Longfellow’s celebration of the forest primeval finds its echo today in the green revolution taking place along the supply chain of the paper industry. Although—as I learned from interviewing people who prefer not be quoted on the subject—good intentions are ahead of actual practice, it is a harbinger nonetheless of the revolutionary transformations taking place in the paper industry’s business practices.
Which brings me to the subject of this column: a snapshot of the globally transforming paper industry, the state of book-paper supply, and how the present outlook shapes your paper usage and purchasing strategies.
As long as print products are foundational to the publishing industry’s revenue base, it will be the state of the forest-products industry and print-manufacturing technologies that shape our economics of survival. I hate to say it, but it’s very much analogous to the relationship of energy sources to styling and performance in the auto industry. Dwindling energy supplies or skyrocketing prices can severely limit automobile use.
The word from industry watchers might be summed up as, “Don’t worry more than is already the case.” There doesn’t seem to be any likelihood that there will be a medium- or long-term crisis in supply, notwithstanding North American plant closings, mergers and acquisitions, and excepting blips in the spot markets for coated and specialty papers.
You may ask, what about those estimable stalwarts that have disappeared or transformed in recent years, such as Warren, Mead, Westvaco, Champion, James River, Howard, Simpson and others? The names may have changed, replaced by the likes of Domtar, NewPage Corp., UPM and Stora Enso (whose North American operations have just been acquired by NewPage), but the mills, machines and forests have a life of their own—passing through other hands. And it bears mentioning that still very much with us are firms such as Sappi, International Paper, Glatfelter, Weyerhaeuser, the newly merged AbitibiBowater, and Mohawk Fine Papers (now home also to the old Strathmore and Beckett brands).
Of course, mill capacity continues to shrink as their new owners downsize and consolidate. Mark McCready, senior forest industry services consultant with Pöyry (www.Poyry.com), a global forestry and energy consulting and engineering firm, provided the following data, which sheds some light on the metrics in this industry:
• 2007 U.S. uncoated freesheet capacity was projected at 12.5 million tons. Mid-year plant closings, mainly by International Paper, will reduce this capacity this year by about 240,000 tons.
• Mid-year closings and suspensions of production will cause a major tightening for coated mechanical and coated freesheet in the next six months or more (last year reported in the press as an oversupply both here and abroad). Montreal-based Tembec’s closing of its St. Francisville plant in Louisiana alone took 325,000 tons out of the North American supply, now reduced to about 5 million tons.
For some perspective, a 2 lb., 100,000-copy best-seller would require 100 tons of paper, scarcely a ripple on the sea of available supply. Even 10 million copies of “Harry Potter” checks out at 3 decimal points of mill capacity.
Jerry Caruso, managing director and head of the Paper Industry Group at investment banking services firm Goldsmith Agio Helms/Lazard Middle Market, cited 376 mergers and acquisitions in the global paper industry in the past five years, in the August issue of Paper 360 (the member magazine for TAPPI, the leading association for the worldwide pulp, paper, packaging and converting industries, and the Paper Industry Management Association). He notes that “a new strategy has emerged” in the paper business. “Abandoning the old model of vertical integration, companies facing an increasingly competitive global market have been shedding non-core assets to free up capital and management, to focus on core competencies and ways to grow their businesses,” says Caruso.
Why is this happening? The Center for Paper Business and Industry points out that North America “remains one of the largest world regions for paper consumption and enjoys significant fiber resources.” Yet, in its 2006 year-end industry summary, it says that “the composite financial performance of the industry has been pitiful looking back and, without a sustained upturn, will further dissuade future investment.”
Industry consolidation and contraction is a response to this dismal financial performance. It is balanced by increasing efficiencies, decreasing demand (remember, we’re talking about book-publishing papers), and a growing global marketplace––especially in Northern Europe, China, Indonesia and elsewhere in Asia––that is leapfrogging U.S. protectionism and shipping imported papers, especially coated stocks, when needed to meet demand.
According to Jack Miller—a senior consultant in North America for Pira International, a global provider of information, testing and consulting services to the paper, print and packaging industries and their supply chains—“net capacity in the United States is still diminishing, although it is partly made up for by upwards efficiency creep of 1 [percent] to 2 percent per year.”
Yet, he also notes that, “in the last 25 years, paper prices have trended flat and, if inflation-adjusted, they have actually been going down. This year, paper prices are up, but the question is: Will they cycle down as in the past, or will they stay up? If the market is now truly global, then lower-cost competition overseas will push prices down,” continues Miller. “Short term, however, factors such as the weak U.S. dollar and high transportation costs are holding down competitive imports.”
It is also useful to note that U.S.-publisher paper consumption is, to an extent, independent of North American mill capacity. Books printed in Asia and Europe for U.S. publishers and shipped back for sale do not draw upon North American mills.
Where the Paper is “Greener”
One of the great stories of behavioral change in recent years in paper-making and purchasing is the growing commitment by the publishing industry supply chain to environmentally friendly practices in paper manufacturing and usage, edged along by organizations such as the Green Press Initiative (www.GreenPressInitiative.org) and the Canadian Markets Initiative (www.MarketsInitiative.org), which help publishers improve their environmental impact. Guidelines for such improvements, as well as lists of paper mills, printers and publishers taking part in these initiatives can be found on the organizations’ Web sites.
Major publishers such as Random House, HarperCollins and Pearson have announced and published detailed commitments to environmentally friendly paper policies. And environmentally friendly practices have been endorsed and promoted by industry trade associations such as the Association of American Publishers, Association of American University Presses, and PMA, the Independent Book Publishers Association.
For larger publishers, my spot check shows that especially among those that buy direct, the use of recycled paper still remains marginal. This is especially true for educational publishers who serve adoption markets. For some mid-range and smaller independent publishers, however, premiums in pennies per hundred weight (cwt) seem easy to absorb and/or build into price increases.
Linda Secondari, creative director of manufacturing and technology at Columbia University Press, is an example of the growing commitment to green policies among independent and university presses. “With the exception of certain backlist titles requiring the bulking of legacy papers, we are printing all new titles on ‘green’ initiative stock. Ten or 12 years ago we couldn’t afford it. But the difference today is pennies, and publishers are more aware of the impact we are having on the environment.”
Purchasing Strategies: Just in Time
Which brings me to paper-purchasing strategies. To begin with, the most sensible policy for small- to mid-range publishers is to have your printer furnish the paper, unless you can realize absolute net savings by purchasing for the run. Storing your inventory on the printers’ floor can eat up any savings and more by limiting your choice of printers, and by accumulating a useless supply of odd lots as titles move into the ‘long tail’ or out of print. Your own purchasing, management and record-keeping time needs to be factored in. And, lastly, you have to ask yourself whether tying up cash in inventory is the best use of working capital.
Tona Myers, production director at New World Library, manages a list of 300 to 400 active titles and follows the now-common practice of shorter and more frequent reprints to reduce inventories. With about 50 re-printings a month, she keeps her inventory levels at no more than three months’ supply in short runs of 2,000 to 5,000 each.
Printers, too, are discovering that a “just in time” policy saves valuable storage space and reduces cash tied up in inventory. As a consequence, paper merchants serving book printers are creating their own stocking and delivery programs to satisfy this demand.
Publishers in the major leagues of paper consumption still pass savings to the bottom line—as long as printers seem willing, in effect, to absorb storage and handling overhead, and private owners or public shareholders can measure the bottom line benefits. These paper consumers, by purchasing in advance, are, in effect, betting on price fluctuations in the commodity futures market. For what it is worth, someone in management might want to measure from time to time the cost benefit of cash tied up in paper inventory in a fluctuating price market, and cash applied to acquisition and marketing in a climate of changing reading habits and channels of information delivery.
Large or small, the state of the paper market drives the economic survival of the publishing industry. And the “forest primeval,” which throughout the last century has provided trees for paper mills, has earned the well-deserved respite that the transforming global paper industry can now provide.
Eugene G. Schwartz is a regular contributor to Book Business. He is a publishing industry analyst, writer and editor-at-large for Foreword Magazine. A former PMA board member, he is president of Consortium House, a management and business consultancy to publishers. He previously was a manufacturing, production and operations executive.
Eugene G. Schwartz is editor at large for ForeWord Reviews, an industry observer and an occasional columnist for Book Business magazine. In an earlier career, he was in the printing business and held production management positions at Random House, Prentice-Hall/Goodyear and CRM Books/Psychology Today. A former PMA (IBPA) board member, he has headed his own publishing consultancy, Consortium House. He is also Co-Founder of Worthy Shorts Inc., a development stage online private press and publication service for professionals as well as an online back office publication service for publishers and associations. He is on the Publishing Business Conference and Expo Advisory Board.