Printing Process Inputs -- Consumables: A Mixed Bag

Paper companies started 2008 by continuing their string of price increases, but ended the year scrambling to make production cuts fast enough to bring supplies in line with sinking demand. Throughout the year, they also had to contend with the snowballing of interest in chain-of-custody certified stocks.

Everyone felt the pain of the rapid run-up in oil prices, but the airlines were possibly the only industry to be more impacted by the spike in cost than ink manufacturers. Several took the unusual step of sending out press releases to announce ink price increases or surcharges, therein making the case that they are at the mercy of their raw material suppliers.

December was the biggest turning point in paper prices, says Joshua Zaret, senior equity analyst with responsibility for the paper and forest products sector at Longbow Research in New York. There previously had been some slippage in the price increases that paper companies had instituted throughout the year, but prices were down for every grade of coated and uncoated paper last month, he notes.

“We can clearly say that 2009 is not looking good (for paper companies). It’s going to be a period of over supply, in part, due to the dramatic decline in demand,” Zaret advises. “What we are seeing is an unprecedented amount of downtime being taken, and the question is, ‘Is that enough?’ Most people expect price levels to continue declining for now.”

Zaret believes prices will not drop as much as they have in previous economic downturns because of paper companies having adopted the supply-side management business philosophy. “The caveat is that the dollar remains relatively weak, since imports coming (into the U.S. market) in a big way would throw things off,” he adds.

Today, paper companies are taking downtime in an attempt to manage inventories, rather than trying to continue to run mills at as close to 100 percent capacity as possible to lower their total costs, the analyst explains. Papermaking is such a capital-intensive business, that in previous downturns, companies would maintain production to spread out their fixed overhead and, thereby, create sharp increases in inventories that lead to severe price declines.

Paper import levels can rise or fall fairly rapidly in response to changes in the value of the U.S. dollar, absent any trade barriers, Zaret says. This makes the exchange rate key to the industry’s health. “At the current dollar level, I’m not looking for a huge increase in paper imports,” he adds.

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