Q4 PAPER OUTLOOK -- On-the-Cheap SheetsSeptember 2003
Of the 12 major advertising categories tracked by PIB, only six had seen growth in ad pages through July. Page gains were registered in the Automotive (21.4 percent), Drugs & Remedies (15.1 percent), Home Furnishings & Supplies (10.8 percent), Toiletries & Cosmetics (8.5 percent), Apparel & Accessories (3.6 percent) and Retail (1.7 percent) categories.
Almost all of the paper makers called attention to rising energy costs, but Badger Paper Mills emphasized this business challenge. The company attributed its quarterly loss to high costs for natural gas and pulp, combined with pricing pressure, especially in printing and writing paper markets. It says expenses for natural gas during the first two quarters of 2003 ran 80 percent higher than for the same period last year.
According to Barry Polsky, spokesperson for the American Forest & Paper Association, up to 20 percent of the energy used to make paper comes from natural gas. However, the commodity represents about 50 percent of the industry's purchased energy. "Roughly 50 percent of the energy used by mills is self-generated," he explains. "Electricity is the major source of energy used."
What has undercut predictions of a rebound in the paper market is, of course, the anemic nature of the economic recovery. The year looks to ring out on a positive note, though, as this time the upturn is the real thing, believes Andrew Paparozzi, vice president and chief economist of the National Association for Printing Leadership (NAPL).
"We expect the economy to continue strengthening over the next 18 months, through 2004. All the stimulus that has been poured into the economy is finally working," Paparozzi says. He adds one big caveat: "That's assuming there's not a major setback in the war on terror."
Private economists are projecting GDP (Gross Domestic Product) to grow 3.7 percent in 2004, while projections from the U.S government call for growth between 3.7 to 4.2 percent, the industry economist says. "As the economy continues to accelerate, we expect print sales to grow in the range of 3.2 to 4.1 percent (not adjusted for inflation) in 2004. We likely could end up in the high end of that range."
People tend to forget that recoveries can be painfully slow, Paparozzi points out, and they can occur in stages. What had been holding the economy back this time was the narrow nature of the recovery. "Consumers were carrying the economy.
"Just in the second quarter, for the first time in three years, we saw evidence that the base of the recovery is broadening," Paparozzi says. "Some of the growth was indeed from defense spending (for the war in Iraq), but that wasn't the whole story. Consumer spending continued to hold up very well, and business capital investment was very favorable. As the base of the recovery starts to broaden, a recovery becomes harder to undermine," he adds.
Printing sales provide a more direct indication of the demand for commercial paper grades. According to Paparozzi, NAPL's preliminary data showed monthly industry sales growing—by just 1.2 percent—for the first time in June. However, sales are still projected to decline by 2.3 percent for the first half of the year as a whole.
"The bigger problem is price pressure beyond anything I've ever seen. We have record numbers (of Printing Business Index panel members) telling us that their prices are declining, and record low numbers telling us prices are rising," the economist says. "The issue isn't just the printer across town any more, it's competition from the printer across the country. And it may even be competition from the provider of an electronic alternative to print."
Check the Numbers
For print buyers, paper is just part of the package. It's another area where they've looked to make cuts. According to Paparozzi, one PBI business indicator is rapidly rising. That's the confidence reading: "Do you expect business to improve, decline or hold steady over the next six months?"
"As late as March, the data showed an even split—24.8 percent saying they expected business to improve, 23.3 percent expecting business to decline," he says. "In June, the numbers jumped abruptly—37.7 percent told us they expected business to improve and only 13.2 percent expected it to decline. The preliminary numbers for July continue that trend, with 48.1 percent expecting business to improve and just 6.9 percent expecting business to decline."
Even with continued acceleration through December, the economist expects industry sales to only be up 1 percent to 2.4 percent for all of 2003. "In all likelihood, the final number will be toward the lower end of that range. We basically lost the first half of the year," he explains.
As the business outlook improves into 2004, there will still be bad news—for printers and paper makers—in the positive numbers, Paparozzi notes. The improvement will be seen in business activity only, not pricing pressure, and it is being measured against very depressed levels, he points out.
"Recovery occurs in stages," he reiterates. "We saw the first stage of recovery last year, when the real deep declines in sales gave way to some modest gains. We'll be in the second stage of the recovery over the next 12 months, as the industry's monthly sales gains become more substantial and consistent.
Recovery On the Way
"We don't expect to see the third, and final, phase of recovery until the middle of next year at the earliest. That will bring restoration of some pricing power and profitability," the economist continues. "It is really the hallmark of full recovery from recession."
Paper manufacturers and other industry suppliers bear watching, since they are not going to want to wait that long to push through their own price increases, Paparozzi adds. "It's been a long time since any company in the manufacturing sector had had pricing power. They all have ground that they want to make up. As this recovery strengthens toward the end of this year and into 2004, we could see paper, ink and other major industry suppliers try to push through price increases."
For their part, paper manufacturers are closely watching the trend in printing industry growth from non-ink-on-paper activity, the economist says. NAPL's annual "State-of-the-Industry" survey asks how much of a company's revenues come from non-core prep, print and finishing activity, he points out. "The average was only 13.4 percent in 2002, up from just 9.1 percent in 1999. But that figure is projected to rise to 19.2 percent by 2004 and 27.1 percent by 2007."
A slightly more optimistic industry outlook is offered by Ronnie Davis, Ph.D., chief economist at Printing Industries of America (PIA) in Alexandria, VA. Davis expects full year (2003) industry sales to show around a 3 percent increase. Next year, assuming the economy performs as expected, sales should grow another 3 to 4 percent, he says.
"The industry will get an extra boost from advertising for the Olympics and the presidential elections," the PIA economist points out. "It also appears that direct mail is getting a boost from some shift away from telemarketing and Internet advertising."
As for the paper market, Davis doesn't expect to see any significant movement in pricing. "There is still a lot of slack in both printing and paper markets due to over-capacity," he asserts.
The impact of the print buyer often is overlooked in considering the outlook for paper. One reason is a lack of available data. While it doesn't look at demand per se, the "2nd Annual Paper Specification Survey" does identify the paper-related needs of print buyers, graphic designers, production managers and art directors.
The survey was conducted by Print Buyers Online.com, a resource Website designed to inform and educate print buyers, in conjunction with PaperSpecs.com, an online paper database. It sampled the views of 140 participants whose companies collectively account for more than $213 million in yearly print purchasing.
"The paper industry is evolving faster than ever before," says Sabine Lenz, founder of PaperSpecs.com. "With mills being consolidated, discontinuing existing stocks and releasing new lines, it is very complex for anyone who specs paper to stay on top of things."
The Survey Says
While 74 percent of the survey's participants said they rely on printers to assist in determining the best paper to use for a project (the top choice by a wide margin), a significant number of them contend that it is difficult to get paper samples from those printers, Lenz says. This year's survey also showed that print buyers and designers are looking to their printers to be more educated about various paper options, not just their house stock.
Despite some dissatisfaction, the overwhelming majority—84 percent—of customers still turn responsibility for paper buying over to their printers. When asked to rank the quality of the advice they get from printers regarding paper, the breakdown of responses was Excellent—15 percent, Good—52 percent, Average—26 percent, Fair—6 percent and Poor—1 percent.
(Complete survey results can be accessed by signing up for a free membership at www.printbuyersonline.com or by visiting www.paperspecs.com.)