Q2 Paper Forecast — Paper Losses

Printers debate the availability and prices of paper as the economy weakens.

BY CAROLINE MILLER

It could be said that as the economy goes, so goes the paper market. And, in recent months, that has certainly been the case. The slowing economy has resulted in what appears to be a stabilization in pricing and availability, reports NAPL Chief Economist Andrew Paparozzi.

"We saw paper prices continuing to aggregate along with the economy right through mid-year 2000. Prices really peaked sometime in the spring of 2000. Then, in the second half of the year, prices started to moderate significantly as the economy rapidly degenerated," he notes.

As the economy continued to weaken into the fourth quarter, Paparozzi began to notice—in his monthly survey of paper pricing and availability—that more and more printers were reporting that prices were stabilizing. "We had a huge majority report that prices were stable in the fourth quarter of 2000. That stabilization was in response to the slowing economy," he explains.

As a result of a weakening economy, many printers also began to see a slowing in business, according to Paparozzi. "In fact, for the first time in 14 months, we saw our panel's sales decline in December. As we've moved into the new year, NAPL panelists have continued to report stabilized paper prices and availability, he reveals.

In January, 88.2 percent of those surveyed reported that paper is as available as it was the prior three months. The panel also reported that paper prices were stable, with 67.8 percent reporting stable prices and 29 percent reporting that prices were rising.

Crunching Some Numbers
These number are in direct contradiction to what printers were reporting a year ago, states Paparozzi. "One year earlier, we saw 72.5 percent reporting that prices were rising and 26.5 percent reporting that prices were stable."

While NAPL's survey is made up of more than 100 printers across the United States, there are some printers who believe that prices and availability have not yet stabilized. Bill Orndorff, Perry Judd's vice president of materials management, characterizes the current paper market as being unsettled, especially when it comes to pricing. "Lower-end grades are experiencing increases, top-end grades have already decreased and middle-value grades are becoming a little more flexible." He also reports that paper availability has followed the pricing curve.

Orndorff isn't the only one taking issue with the belief that prices and availability have stabilized. Michael Dubowitch, president of Philadelphia-based Oak Lane Printing, claims that the availability of uncoated paper has become tighter and prices have continued to increase.

"Prices of uncoated paper have just increased by approximately 8 percent. In the direct mail market, in which we print both sheetfed and continuous web, this has presented an obstacle due to the fact that our customer base has been very resistant in accepting price increases. As the paper mills continue to merge and take machines off-line, it seems that the situation is only going to continue for the foreseeable future," states Dubowitch.

Jeff Harris, supply chain product manager for R.R. Donnelley & Sons, agrees. "There is a lot of uncertainty out there about the health of the economy. The paper companies are interested in long-term opportunities that fit them strategically. In the short run, they have shown a willingness to take production downtime rather than simply drop prices," he remarks.

This movement toward paper-making machine downtime is not surprising given the economy, claims Paparozzi. "You now have an economy that is very resistant to price increases and, therefore, any inefficiencies and cost excess comes straight out of the bottom line. In this type of economy, productivity becomes the key. You want to operate as efficiently as possible, because it's very unlikely you are going to be able to pass those costs along to your customers."

Consolidation Questions
While paper mills will need to find new ways to operate more efficiently, Paparozzi can't speculate on whether a continuing soft economy will force more paper mills to consolidate. "I don't know," he admits. "They do need to achieve long-term efficiency now that they are dealing with an economy that makes it very difficult for them to raise prices. It does put enormous pressure on profitability. Consolidations are long-term propositions; this slowdown came upon us very, very, quickly."

Still, the decision of some paper mills to take machines off-line may impact printers later in the year, as the traditional seasonal pick-up in demand for printing begins in the third quarter, suggests R.R. Donnelley's Harris. "There's the possibility of supply shocks due to unscheduled downtime from mills as a result of soft demand patterns or insolvency," he reports.

Since paper prices and availability tend to follow the health of the economy, printers should continue to watch the economy, says Paparozzi, who is not optimistic that there will be a recovery any time soon. "The real optimistic projections are that we will see a noticeable upturn in activity in the second half of the year as help starts to arrive in the form of tax cuts and interest rate reductions. I'm not sure that I agree with that. I think the significant upturn will come closer to mid-year 2002," he predicts.

Paparozzi cites the time it will take for interest rate cuts to take effect, as well as the policy lag time that will come with a major tax cut. "We know that help is coming. The Federal Reserve and Congress realize that the economy has weakened significantly. They are coming to its aid. The big issue now is: How much stimulus do we get and when does it hit?"

It should come as no surprise that the economy might not make a significant turnaround until 2002, Paparozzi remarks, when you take into account the beating it has taken in recent months. "In the past 18 months, the economy has withstood a severe shock in the form of a sudden downturn, rapidly rising energy prices, rising interest rates and even fiscal drag.

"The fact that the economy is still standing is much to its credit," he contends. "Given what the economy has been hit with, it's hard for me to imagine this thing turning around as quickly as the second half of 2001."