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

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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