Q3 Paper Outlook — Beaten to a Pulp

Pass-through Costs

"Paper prices, when compared year-to-year, have dropped off rather dramatically," explains Addis Hilliker, vice president of supply chain management for Banta. "We treat paper as a pass-through cost so, as paper prices have dropped, our total sales revenue has dropped. In the last year, the price drops have been across the board, in all grades.

"It appears that we are now at the bottom of the cycle, but people have said that before and prices have continued to turn down," Hilliker continues. "By all measurements, it looks as if paper prices will likely be stagnant for a quarter or two before turning up or may start turning up even sooner. We're not expecting a dramatic upturn in either demand or pricing, but we definitely don't expect to see any further declines."

Paper prices are primarily impacted by print demand which, in turn, is impacted by the economy, the company exec says. "The supply of printing paper is rather inelastic, since the industry is so capital-intensive," he explains. "We really haven't noticed any pricing impacts from the mergers among the paper producers, but there are getting to be fewer and fewer paper options available."

Banta buys almost all of the paper for the products it prints, Hilliker reports. "We've always tried to form alliances with a select group of mills and, in essence, work with them to sell their paper." He agrees that the current market conditions might present an opportunity for printers to lock-in lower prices through contracts, but he questions the merits of adopting that approach. "It depends on the extent to which you view your relationship with paper companies as adversarial versus cooperative. Banta takes the cooperative approach," the paper buyer notes.

Lower paper prices haven't led print buyers to upgrade the stocks they use, but other market trends have, Hilliker says. "We have customers doing fewer mailings or cutting down the recipient lists for their publications and catalogs. Their audiences may be getting more targeted, but marketers and publishers seem willing to upgrade the quality of the product they are putting in the hands of a smaller number of customers. Companies seem willing to spend a little more if they feel they will get a better return."