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Q2 PAPER OUTLOOK -- Run of the Mill Demand

April 2003

At 27.3 million tons, printing/writing paper capacity in 2002 declined 2.7 percent from 2001 levels and was off 7 percent from the record year of 2000. This represents a loss of about 2.1 million tons in just two years, AF&PA notes. Capacity is now at its lowest level since 1994 and is scheduled to remain essentially unchanged in 2003 before rising by 1.6 percent in 2004 and 0.5 percent in 2005, the reports says.

After falling by almost 7 percent in 2001—to its lowest level since the late 1980s—uncoated groundwood capacity climbed by 10.3 percent in 2002, to 2.01 million tons, the survey found. Capacity is projected to grow another 5.4 percent in 2003 and 3.4 percent in 2004, then remain essentially unchanged in 2005.

Coated groundwood capacity continued its upward trend, growing another 2 percent in 2002—to 5.04 million tons—on top of its nearly 2 percent rise in 2001. Following a projected pause in 2003, with capacity slated to decline by 3.6 percent, the grade is expected to get back into a growth trend with a forecast rise in capacity of 1.8 percent in 2004 and 0.6 percent in 2005, according to AF&PA's research.

Unlike the groundwood grades, coated free sheet capacity declined in 2002—from more than 5.4 million tons in 2001 to about 5 million tons in 2002, or by about 7 percent. Another 2.4 percent drop is projected for 2003, according to the survey, which will represent a capacity decline of 12.6 percent from the peak level in 2000.

Uncoated free sheet capacity fell to 13.6 million tons in 2002, which is said to be the lowest level in almost a decade. From its peak of 15.2 million tons in 2000, this drop represents more than a 10 percent decline in capacity within just a two-year period, AF&PA notes. Production is scheduled to grow to 14 million tons in 2004, or by an annual rate of 1.4 percent during 2003-2004, with no appreciable change expected in 2005.

On another front, the SC Council reports shipments of supercalendered paper to North America increased by 6.4 percent in 2002. SC-A shipments, which represents the majority of SC paper used in North America, were said to be up 12.7 percent.

According to the association, a total of 2.967 million metric tons of SC paper were shipped in 2002, compared with 2.788 million metric tons in 2001. Of the total 2002 tonnage, 81.7 percent was shipped by North American SC producers.

In a bid to capitalize on that popularity, there were reports of proposed $60 per ton price increases by the major SC-A producers. Slated to go into effect April 1, the new pricing is said to represent the first increase in several years.

Similar price increases were proposed for lightweight coated groundwood, also to go in effect for deliveries from April 1, 2003. A projected pickup in advertising pages was cited in support of the increase, but global tension cast that in doubt.

Updated Figures

At the time of this writing, only magazine advertising figures for January 2003 were available from the Publishers Information Bureau (PIB) in New York City. Total magazine advertising revenue for the month reportedly increased 9.5 percent, compared to January 2002. According to PIB, ad pages were up 4.8 percent, year-over-year, in January. Ten of the 12 major categories it tracks registered an increase in pages, including several showing double-digit growth.

One month does not a trend make, though. The overall picture for the first quarter won't become clear probably until the latter part of April, as economic and business data trickles in from various sources, points out Ronnie H. Davis, Ph.D., chief economist at Printing Industries of America in Alexandria, VA. However, Davis says so far he hasn't seen any signs that the current print markets will support higher paper prices.

"Except for the possible war, I do not see much changing in the short term," the economist notes. "I don't think print (and paper) markets will rebound significantly until next year, with the return of robust advertising spending buoyed by the Olympics and the Presidential elections. Our preliminary data show that 2002 was another down year for print sales, and I expect just a slight increase in 2003."

The global picture does have some potential to drive up costs independent of demand, Davis concedes, but he thinks the impact would be short term—assuming any military action is successful and over quickly. However, the industry economist points out that all increases are magnified because printers buy so much paper—typically equaling about 20 to 25 percent of revenues for a sheetfed printer and 30 to 40 percent for a web printer.

In the first quarter, rising diesel fuel prices already led to reports of some haulers assessing a surcharge on loads to cover their higher costs. Any disruption of oil supplies could lead to broader energy shocks that would impact heavy manufacturing industries like papermaking.

In addition, the U.S. printing market has come to rely more on paper imports, particularly for sheetfed grades. There is at least the potential for the flow of imports to be reduced, if not cut off, especially given the concerns about port security that have been raised since 9/11.

PIA's Davis says the critical variable would be the duration of the war, should it prove inevitable. "The most likely scenario is for a short, successful war with oil prices spiking and then declining to levels lower than at the start of the year," he says. The continuing soft demand for paper will help to buffer any shocks, the economist adds.

Along with the release of quarterly business reports, April also brings this year's edition of the On Demand Conference & Expo. It seems like a fitting time to consider the outlook for the digital paper market segment. Although, the most significant trend may be a move away from treating digital papers as a distinct market.

Markets Are Merging

Offset and digital papers are converging, confirms Ned Spangler, brand manager for Merchant Office Papers at International Paper in Stamford, CT. "But at the present time, IP still sees them as distinct markets," he adds.

"While most digital papers can be printed via offset, many offset grades are still not suitable for digital printing," Spangler continues. "Digital papers are typically smoother, brighter, better formed and have tighter electrical properties than traditional offset grades. IP is now making many of its traditional offset grades 'digitally compatible' because we see it as a growth opportunity."

Even as the different process requirements are bridged, Spangler believes the applications still impact customer demands. "We are seeing better grades of paper (brighter, smoother, higher basis weights, coated) being used for digital printing, particularly if color is involved," he notes. "Due to the shorter run lengths, the printer's customers can often afford to put digital work on a better substrate. We are seeing significant growth in coated papers for digital printing."

Market acceptance of the digital printing process is also driving the convergence with offset, asserts Laura Shore, creative director at Mohawk Paper Mills in Cohoes, NY. "A more precise term might be 'co-habiting,' " Shore says.

"Digital and offset presses are being installed side-by-side in more commercial print shops. As the output quality of high-end digital color presses continues to improve, commercial printers are increasingly selling digital impressions to their core customers."

While the markets are converging, the equipment still can require very different substrates, Shore adds. "Digital papers must be made to tight equipment-specific tolerances, including smoothness, size, moisture, etc. These papers are different from offset papers, even though they may look and feel the same to the designer and end user."

Mohawk believes digital print customers are looking for the same things as other paper buyers. "They want the ability to choose from a variety of shades and finishes at a variety of price points. In addition, they want to be able to spec the same papers across printing platforms to maintain consistency in the various parts of their identity and marketing communication programs," she explains.

While the trends in demand for digital paper seem clear, there may never have been a higher degree of uncertainty in the outlook for the market as a whole. Like the terrorist alert system, though, being put on guard for something to happen doesn't mean it will. Our next Quarterly Paper Outlook could well find a continuation of the status quo.



Hearing the Call of the Wild

A previous paper outlook story mentioned a "listening study" being conducted on the use of environmental papers, including recycled and alternative stocks. Funded by a grant from the U.S. Environmental Protection Agency, the study was undertaken by Conservatree in San Francisco.

According to Susan Kinsella, executive director, the publishing schedule for the findings had to be pushed back, but she expected the first reports to be available by the time this article was in print. A special Website, www.paperlisteningstudy.org, has now been created for the study.

Kinsella hopes printers will also check out the "Common Vision" document on the organization's main Website (www.conservatree.com). "Environmental groups from all over the U.S. and Canada collaborated on the piece to present a positive vision for environmentally sustainable paper development," she says. "We would like it to create a dialog with the paper industry and allied industries, such as printing, to find ways to move environmental paper development forward."
 

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