Arandell Corporation

Blake Hutchison, Director of Purchasing

My Paper Prognostications for 2010

Gazing into the crystal ball, here are some things that I see coming in the New Year:

Supply:
Throughout 2009, seldom has a week gone by where we have not read about a sawmill closing, a paper machine being idled or a mill closing their doors. Supply is what paper mills can control the most, and to try to keep pricing in line with demand, they have taken a large chunk of capacity out of the system. The mills have also looked at their platforms and tweaked schedules to fit demand. In some cases, grades and basis weights that were run two to three times per month are now only run once, and some are only run once every six weeks. This has resulted in us seeing lead times and LDC dates push out to four to six weeks on some grades, where they had been only two to three weeks earlier in the year.

Inventories have been worked down to lower-than-normal levels, and I believe that paper mills are going to engage in rush inventory building or order pre-making due to their desire to have cash readily available and not tied up in inventory.

So, with reduced schedules and inventories and fewer machines making paper these days, I would watch for some LDC extensions for the next couple of months. I expect more mill downtime in the first and second quarters as demand decreases over the first half of 2010. If the second half of 2010 is busier than 2009, which I certainly hope it is, I expect longer lead times and potentially some tight markets, especially for SC grades. A key thing to remember is that it is not going to be as easy to get paper during the second and third quarters of 2010 as it was in 2009. Plan ahead.

Demand:
Demand estimates for coated paper in 2010 range from a 2% to 8% INCREASE over 2009 from what I can see. In speaking with the paper mills, a general consensus is that 2009 was horrible, but 2010 should see a small improvement; somewhere in the 3% to 6% range and this is what they are budgeting for. I believe they are hoping that the holiday season goes well and that companies will start to print again. I believe (and hope) they are right in their predictions.

Price:
The increase announcements that were to have taken effect in October never really materialized.  I believe that was more of an effort by the coated and uncoated producers to try to stop the pricing reductions of the second and third quarters more than trying to get more for their grades.

But, rest assured that there will be more increases coming in 2010. Several factors will lead to this, but the big factor is the elimination of the black liquor tax credit at the end of 2009. During the third quarter, U.S. paper mills that had pulping capacity took in almost $1 billion in tax credits from this program. In many cases, this helped the mills to go from red to black on the balance sheets. Well, that is going away. Input costs for the mills have been rising and this credit has been helping them weather the storm. Watch for an announcement sometime in January. That probably will not hold for long (if at all), but there will be at least $3.00/cwt worth of paper increases in 2010. Plan on it for the second half of the year.

If you have any questions, please just let me know!  Thank you again for your business!

Blake Hutchison, Director of Purchasing

I recently read an article in Multichannel Merchant that detailed some ideas about how a cataloger can gain control of their paper spend for 2010 and how these ideas will always result in lower costs.  In reviewing these ideas, I found some of them to contain the truth, but not “the whole truth” as they say in court.  So I thought I would provide some perspective from a printer who supplies paper for many of our clients.

Idea #1:  Establish long term pricing now

Pricing levels have decreased some 20% YTD.  And while the buyers of paper have had the upper hand throughout the year, that will change in 2010.  The producers will be able to pass along some increases.

Printers have the upper hand when it comes to negotiating pricing caps.  When an end user is negotiating their prices with a mill (through a merchant), their only negotiating tool is their annual tonnage.  A printer has the ability to take the annual tonnage of all of their paper clients, combine them and use the whole as leverage with their mill partners, thereby increasing the paper buying power of their clients.  By being part of the whole, you can significantly limit your exposure to these increases.

Ideas #2 & #3:  Challenge your printer to reduce waste and use paper calculators

Paper waste is a natural part of the printing process. A printer is not only challenged on their waste factors by end users, but also by the industry as a whole.  The more they can reduce their waste factors, the better position they are in to reduce paper consumption costs.  A “paper calculator” is a very generic tool that some merchants have put together to try to challenge the printer on their waste and create an “in” with an end user. 

The printer knows their presses. They know the most efficient way produce a job on press.  They know what grades, basis weights, finishes and specific brands of paper perform the best on their presses.  They work everyday on ways to reduce paper waste factors.  Yes, it is important to consider waste.  But to use a very generic calculator to come up with tonnage numbers that really have no basis in reality is a good way to create contention. Trust me; the printer is doing their very best on your behalf.

Ideas #4 & #5:  Reduce your cover and text weights

Always a good thing to consider when looking for ways to reduce paper costs.  But BE CAREFUL.  It might not always be the best idea.  The USPS has just announced new “droop test” regulations that have a lot of end users scrambling to HIGHER basis weights in order for their pieces to pass the test.   

You also might want to consider how your printed piece will look.  As you decrease your basis weight, you are sacrificing opacity and creating “show through”.  Your printer should have plenty of printed samples of what downgrading in basis weight will look like.

Idea #6:  Ship rail

Remember the idea of combining purchases to leverage paper prices?  The same can be done with shipping costs.  The more paper you are ordering as a whole will dictate whether or not you are able to ship rail.  An end-user who prints three or four times annually only gets to combine those tons in a shipment.  But a printer who may have three or four other paper clients printing right around the same time can combine those tons and get them to ship rail.  A printer has the ability to forecast, well in advance, and is in a much better position to work with mills to achieve maximum transit cost savings.

Some other ideas not mentioned in the article:

• For those end users who purchase their own paper: pay close attention to your consumption reports. The leftover inventory that is listed on your report is REAL MONEY and should be utilized as quickly as possible. Make sure you work with your printer to find a home for it as quickly as possible.
• If an opportunity to use it isn’t readily available, work with your printer to get rid of the paper. They might have an opportunity to use it on another printing for another client and might buy it from you.
• Do you know what the storage and handling charges are at your printer? If not, you should. The storage and handling of paper is a real cost to a printer. If they aren’t supplying the paper, they are going to need to charge for those services.
• In many cases, if the printer is able to supply the paper, they will waive those charges.

Questions? Please feel free to contact me any time at 800-558-8724, ext. 165 or BJHutchison@arandell.com.

Blake Hutchison, Director of Purchasing

As a catalog printer, from time-to-time, Arandell will receive concerns from environmentalists about the products we produce and the materials used to produce them. (You can imagine, as the one charged with purchasing all o f our paper, I take an interest in these concerns because most of them revolve around paper!)  In a previous article I addressed the “greenness” of catalogs and direct mail pieces. As I continue to research the environmental impact of direct mail pieces I am finding helpful tools to calculate the positive and negative impact of direct mail.

A tool that I found most interesting was created by the paper suppler West Linn. The tool helps calculate the impact of using PCW (Post-Consumer Waste) paper. Click here to use the tool. This is a impressive calculator because users are given the opportunity to change multiple variables, such as PCW percentage and paper tonnage and basis weight on their paper grades.

At Arandell, we implement best practice green initiatives in both the office and manufacturing facilities. We are certified to produce catalogs on FSC (Forest Stewardship Council), SFI (Sustainable Forestry Initiative) and PEFC (Programme for the Endorsement of Forest Certification schemes) certified papers.

If you are interested in using “green” certified papers let us know! Along with aforementioned calculator we have various tools at Arandell that can help you calculate the positive environmental impact your paper choice will create.

Blake Hutchison, Director of Purchasing

I just received the following letter from Verso executive Michael Weinhold.

Click here to read the letter.

I find this letter to be extremely interesting.  I was expecting mills that were garnering large sums of money from the black liquor tax credit to announce increases by the end of the year (as per my earlier post), but Verso has just jumped the gun on everyone.  We aren’t sure at this point if it will stick.  I think a lot of it depends on what the other coated freesheet producers (NewPage, Sappi, Appleton Coated, West Linn, etc.) do in response to this.  Some of them have been taking money from the tax credits, but others haven’t. 

We will keep you posted.  Any questions, please feel free to contact your sales rep or myself directly.

***SEPTEMBER 2, 2009 UPDATE***

I also recieved the following letter from NewPage proclaiming their price increase. It appears this will be an industry trend….

NewPage increases prices for coated freesheet grades.

Blake Hutchison, Director of Purchasing

It’s that time of year again …

For the average American the holiday season begins with a kick in November…and maybe October for the early planners. But for us in the printing and catalog/retail industries, the holiday season is well under way. At Arandell, we are deep in the midst of receiving files packed full of fur-lined boots, scarves and mittens, and delicious holiday hams and turkeys.

With the start of the “busy” holiday season, there are a few things that every cataloger must remember to ensure their books are produced to spec and delivered on time. One key factor of importance is meeting your LDC, or Last Date to Change.

LDC’s are creeping out.

According to Pulp & Paper Products Council, June shipments of printing and writing papers showed a 5.1% INCREASE over May shipments. Amazing!  This affects catalogers because we are also seeing LDC dates creeping out. In the past we have seen three- to four-week LDC dates; now they are moving out to four- to six-weeks in some cases. Why the movement? A couple reasons:

   • We are entering the typical “busy season” for paper mills, where their backlogs of orders and runs are filling up. This happens every year.

   • The mills have taken a lot of downtime throughout the slow spring season. Many of the machines are still down. Because of this, specific combinations of basis weight and grade (i.e. 80#, #3 COVER) that might have been manufactured twice per month in the past, are now only manufactured once, and thereby increasing lead times and LDC’s.

In the past six- to eight months paper has been readily available; last-second spot orders have been able to be filled. Given the above two factors, however, things will continue getting tighter, and much more quickly than anticipated. 

With paper prices falling to levels last seen over a year ago, there have been cases where LDC orders have INCREASED because end users have more money to spend than the last time. Multiply situations like this all over the country, and ready dates and LDC’s could continue to move out further and further.

How to ensure you have your paper when you need it.

It is important to keep in close communication with your printer and watch your LDC dates. Make sure you and your team are ready when it comes time to finalize everything. Missing your LDC could drastically affect your holiday selling season.

Blake Hutchison, Director of Purchasing

As the United States House of Representatives sends the newly passed “cap & trade” legislation over to the Senate for debate, I thought now might be a good time to discuss electronic versus paper communication.

While it is true that both can (and should) be used in concert with each other, is one better than the other from a sustainability standpoint? The answer is a resounding “YES.”

Consider the issue of inputs/raw materials being renewable. Printed communication uses paper as its primary material. Paper comes from trees, which are a renewable resource, and have been for longer than humans have been on the planet. Since this is the case, and since forest products companies rely on trees for their products, they take great care to “renew” their main resource. The forest product industry plants 1.7 million trees per day, more than three times what they harvest. The primary materials used to make a computer require the mining and refining of many different metals and minerals (including gold, silver and palladium). These are non-renewable resources from the standpoint that an individual cannot just “plant” a metal or mineral. 

In addition, paper and printed pieces have a leg up on the electronic medium when it comes to energy consumption. 60% of the energy required to manufacture paper in the U.S. comes from carbon neutral sources and is produced onsite at the paper mills. Compare that to the electronics industry, which obtains over 90% of its power from the national power grid, a large part of which is greenhouse gas-emitting, coal-powered power plants.

As well, paper products stand a much better chance of being recycled properly.  Nearly 60% of all paper in the U.S. is recycled annually, while only 18% of electronic devices are; and of those that are, almost none are being reused for other products. E-waste is the nation’s single largest toxic waste export.

Some interesting facts, courtesy of International Paper:

• 20% Less CO₂ is used per year by a person reading a daily printed newspaper versus a person reading web-based news for 30 minutes a day.
• On average it takes 500 kilowatt-hours of electricity to produce 440 pounds of paper, the typical amount of paper each individual uses in a year. That’s the equivalent of powering one computer continuously for five months.
• It costs an estimated $2.8 billion of energy to leave computers sitting idly overnight in the U.S. On a CO₂ basis, that’s an amount equivalent to four million cars on the road.

The paper industry has had much more time to figure out how to be sustainable and responsible. In time, the electronics industry will do the same. But, until then, paper and printed communications have the upper hand when it comes to being sustainable. And while a balance is required between the two for effective communication, it is important to keep the above facts in mind when finding that balance.

Blake Hutchison, Director of Purchasing

Fraser Papers Files for Bankruptcy Protection.

Fraser Papers, which operates two paper mills and two pulp mills, produces mostly uncoated publishing grades, although they do manufacture some coated groundwood products.  Annually, they produce 410,000 tons of paper and 615,000 tons of pulp.  The company claims that, at least initially, their operating plans remain unchanged, and that they will continue to manufacture specialty paper products for existing clients.  How long that continues to be the case depends on how much cash they can generate to continue operations and how many orders they continue to receive.

This is the second North American mill to file for protection this year, click here to see the first.  A continuing trend?  Doubtful.  But, if Fraser fails to generate enough cash to keep paper operations going, it will force many of their clients to seek paper elsewhere, and that could tighten the market up.

Blake Hutchison, Director of Purchasing

Could it be true?  Could the paper market be correcting and things starting to look up?

In discussing current market affairs with many of our paper suppliers, the answer seems to be a guarded “yes.”  While the first and second quarters have seen a tremendous amount of downtime taken (both temporary and permanent), the mills feel that the moves they have made have been adequate enough to balance their supply with market demand.  We shall see.  But one thing is for sure: any more months of +/- 20% paper ship rates, and the paper mills could be in more trouble than they are now.  No one wants to see that.

What does this guarded optimism mean for prices?  Well one thing is for sure: the drastic reduction in paper prices we have seen the last two quarters cannot be sustained.  The mills have given back most, if not more than what they gained over the last 18-24 months.  And while the mills’ costs have decreased as well, they have not decreased in tandem with price decreases. 

Does this mean that increases are on the way?  I highly doubt it.  Are we going to continue to see the vast differences in pricing levels that we have seen over the past six months?  I doubt that as well.  Whatever your paper price is today, feel confident that you are not going to see any increases through the end of the year. Also feel confident that you are not “missing out” on some paper price deals by continuing to shop around. 

One thing to watch:  black liquor credits.  What is that?  Black liquor is a by-product of the paper making process that is created and then re-used elsewhere down the process chain.  Some mills have been able to apply for, and receive large amounts of government money under a loophole in a budget bill passed in 2005.  That loophole is set to expire soon, and some members of Congress are looking to close it sooner.  Those mills that are relying on this additional loophole funding now might be caught in a bind sooner rather than later if this loophole closes before it is supposed to.  If you would like more information about this, please just let me know.

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.

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