In looking back on 2001, the state of the pulp and paper market can be best described as volatile. And as the strains of "Auld Lang Syne" fade away, the outlook does not appear to be any more stable for the coming year. In fact, due to the dipping economic outlook that many pundits predicted months ago, paper buying has taken on a renewed set of competitive objectives starting foremost (and not surprisingly) with affordability. Since slower publishing demands contributed to a waning paper market throughout 2001, according to the Labor Department's International Price Program, buying habits have been greatly affected. Coupled with international conflict and national security concerns, the commercial feasibility of a market as traditional as book publishing comes under the gun. Sluggish book sales during the holiday season certainly did not help matters, leaving the future of the paper market in 2002 to much speculation.
According to Mead (www.mead.com), "Americans use an average of 749 pounds of paper products per individual per year. Overall, that's about 187 billion pounds of paper for the United States as a whole!" Additionally, paper production accounts for seven percent of the total manufacturing output in the U.S, employing 1.4 million Americans, Mead reports. The industry generates $200 billion in sales annually.
"There is no doubt, however, that the tragic events of September 11 have placed additional stresses on consumer confidence in an already weak economy," admits John Dillon, International Paper's chairman and CEO. "Like many other companies, we experienced business interruptions during the week of the terrorist attacks. The long-term impact on our company resulting from those events is still undetermined."
The paper trail
When asking most print buyers about the market, answers are hard-pressed to define paper as "cheap." In the short-term, predicting this year's market hinges upon—what else but "the economy, stupid." This financial uncertainty proves that in many cases, the corporate paper end game is in the hands of the much more generalized economy, not just publishing components. That's why paper companies are having to find even more ways of competing.
For instance, Alufoil (www.alufoil.com) is now offering new holographic foils in covers and weights. The company has also established an Internet presence in hopes of reaching more would-be paper consumers—already a trend among most vendors.
Raymond Royer, Domtar (www.domtar.com) president and CEO, puts a more positive spin on things: "The enthusiastic response of the financial markets…has enabled us to maintain a healthy balance sheet…The commitment by employees in our new mills to achieve the quality and service standards of our distribution network is remarkable, and has enabled us to achieve satisfying results, despite a hesitant market in all areas."
Westvaco (www.westvaco.com) Chairman and CEO John A. Lukes, estimates, "As we prepare[d] for our planned merger with Mead, we [were] highly focused on developing rigorous programs to achieve $325 million in synergies that we have targeted within two years. We are intent on generating higher earnings and higher returns on capital by building on the strong—and in many cases, complementary—businesses of Mead and Westvaco."
In the paper segment alone, which includes the company's envelope business, 2001 fourth quarter operating profits claimed $13.4 million, compared to $37.6 million in 2000. Segment results reflect weaker market conditions, especially in the autumn of 2001, when many buyers postponed or cancelled major printing projects. For Westvaco, these results also reflect market-related downtime of about 10,000 tons at the company's Luke, MD, and Wickliffe, KY, mills, as well as competition from imports, adds Lukes.
"The mill's workforce has aggressively confronted extremely challenging market conditions," champions James A. Buzzard, Westvaco executive vice president. "These efforts, however, can no longer overcome the competitive pressures caused by the economic slowdown, the strong U.S. dollar and the related sharp increase in imported paper. Today's circumstances dictate that we concentrate our production on the most efficient equipment."
Business as unusual
Since early 2001, the economic slowdown has also admittedly had an unfavorable impact on demand and prices for Domtar's products. But the paper company says it remains confident in the long-term fundamentals of the uncoated freesheet market. Royer outlines that he will continue taking steps to improve product quality and productivity and to obtain synergies as quickly as possible from the integration of four new mills. He also says he will continue to monitor inventories closely in order to maintain optimum levels of supply to meet demand.
Other companies, such as P.H. Glatfelter (www.glatfelter.com), started anew by rolling out a new name and aesthetic, becoming simply "Glatfelter." And according to Chairman and CEO George Glatfelter III, "We're going head-to-head with some of the biggest companies in the industry and we're determined to further differentiate ourselves from the pack"—a necessity that can mean the difference between leverage and loss this new year.
A key component of Glatfelter's vision is to reach $1 billion in sales by 2004, with an annual return on capital of 17 percent. The company posted net sales of $724 million in 2000, he says. But for the next two years, Glatfelter is quite confident in the market outlook.
For other paper players, cult of personality becomes a way to illustrate product usefulness while treading new commercial waters. For ICG/Holliston (www.icg-online.com), a producer of book cover materials, Michael Jordan, Martha Stewart and Elton John will become synonymous with its DigiTex bookcloth, a material that the company says it will promote heavily in 2002, using the celebrity names.
Fit to buy
Of course, success or failure will not only be predicated upon whether the economy improves but also how well paper buyers recover from a shallow market.
"The buyer who purchases the right product for the job at the best price is one who is knowledgeable about the product lines. This knowledge comes from experience and from resources such as paper merchants, office supply houses, paper mills and trade organizations," writes author Lawrence A. Wilson in Paper Buying Primer. "However, most buyers don't take full advantage of the available resources."
Weyerhaeuser (www.weyerhaeuser.com) CEO Steve Rogel believes that the new year within a relative new century will also play a role in how paper buyers and sellers choose to operate. "As we enter the 21st century, we find ourselves in the midst of what sailors call sea change—change of a very large magnitude," he describes. "This includes learning how to operate according to a new business system…dovetailing our support staff services…fully integrating our acquisitions…and coping with extremely rapid technological change—or, as we call it internally, adjusting to 'e-time.' Another change we're adjusting to is industry consolidation that dictates that we grow and grow profitably—or be absorbed."
Rogel isn't alone in reevaluating how best to operate in 2002. "International Paper is continuing to streamline and improve its operations," agrees Dillon. "We ran our mills more efficiently in the third quarter. And (last year), we announced the permanent closure of our Erie, PA, mill."
Compared to third quarter 2000, earnings declined in most paper segments as the impact of the slow economy reduced demand for products used for advertising and print. Forest Products earnings did, however, improve compared to one year ago, notes Dillon. And his company realized higher lumber prices and volumes as a result.
He anticipates trends in early 2002 that mimic those from the last quarters of 2001. "Third-quarter earnings for printing papers were $146 million, up from $119 million in second quarter 2001, as a result of higher coated paper volumes reflecting holiday catalog demand," says Dillon. "European paper results were slightly weaker than the prior quarter, due to the increased slowdown in European economies, which lagged the downturn in the U.S. economy."
A hopeful horizon
To make sense of the market's fluctuations, The National Association for Printing Leadership (NAPL) published a comprehensive industry report which predicts that recession will turn to moderate growth and then to vigorous growth for the commercial printing industry over the next 18 months.
According to The NAPL 2001-2002 State of the Industry Report, prepared by NAPL's Printing Economic Research Center (www.napl.org), the print industry is in a recession that began well before September 11. "Even without that day's unspeakable tragedy, a meaningful upturn in business that supported healthy sales growth and relieved the intense pressure on printing industry profits wasn't likely before next spring," the report states. "Now, it's not likely until the second half of 2002."
-Natalie Hope McDonald