Q1 Paper Outlook — Market Taking Stock
Pictorial's Samuels says before the end of 2002 he already was getting reports of another price increase for web papers proposed for February or March of 2003. He is expecting it to be in the 4.75 percent range.
So far, paper price increases generally have met with understanding on the part of buyers. Rather than grumbling, they recognize that the historically low prices had put mills into an unsustainable financial situation.
Cuts to Capacity
Every mill basically had been losing money, Samuels notes, which led them to cut capacity. "A paper machine has to be kept running 24 hours a day, seven days a week. It can't just be turned on and off," he points out. "This has led to a 20 percent decrease in capacity over the last two years as papermaking operations were shut down."
Viewing the market from the supply side of the equation, Jack Miller, director of market intelligence at Domtar Inc. in Montreal, paints a similar picture. Miller says conditions are right for a strengthening paper market because inventories are currently low and mills are running at close to full capacity. He believes the market dynamics were markedly different during the industry's last availability crunch in 1995.
"The markets were extremely volatile and prices were depressed, so there were overreactions to a modest increase in price and demand," Miller asserts. "The buying frenzy created false demand and led to inventory shortages. Prices rose rapidly from depressed levels."
Miller contends that industry consolidation has introduced greater stability into today's paper market. "In addition, printers and merchants are better equipped to respond to (supply and price) fluctuations. We don't foresee the same pressures leading to the creation of false demand, and we don't anticipate seeing the same overreactions to modest demand increases," he says.
"As the economy recovers, we do expect gradual and modest increases in prices," Miller continues, "but they won't be nearly as extreme as they were in the past. The industry is not recovering from as extreme of a downward trend as we were in 1995."
