Paper Prices Going Up or Down?
In 2009, North American printing and writing paper shipments were down 16% from 2008. During the fourth quarter, in the aftermath of the greatest demand collapse the North American paper market has seen in recent memory, price increases were announced on both coated and uncoated papers. For uncoated papers, a second round of increases was announced this January, to be effective in February.
Does this make sense?
Well, yes it does. True, demand is down sharply, but capacity is down, too, and supply and demand are more balanced than was typical during most of the past two decades. With supply and demand balanced, mills are able to pass their costs on to customers. Mills have been under cost pressure for years, and have consistently failed to return the cost of capital, often posting outright losses. Several mills have gone into Chapter 11.
Mills in the U.S. received something of a bailout when they discovered that a subsidy for burning bio-fuels could apply to black liquor which the mills have always burned for fuel. This subsidy pumped billions of dollars into the industry, but this subsidy ended on December 31, and so the cost pressure is back. As the sales VP for one mill explained, in 2009, the coated mills gave the subsidy to their customers, and now they are again scrambling to cover their costs.
Will these prices increases hold, and will more increases follow? The dynamics are a complex mix of positives and negatives, and the mix is different for different grades. The coated paper price increases announced during Q4 2009 have all but evaporated, but the uncoated increases have held, and a second round of increases was announced in January to be effective in February.
A major pressure point on the supply demand equation, especially for coated papers, has been imports. With the weak dollar, the U.S. market is less attractive than other markets, so this pressure has been lessened. Further, an anti dumping case on coated printing papers has been filed against China and Indonesia. A full investigation by the Department of Commerce is underway, and if duties are imposed, this will also relieve downward pressure on prices.
Regarding the shipment numbers, one must be very careful when examining statistics. North American printing and writing paper shipments were down 16% for the year 2009, but were up 3.5% in December 2009 from December 2008. This would appear to be a sign of strength—a solid rebound. While this is certainly positive, it is an increase from a very depressed level, a level depressed not only by weak consumption but also by inventory liquidation.
The inventory liquidation is over, and inventories are now low. This factor, more than the 3.5% shipment increase, suggests an environment favorable to paper price increases. For uncoated papers, prices are at reasonable levels, and increases are likely to be modest. Coated paper prices are more depressed, and if anti-dumping duties are imposed, the recovery in prices may well be more rapid.
How can you tell if a price increase will hold? It’s always a matter of supply and demand. Are you able to get as much paper as you need before the price goes up? If so, it is likely that supply is more than adequate and the increase will fail. If not, supply may really be tight, and the increase will hold—unless the tightness is artificial, driven by excessive pre-price increase buying.