The Changing Paper World, Spring 09 Edition
Blake Hutchison, Director of Purchasing
In looking back at what I was predicting to happen in the first part of 2009, I have found that I was right about decreased demand, decreased pricing and increased downtime and capacity reductions. But I was not envisioning these types of numbers:
Decreased Demand
Through a variety of different end-user actions, such as reductions in page counts, changes in trim sizes, pared-down mailing lists and cancelled print projects, consumption of coated paper in North America has fallen over 25% since the third quarter of 2008. So far in 2009, shipments of paper have fallen by over 20% on a monthly basis as compared to shipments in 2008. This trend is expected to continue until at least the second half of 2009.
Because of these actions, the paper mills have attempted to match this drop in demand with supply. The easiest way to do this for them is to simply shut down their machines.
Paper Prices
After a year and a half of almost constant, quarterly price increases, paper prices are retreating and retreating quickly. No more is this evident than in the coated groundwood stocks. Coated freesheet prices have fallen to levels last seen in June and July of 2008, and they continue to fall. Coated groundwood prices, however, continue to fall and they are a moving target on a daily basis. Part of the reason for this is the greater number of groundwood manufacturers than freesheet producers.
Mill and Machine Downtime
Since the beginning of 2007, over 2.1 million tons of coated paper have been shuttered in the form of machine and mill closures. (This represents about 20% of the North American coated paper market.) These are tons that are not likely to return unless private or public investment takes them over, which in this economy, is not very likely. But it is not impossible. (For example, the former Tembec mill in St. Francisville, LA was recently purchased by a private equity firm who has plans to reopen the mill and begin to make paper again in the near future.)
In addition, since the second quarter of 2008, another 462,000 tons have been removed from the system in the form of machine or mill downtime. This is another 5% of annual production removed from the North American market. Most, if not all of the machines/mills that have taken downtime, have come back online, but those tons that were removed from the market during their downtime are not able to be replaced.
All of this capacity reduction is an attempt by the paper mills to try and balance demand with supply as well as save costs. Unfortunately for the paper mills, printer, end-user and mill, inventories were at high levels when the downturn started, leaving all three with higher than normal levels of inventories. All three entities have been working to reduce their inventories, which have been coming down in recent months. But this is at the expense of ordering new, manufactured tons, further compounding the issue and driving operating rates below the 80% level.
The Wild West
Second quarter is usually the slowest quarter of the year for paper mills. This year, it has been brutal, and it is only one month old!
With prices changing so often, many times mills and merchants are shooting from the hip when quoting paper prices. They shoot a price out first and then ask questions later, like “how am I going to find a way to make that price a reality?” There is often a stampede of mills racing to match whatever their nearest competitor is doing on a new piece of business while at the same time trying to corral and contain their current business.
What is important now, when it comes to your paper price, is that the whole picture of everything involved with paper be considered. A great price that is very attractive might be quoted for you today, but you may not print for another few months. How firm is that price? Is that price still going to be good when you actually need it? How does the paper you are being quoted look when compared to what you currently print on? How would a change affect the look of my printed piece? Is the grade I am being quoted a foreign or domestic grade of paper? What does my printer think of this grade? Does it run well through their presses? Would they recommend it?
The Good News
In discussions with some of our mill partners this week, they have begun to show signs of optimism. They are reporting that their order books are beginning to come back to life, that all of the price quoting they have been doing the past few months is beginning to pay off in the form of new orders. There is a belief out there in the market that while it has been bad, things are starting to look up. They agree that the constant rise in paper prices over the past 18 months did a lot of harm to their business and they have been paying the price the last few months. And while there are some crazy things being done in the marketplace, they seem to believe that come the second half of this year, those things will cease and those parties who are responsible and have built good reputations and relationships and stuck to them during these difficult times will come out on top.
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