says. "The Asian recession and resulting decrease in demand for paper has been exported to America, particularly groundwood paper. Figures from late last summer show the European industry is running close to capacity—its rate of manufacturing is a comfortable operating rate. As further statistical evidence, paper has been redeployed in North America."

Kullman notes that price levels in the United States last summer made America an attractive choice for European mills. As for Asia, he feels paper consumption should return to normal levels there once the recession concludes.

There could be a paper thawing once spring arrives, but until then, "it'll be a tough winter for paper makers and a good winter for buyers," Kullman says. He sees more coated freesheet capacity washing up on U.S. shores.

In terms of growth for the paper market, he predicts slow growth in America with little to no growth in Asia. Both the former Soviet Union and Latin America are also floundering.

"I don't believe anyone's forecasting a collapse in the market like we saw in 1996," Kullman remarks.

Not everyone sees the excess of foreign supply in glowing terms. According to Janis, it's a matter of quality.

"Who wants to buy Russian paper through a North Korean bank?" he asks. "Just because paper is available doesn't mean it's good paper. The question is: Do you want it once you have it? If there's foreign availability from European mills, it's a lot different than paper from Malaysian mills."

Additionally, not everyone shares the view that prices will remain soft for much of the year. Kelly Gilroy, chief marketing and sales officer for Solar Communications—which annually purchases more than 25 million pounds of mostly uncoated return card stock for its customers' direct marketing needs—sees a price increase on the horizon.

"Paper prices have been stable or slightly lower, depending on the grade, for most of 1998," Gilroy remarks. "Solar sees first quarter 1999 prices staying at the same level as last quarter 1998. However, after the first quarter, there is potential for mill prices to increase due to supply reductions caused by consolidations and/or shutdowns.

"We have not seen paper price stability for this length of time since 1994," Gilroy concludes. "Based on historical trends, paper price increases may stick after the first quarter, when paper demand begins to increase for 1999 spring campaigns."


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