PAPER PRICING: Pulp Nonfiction
Trying to decipher paper pricing trends is like scrutinizing snowflakes—the closer you get, the more complex they seem. Still, there are a few key factors when considering the current economics of the paper business, which has been subject to unprecedented forces during and in the wake of the recent recession.
Paper prices are affected by the market for the two types of paper used in publishing: groundwood (or mechanical) and freesheet. Both of these paper types are manufactured in coated and uncoated form, with coated papers traditionally used in glossy publications, such as coffee table books and magazines, and uncoated in most other books. Freesheet paper contains no more than 10 percent wood pulp and is whiter, brighter and longer-lasting than groundwood, which contains more wood pulp and lignin (the chemical in wood that makes paper yellow over time).
Paper pricing has been affected in the past few years by a general decrease in demand for printed products, which affects all paper types and grades. Within the market, however, complex dynamics play out as supply adjusts and demand shifts in the wake of price fluctuations. A publisher might switch from coated paper to uncoated or free sheet to ground wood to save costs, for instance; higher demand may not lead to higher prices if mills shift output to create more supply. On the other hand, prices could go up if mills close or less of a particular type of paper is imported due to foreign demand.
A few significant trends have been apparent recently.
Coated paper prices are falling. Coated freesheet paper prices are down seven percent compared to a year ago, and coated groundwood prices are down six percent in the same period, according to Jack Miller, a paper industry consultant and regular contributor to Printing Impressions magazine, quoting figures from forest products industry association RISI Inc. This is due to falling demand for coated paper (in publishing and other industries), and is also affected by mill operating rates (calculated as a percentage of what mills are actually producing compared to output capacity). Operating rates for coated free sheet, for instance, are at 90 percent, up slightly from last year, Miller says; this change is influenced both by the volume of imports (decreasing of late) and the elimination of some overall production capacity.
"Coated paper prices have been sliding since the end of the recession in mid-2011 and are in a very tenuous position at the moment," says Derek Mahlburg, an economist at RISI. "The lack of profitability for producers (two are bankrupt) provides an impetus for upward movement, while the struggles of publishers and printers have made the fight to regain the lost ground a difficult task. Implementation of announced summer hikes has been slow."
Uncoated free sheet prices have stabilized. "Uncoated freesheet production is a fairly concentrated industry, but producers are walking a narrow line between trying to preserve profitability via price hikes without drawing a flood of imports to the market," Mahlburg says. Prices have held steady and may rise in the second half of 2012, he says. The uncoated free sheet market is helped by a demand for the product in short run digital printing, Miller says.
Uncoated groundwood paper prices are falling. Groundwood use is actually up among book publishers, Miller says, as many are replacing freesheet paper with the lower-price groundwood. This increase in demand is offset by a rise in production coupled with a collapse in demand for the product elsewhere.
"Groundwood is under pressure because a lot of the groundwood producers were also producing newsprint, and newsprint has tanked, so [these paper producers] are trying to convert newsprint mills to produce … groundwood book papers, which tends to flood that market," Miller says.
Groundwood as a grade is suffering from "terrible demand" in directories and newspaper inserts, once a core market, Mahlburg reports. The only thing holding the price up, he says, is a slim profit margin: If the price drops far enough, output capacity falls (because it ceases to be profitable to produce), leading to less supply.
Emerging and mature markets in other parts of the world have various effects on the U.S. market. In an effort to avoid shutting mills, American paper producers have sought to increase exports to emerging markets, but have been met with an increase in production capacity in other parts of the world, especially Asia. According to Mahlburg, Asia is now oversupplied with freesheet capacity and is competing with North American paper suppliers to export paper to regions such as Latin America.
"A lot of the mills that have been built in China, Indonesia and Korea—the intent was that they would supply those growing Asian markets," Miller says. "As they have built these mills they have become a surplus exporter to Europe and America until the Asian market can catch up. [When that happens] that will reduce pressure on them to export." The rate of increase in production capacity has recently slowed in Asia, he adds.
Import duties designed to cut back on surplus "dumping" in the North American market have in some cases been met by cheap imports from Europe, he says, though imports from Asia still tend to have a bigger effect on supply.
Wild cards that could affect prices here in the U.S. include the euro/dollar exchange rate (which Mahlburg says "could have a major impact on the presence of European paper in North America and the ability of North American mills to compete abroad"). American mills are in the best position to compete if international pulp prices rise. All of these factors could influence the supply of paper available (based on their effect on capacity) and the demand, both foreign and domestic.
A Volatile Market
Another factor affecting supply and demand is the ability for paper producers and consumers to quickly adjust capacity, types of papers produced and types of paper used in response to market pressure.
"Everything interacts with everything else on the supply side and the demand side," Miller says. "Even on the demand side, people will switch from coated to uncoated depending on the price. Not so much with books, but if you are doing commercial printing, on a job without a lot of color you might [switch to] uncoated paper [to save money]. If prices get too far out of line, people switch from one for the other."
For their part, mills can switch from making coated to uncoated paper. "Coated mills just turn off the coater. When they are really desperate for orders, they do that," Miller says. "This puts pressure on the uncoated side."
Mills (and printers) announce price increases, which are sometimes implemented and sometimes not, Miller points out in a recent Printing Impressions blog. Sometimes price increases go into effect but are quickly rescinded due to competitive pressures, usually from rival mills offering lower prices. Imports are down of late, but so is domestic mill profitability, which could lead to price hikes or capacity cuts. According to Miller, prices in the long term will almost surely move up, because unprofitable mills cannot lose money forever and will have to close, reducing supply.
"The dynamics fluctuate," Miller says. "The demand is falling across the board, and supply is adjusting, and sometimes it is adjusting more quickly than others. So when supply side adjusts more quickly the prices can firm up. When the supply side is not adjusting and you have a greater excess of supply over demand, then the prices will be under greater pressure." BB
James Sturdivant is Book Business' Senior Editor and the Managing Editor of Publishing Executive, where he writes the Pub Talk blog (pubexec.com/channel/pub-talk). Email him at firstname.lastname@example.org.