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Q3 PAPER OUTLOOK -- Beaten to a Pulp

September 2002

For better or worse, the fortunes of printers and paper producers are inextricably linked. If one sees this as an adversarial relationship, then the paper producers clearly are in a defensive position. Printing papers have been on a downward trend for some time and now are at or near historically low prices. Even the mega-deal consolidations among the major producers have yet to have any obvious impact on the level of competition in the marketplace.

Lower paper prices are not necessarily good news for the printing industry, so say even those responsible for buying large quantities of it. "We all need the paper companies to be healthier than they are right now," asserts Dan O'Brien, senior vice president of paper operations for Quebecor World in Greenwich, CT. "It's a very capital-intensive business, so paper producers need better market conditions to support reinvesting in their operations and capabilities. There are signs indicating that the market has bottomed out."

O'Brien notes that prices continued to decline even as paper producers took steps—chiefly mergers—to improve their ability to manage supply in relationship to demand. "Actually, most of the papermaking assets are still there, they're just controlled by fewer suppliers," he says.

Independent of this industry consolidation, Quebecor World made a decision to narrow the number of paper suppliers it uses on a regular basis, the company exec reveals.

"We decided to invest in the suppliers we want to do business with long-term and who we think are willing to work with us in a way that is in everybody's best interest. That's become our standard procedure regardless of turns in the market, but it's especially important for us to invest in those companies during the tough times."

Marketing Relationships

Paper expertise and effective relationships with suppliers can be translated into a marketing tool and opportunity, O'Brien says. A case in point is the long-term relationship Quebecor World recently entered into with Sears, Roebuck and Co. for the printer to furnish all the roll stock paper used to produce the retailer's newspaper inserts.

According to the company vice president, a significant percentage of the large retailers buy their own paper for their insert programs. O'Brien says he hopes the Sears deal does turn out to be the start of a trend toward printers playing a larger role in the selection of substrates, whether that means they actually supply the paper or just get to be a key influencer in the purchasing decision. Since they touch on all stages of the supply chain and production cycle, printers are in the best position to find ways to pull costs out of the system, he points out.

"I don't think the focus should be solely on the price component," O'Brien says. "A printer can work with the end user and the paper producer to understand the broader issue of the total cost of a printed piece and do things to reduce contributing costs. That doesn't always mean getting a lower quoted price. If we're able to save a dollar and share it, everyone benefits."

Opportunities for savings can be found in doing things like combining roll sizes from multiple customers to give mills better trim utilization, finding better ways to package and ship rolls, etc., he points out.

One trend in the industry that is directed right at the price issue is the growing use of supercalendered grades (SCA) that compete with the lightweight coated stocks, O'Brien notes. "The quality of SCA has improved, so users can get a similar quality product that throughout the pricing cycle (up and down) will always be on the lower end."

The impact of falling paper prices can manifest in some surprising ways. In its recent financial report for the second quarter, Menasha, WI-based Banta Corp. noted that: "Sales for the quarter were $333 million compared with last year's $339 million. Lower paper prices reduced this year's second quarter sales by approximately $10 million." Despite its lower sales, Banta actually reported a seven percent increase in net earnings for the quarter as compared to 2001.

Pass-through Costs

"Paper prices, when compared year-to-year, have dropped off rather dramatically," explains Addis Hilliker, vice president of supply chain management for Banta. "We treat paper as a pass-through cost so, as paper prices have dropped, our total sales revenue has dropped. In the last year, the price drops have been across the board, in all grades.

"It appears that we are now at the bottom of the cycle, but people have said that before and prices have continued to turn down," Hilliker continues. "By all measurements, it looks as if paper prices will likely be stagnant for a quarter or two before turning up or may start turning up even sooner. We're not expecting a dramatic upturn in either demand or pricing, but we definitely don't expect to see any further declines."

Paper prices are primarily impacted by print demand which, in turn, is impacted by the economy, the company exec says. "The supply of printing paper is rather inelastic, since the industry is so capital-intensive," he explains. "We really haven't noticed any pricing impacts from the mergers among the paper producers, but there are getting to be fewer and fewer paper options available."

Banta buys almost all of the paper for the products it prints, Hilliker reports. "We've always tried to form alliances with a select group of mills and, in essence, work with them to sell their paper." He agrees that the current market conditions might present an opportunity for printers to lock-in lower prices through contracts, but he questions the merits of adopting that approach. "It depends on the extent to which you view your relationship with paper companies as adversarial versus cooperative. Banta takes the cooperative approach," the paper buyer notes.

Lower paper prices haven't led print buyers to upgrade the stocks they use, but other market trends have, Hilliker says. "We have customers doing fewer mailings or cutting down the recipient lists for their publications and catalogs. Their audiences may be getting more targeted, but marketers and publishers seem willing to upgrade the quality of the product they are putting in the hands of a smaller number of customers. Companies seem willing to spend a little more if they feel they will get a better return."

Looking beyond the headlines of falling prices and industry consolidation, there are other paper-related developments impacting the industry. One is the aforementioned growth in use of supercalendered papers. Hoping to add momentum to the trend, The SC Council (an international association of supercalendered paper manufacturers) announced plans to launch a high-impact ad campaign targeting volume printed product users. The campaign will focus "on the significant cost savings offered by SC paper, while delivering printed results comparable in quality to No. 5 LWC," according to the announcement.

"From all perspectives, SC paper provides printers and printing buyers with an important set of options and the flexibility to control costs at several points in the production and distribution process," says Mario Albanese, executive director of The SC Council. "It's an important message that we need to hammer home to publishers, catalogers, FSI media and every other volume printing buyer."

A development that can cut across all grades of paper is the use of recycled stocks. While the natural inclination may be to think "been there, done that," proponents say there are signs of renewed interest in environmentally friendly or sustainable manufacturing processes.

Altman Printing, in Spartanburg, SC, has begun marketing what it calls the Environmental Triad, a term it has registered as a trademark. The term refers to the use of UV inks (instead of the heatset process), direct-to-plate imaging and recycled paper with postconsumer-waste content on the shop's eight-color web offset press. "We see a market for people who believe in helping the environment, personally or on a corporate level," says Lee Altman, marketing manager.

Altman concedes that his company is having to develop the market for the most part, rather than servicing an existing demand. He says he hit on the concept largely by accident while reviewing the entry form for Printing Industries of America's Premier Print Awards (also known as the Benny awards).

"It had a new category called 'Environmentally Sound Materials.' Entries must use at least three of the listed processes or materials, which we did," the marketing manager explains. The list includes: "recycled papers, soy- or vegetable-based inks, direct-to-plate, aqueous coatings, energy-curable inks and coatings, or other environmentally sound product not mentioned here."

The perception is that it costs more to use recycled papers and environmentally friendly processes, Altman admits. "However, our process can't be priced higher or it won't be sellable in the current market environment. We are price competitive but, for us, it's not a question of choice. This is how we print and what we have to offer."

While using recycled stock is still offered as an option, Altman Printing has adopted recycled papers as its house stocks for web printing, the marketing manager notes.

"We try to swing clients to recycled stocks if the materials meet their needs and appropriate stocks are available," Altman explains. "Products with postconsumer content are not available in all types and grades of paper. We can get a good selection of white stocks, but colors and special finishes can be hard to find. When they are available, often it's in a minimum order of 5,000 or 10,000 lbs. and the lead time can be months. That's a big order for a small commercial shop, even on our web press." Altman classifies the company as a small web shop since it only has 24 employees

The combination printer still runs conventional inks on its sheetfed presses and typically doesn't use recycled stocks for that work. That's partly because the firm has been focusing on web work, but also because the variety of stock requests makes it difficult to justify having a cut-sheet house stock, he explains. Performance isn't an issue, since the shop hasn't seen any difference in how recycled grades handle in production, Altman says. "The grade level, regardless of whether the stock is recycled or not, is what impacts how a stock runs on-press," he adds.

The company exec says he personally believes in using recycled stocks in environmentally friendly processes and would promote the Environmental Triad system even if it did cost the company more money to do so. "We're still figuring out how to market the process," Altman admits. "It requires more than just a local sales effort. We're looking for potential clients with an environmental commitment, but it can be a frustrating process because even companies that issue environmental statements often don't care about the printing they buy.

"If awareness does pick up as we expect, we'll be ahead of the curve," he continues. "We'll have the process already in place."

It's also important that the printer practices what it preaches, Altman says. A prime example is recycling its paper waste instead of just sending it to a landfill, which has a direct financial benefit, as well, he explains. "We had been paying $400 to $600 a month to have our garbage hauled away. Now we're paying about $200 to $300 a year because we are recycling so much of the volume."

Printers need to get beyond the simplistic approaches to recycling of the past, agrees Don Carli, president of research firm Nima Hunter in New York City and a long-time advocate of advances in printing technology. Carli says the industry's focus needs to be broadened to look at sustainable manufacturing. "The sustainability concept accounts more comprehensively for all the inputs and outputs throughout the lifecycle of a product or service," he explains. "This includes looking at energy use, materials consumed, waste produced, toxic dispersals, green house gases, etc. It involves systematic thinking."

According to the industry researcher, it's possible for a more comprehensive analysis of this type to even show that print buyers and producers would be just as well off using virgin fiber paper, in some instances. Key questions include whether the pulp comes from a sustainably managed forest and if it is processed in a chlorine-free, or at least elemental chlorine-free, process, he explains.

Rather than overriding all other concerns, Carli believes the recent accounting scandals that have shaken corporate America actually strengthen the case for action on the sustainability front. "Managing and reporting on their environmental and social performance can help corporations repair trust and reestablish their reputations through positive actions," he asserts.

As a result, knowledge of the issue and expertise in managing the variables in sustainable print sourcing is value printers can sell to clients, Carli says. "The adoption trend will start with the global trans-national corporations," he adds.

In order to back up his observations of a market trend, Carli's firm has undertaken a benchmark study called "The Greening of Print." The stated goal is to survey and forecast trends, attitudes and behaviors driving green procurement and sustainability in the printing, publishing and packaging markets. The study will be based on a survey of more than 1,200 buyers, specifiers and producers of print and is scheduled for release in the fall. (For more information, visit

While there is more to sustainable print than just paper, Carli says that's not a bad place to start given the amounts of fossil fuel and water used in its production. Winning converts will be an uphill battle, though, if the market's reaction to recycled paper is any indication.

"Recycled printing and office papers have been losing market share since 1995, despite the fact that they are higher quality and lower priced than ever before," reports Susan Kinsella, executive director of Conservatree, a San Francisco-based nonprofit organization dedicated to converting paper markets to environmental papers. "There are hot spots of interest in chlorine-free, tree-free and sustainably forested papers, but they are still a miniscule part of the market."

To find out why demand is lagging, Conservatree is coordinating a "listening study" funded through a grant from the U.S. Environmental Protection Agency. Kinsella says the study will provide a comprehensive "snapshot" of the industry and its markets in order to reveal the basis for the obstacles slowing market development.

Recommendations Due

It also is expected to recommend courses of action to further work toward resolving the underlying barriers, she adds. The study's conclusions and recommendations are due to be released this month. (For more information, visit

As was noted earlier, one of the potential barriers is at least the perception that recycled grades cost more. It's understandable that pricing creeps into pretty much every discussion of printing papers, given data such as PIA's recent report that paper typically comprises 20 to 30 percent or more of a printer's sales revenues, depending on printing processes and products.

To help shops manage that cost, the association has begun offering a new Paper Price Tracking System to its members. "This new source will give printers recent information on paper prices, making them more informed consumers in dealing with paper companies and merchants," says Dr. Ron Davis, PIA's chief economist. The system will feature a direct interface to the Bureau of Labor Statistics' Producer Price Index (PPI) data for paper, which covers some 25 different grades, Davis notes. That data will be supplemented with findings from paper-related questions being added to the association's regular member survey, he adds.

Davis envisions the data being used as a sanity check on the prices printers are quoted by paper merchants and as an indicator of whether they should stock up on paper inventories or draw them down. The tracking system isn't intended to predict future paper prices, but the economist says he does plan to start offering some insights on the subject, as well.

"Even if the U.S. economy picks up toward the end of the year as expected, that may not put much upward pressure on paper prices because paper has become an international commodity," Davis notes. "I don't think the double-dip recession that is being talked about is going to happen at this point, but there are some serious issues dogging the recovery. The growth rate of the U.S. economy has slowed a little, but we still expect the second half of the year to bring a return to long-term growth of around three percent. That's if consumer confidence holds."

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