Q3 PAPER OUTLOOK — Paper Thin Market

BY MARK SMITH

On paper, the interplay of supply and demand looks like a straightforward model for the forces that shape a market. When it comes to predicting the outlook for paper, though, lately it seems as if one might be better off reading tea leaves.

Paper makers have gone to great lengths in a collective attempt to rationalize the supply. Unfortunately, the demand side of the equation hasn’t performed in the way that was hoped. The industry also has been buffeted by developments beyond any company’s control.

Quarterly financial reports from major manufacturers have included a mixed bag of earning declines, losses and slight improvements, depending on the company and whether one compares year-to-year or successive quarter results. They’ve also offered pessimistic projections for the remainder of the year, which is good and bad news for printers. While their costs may not increase, or at least not by as much as some feared, the outlook for growth in print sales is sluggish at best.

Stora Enso’s CEO, Jukka Harmala, warned that worldwide demand for paper would likely be down for the rest of the year because of overproduction and declining demand in Europe. Harmala holds out some hope for a turnaround in the U.S. market, driven by a recovery in advertising spending with the war in Iraq coming to a close.

International Paper pointed to higher energy and fiber costs, as well as weather-related operating problems at U.S. mills, as reasons for the disappointing performance of its Printing Papers operation. Bowater Inc. also cited higher energy prices, along with the cost of converting a South Carolina plant to produce coated papers, in explaining its quarterly loss.

Overall, the Pulp & Paper Products Council reports that North American printing and writing paper demand actually increased by 3.3 percent in the first quarter of 2003. It says mill inventories closed the quarter at 2.6 million tons, having increased by 72,000 tons in a month.

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