As one mill goes on allocation, people who buy on the spot market then turn to the other mills to try and get paper, which can force them to go on allocation, he points out. This leads to a domino effect in the market, at least in part driven by “what ifs” and emotion.
In this case, there are hard numbers to back up the concern. For example, the most recent report from the Montreal-based Pulp and Paper Products Council (PPPC) showed that demand for all printing and writing papers in North America rose 1.9 percent in October 2002, compared to the same period last year. The post-9/11 business fallout undoubtedly accounts for some of the difference, but the year-to-date data all show an increase in paper demand, albeit a more modest +0.5 percent. The more telling finding is that paper production for the first 10 months of 2002 was running 1.1 percent lower than the previous year.
Looking at conditions another way, the PPPC reports the industry’s operating rate (measured by the shipment-to-capacity ratio) stood at 93 percent in October 2002, compared to 89 percent the previous year. Mill inventories were down more than 8.5 percent compared to October 2001 and had dropped 3 percent just from the prior month (September 2002), according to the association’s monthly market data.
Pricing is also subject to a domino effect, of sorts. A mill typically will float a price increase in advance of a proposed effective date in order to gauge market reaction. If other mills see that the increase is likely to stick, they tend to follow suit with a comparable hike. An example of this market dynamic recently played out when International Paper, Domtar Inc. and Stora Enso North America each proposed increasing the price of coated freesheet stocks to $40/ton.