Well, print buyers, I have good news and bad news about the state of the paper industry and what it means for you.

 

The bad news is that demand for coated paper is way down—which is not a good sign for the general state of the printing and publishing industry. My colleagues at RISI, the leading information provider for the global forest products industry, report that 2008 year-end U.S. demand statistics will look something like this: 12% decline for coated freesheet and 11% for coated mechanical. The kicker here is that RISI projects demand recovery in 2009 will be “almost nonexistent.” This sustained decline in demand is the result of converging factors that have publishers decreasing page/run counts: the continued high cost of paper; intense cost pressures beyond paper (ink, postage, and transportation); the general diversification of publishing to non-paper-based media (digital versions, websites, email, etc); and the overt threat of a prolonged recession, which has both advertisers and publishers tightening their purse strings.

Ready for the good news? The good news is that we’re starting to see paper makers easing up on prices as a result of this weak demand. When I last wrote to you, I reported that freesheet paper prices were going up October 1. My friends at Lane Press were skeptical that these increases would hold, so they held off on passing the increase to customers for the month of October, essentially buying some time to see how the market would settle out on this. Fortunately, the full increase did not stick. While paper makers have not completely rescinded the October 1 increase, many have reduced it (reductions vary by manufacturer, paper, and grade). There’s also good news in the groundwood market, where there is some slight downward price movement (again, varying by manufacturer, paper, and grade). All price reductions have been passed directly on to Lane Press customers. As always, my friends at Lane Press will contact each of you individually to communicate the specific price change you will see as of November 1.  

So, we are starting to see prices come down as a result of weak demand. However, there are still a number of factors at work in the market that conspire to drive prices in the other direction.

The most significant of these factors is constrained supply. Paper makers both here and abroad continue to curtail production and optimize operations in order to stay profitable and keep supply in line with demand. This issue of the Paper Prophet is chockfull of news about mills reducing production either temporarily or permanently: M-Real, Verso, NewPage, UPM, Stora Enso Oyj….

Meanwhile, we’re starting to see consolidation among paper makers in Europe (with the sale of M-real graphic paper mills in Europe to Sappi Limited) that mimicks the recent consolidation in North America. As we well know, the consolidation here has enabled paper makers to tightly control supply and keep prices high despite weak demand. I suspect the current credit crisis may stall further consolidation in Europe for now. However slowly it may proceed, continued consolidation and its associated curtailments will serve to further constrict supply.

The last supply issue I’ll mention is happening further upstream. Russia, the world’s largest exporter of roundwood (unprocessed wood), is dramatically increasing its tariff on wood exports (from 6.5% to 80% over 18 months) as part of an initiative to fund improvements to its own wood processing capabilities. This steep increase will have a dramatic impact on the major buyers of Russian roundwood, including Finland, Japan, and China. Of these countries, Finland will be most affected in terms of publication paper production because it is home to three major papermakers: Stora Enso Oyj, UPM Kymmene Corp, and M-Real Corp. In this arena, the tariff is expected to lead to reduced export levels to Finland and, resultingly, less end product in the overall market.

So while we are seeing prices for publication papers starting to ease up, there are still considerable factors in the market serving to support upward price pressure. Gazing into my trusty crystal ball here, I see these factors essentially balancing each other out and prices remaining relatively flat for the foreseeable future.