Paper Outlook — Cutting the Bottom Line

Europe’s paper-making industry has started down the rightsizing path established in North America. The profit restoration program announced by UPM-Kymmene gives an indication of the scope of this effort. Through the closures, it reportedly intends to reduce 17 percent of its coated magazine paper capacity and 12 percent of its coated fine paper capacity in the region. According to Jussi Pesonen, president and CEO, this scaling back is necessary because “cost of production inputs have dramatically increased, and Asian and South American competition has entered the market.”

One other factor worth considering in assessing the outlook for paper in the fourth quarter is the impact of the postal rate increase that went into effect in January. Partly because the increase was expected for so long, print demand has held up despite this added cost. The last quarter is the real crunch time for budgets, though, so direct mail campaigns and holiday catalog mailings could still take a hit.

Looking ahead to 2007, the U.S. Postal Service has proposed an 8.5 percent rate increase that would likely take effect next May. Another big postage increase so soon is more likely to spur publishers, catalogers and direct mailers to switch to lighter weight grades, reduce page counts and trim sizes, and generally mail less, all of which impact the demand for paper. zz

Strikes, plant shutdowns and changes in demand that occur in one region can have a ripple effect on others.