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
Recently, I was asked a series of questions about the paper market and where it is heading in the near and long term. I thought I would share some of my answers with you.
Q: What do you see as far as paper prices for the first quarter?
A: I see paper prices as a whole going back down to the levels we saw during the 2nd quarter last year. That would mean a drop of about $40-$60 ton overall. Coated groundwood will drop faster and perhaps farther than coated freesheet will. But how much depends on where supply and demand are.
Q: How would you describe the current conditions in the market as they relate to paper prices, supply and demand?
A: Right now, demand has dropped MUCH faster than the coated mills can cut their production and inventory levels. This has led to shorter than normal lead times, excess inventories, and reduced prices across the board. Since most, if not all mills are still not turning a profit (despite such dramatic price increases over the last six quarters), I believe they will try and hold the line on price. In order to do this, they will attempt to reduce capacity to a point more in line with demand. This could be very tricky, as demand continues to decrease at a rapid pace with no apparent bottom in sight.
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