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MARKET "NORMAL" FOR 1997

Mar 1, 1997 12:00 AM


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Forecasting the paper market, even for seasoned experts, can be a frustrating task. "Even with all the time and effort we spend on market analysis, I'm sometimes tempted to look at a forecast and say, 'Great, then let's plan for the opposite to happen,'" comments Mike Stickel, Simpson Paper's vice president and general manager of coated and specialty lines. Many other industry experts would be tempted to agree.

Still, experts such as John Maine, a vice president at Resource Information Systems Incorporated (RISI) in Boston, MA, make their best estimates with what few statistics the relatively data-poor paper industry offers. His general outlook? "Demand in the printing paper markets will grow at a moderate pace over the next two years," Maine projects, and that will produce a tightening in prices for the months ahead.

Since the paper industry itself has seen relatively weak profits in the past few quarters, we've experienced relatively low capacity growth, argues Maine. In fact, the American Forest & Paper Assn., in its 37th annual capacity survey, forecasts the following: * pulp, paper and paperboard capacity will grow at less than historical rates (i.e., at an average of 1.5 percent) in the U.S. over the next three years; * paper capacity in tons is expected to rise from 99.1 million in 1996 to 103.7 million in 1999; * consumption of recovered paper, while growing faster than underlying capacity, is expected to flatten to an average rate of 2.9 percent per year over the 1997-1999 period; * recovered paper use by printing-writing mills is projected to grow at an average annual rate of 5.1 percent over the next three years, significantly faster than this sector's underlying capacity growth.

Beyond the U.S. markets, the capacity looks quite different, as coated production has grown in recent months for both the Asian and the European markets. This increased supply will help offset the slow capacity growth in this country, Maine adds. (See chart, "Capacity Comparisons by Paper Grades.")

Speaking of supply, perhaps the key missing piece of most paper market analysis is what's called consumer inventories, potentially a big swing factor in this market if customers believe that prices are about to run up, according to Mark Diverio, vice president of equity research at Union Bank of Switzerland (UBS).

In fact, most experts agree that the "X" factor--the unknown ingredient--in the paper price runups of 1994-95 was the extent of consumer paper inventories, i.e., paper held by merchants or end-users, not mill inventories.

Nor is there yet any means of collecting data on consumer inventories, although the Graphics Communications Assn. (GCA/PIA) has launched an effort that could make inventories held at the top large web printers transparent to the marketplace (see page 77).

Perhaps ironically, customer inventories and inventories "in the pipeline" currently look better for both coated markets than mill inventories, which are "on the high side." Mill downtime has been less broad-based than expected during the past few months, notes Diverio, who says that mills have chosen to simply keep running rather than dip into inventories.

That's something of a surprise, since last year's presidential election and Summer Olympics were supposed to work down the inventory backlog accumulated during the 1994-95 price rise.

To add more new supply of coated free sheet to the market will be International Paper's machine conversion project--from uncoated to coated product--at a cost of $125 to $150 million. Appleton Paper is converting a carbonless machine to coated free sheet output for $200 million, with product due later this year.

Yet another supply factor looming just ahead for coated free sheet is a global one. Four large European coated paper machines are coming online, two of them already in production. The third, turning out #3 and #4 grade, will be going online any time now, while the fourth will go into production late this year.

"A sluggish economy in Europe forced European paper producers to ship excess capacity to the U.S. in recent years," points out Fred Stabbart, CEO of West Coast Paper Company in Seattle. Add to that the rising production capabilities in Asia and Indonesia and you have foreign products continuing to undercut domestic by about a 20 percent price differential between some grades, according to Stabbart.

On the demand side, Diverio notes that magazine ad pages were up 8.9 percent last year over the previous year, after a very weak start in early 1996. "Ad pages were basically flat in 1996 but finished on an upward trend, which will continue," in his view.

More bullish on the coated markets is Paul Hannah, Repap Sales' vice president of strategic information and analysis. He observes that order books for coated product currently are in much healthier shape than one year ago. "Buyers who have been predicting a sloppy market may be in for a surprise," Hannah suggests. He believes that North American papermakers likely will be forced to raise prices "in the not too distant future."

For uncoated grades, there's still "lots of uncertainty," Stabbart reports. He notes that the 8.5 x 11-inch cut-sheet market has been "very up and down" in the last few months. West Coast Paper Company sees the uncoated market growing in both demand and supply which will result in a less dramatic price range this year. In particular, a new uncoated machine from Boise Cascade (in Jackson, MS) is expected to put a damper on pricing.

Of all the major grades, perhaps uncoated free sheet has made the most headway in working down mill inventories--25 percent down from their highs of February 1996, UBS's Diverio points out. That makes him mildly bullish for this year, given likely upticks in demand around the second and fourth quarters--two chances for price hikes that may stick.

For the moment, however, many printers seem to share the view of Herb Blackinton, president of Emerald City Graphics in Kent, WA. His business is mostly uncoated work such as software training manuals--"no Picasso printing" as he puts it. "We're very comfortable with the paper market at the moment. Our concerns are not about price but things like paper handling and quality control."

For more information, please refer to the charts on pages 74 and 76 of the March 1997 American Printer.

Our market analysts are: John Maine, vice president, Resource Information Services Incorporated (RISI); Mark Diverio, vice president, equity research, Union Bank of Switzerland; and Jim Miller, market development manager, Georgia-Pacific.

Here's the way they see the printing and writing markets for the remainder of this year:

Coated free sheet Maine: "This market has ample supplies which will keep prices competitive this year."

Diverio: "Mill inventories are on the high side currently. For this grade, we're only seven percent below the inventory levels of November 1995, based on November 1996 numbers. Capacity utilization (i.e., the mills' operating rate above which prices tend to rise and below which they tend to fall) in this market is running at about 83 percent to 84 percent currently. We may move toward only the high 80s in the second half of the year. This market has probably bottomed out. Any movement here depends on the underlying pulp market, due to the economic link between CFS and chemically-treated pulp."

Miller: "This market began to firm up in the latter half of 1996. The whole coated market looks quite a bit stronger for 1997."

Coated groundwood Maine: "Very little capacity growth in this market last year. The problem has been low demand--it dropped 18 percent in 1996. Watch for a recovery over the next 24 months, however."

Diverio: "Demand is soft currently. Inventories are only 17 percent below their May 1996 highs, which is still double the levels one year ago. Catalogers seem to be optimistic about business this year. Capacity utilization for this market is also in the 83 percent to 84 percent range but may reach 90 percent this year. We see prices for this grade beginning to move up in the third quarter."

Miller: "Prices in this market should continue to improve gradually this year, as we work through producer inventories."

Uncoated free sheet Maine: "This is the larger, more mature market but we've seen some tightening in the past three to six months. Look for some more modest tightening this year."

Diverio: "We're at the bottom and a turn in prices is more likely in this market than in the coated markets. Even with some new capacity coming online this year, demand should be good in the second quarter, leading to a first round of price rises. A second round is possible in the fourth quarter this year."

Miller: "We've seen some big inventory shifts in the past 18 months. Demand is reasonably good, but pricing is not so good as yet. This market matched GDP growth last year and will do about the same over the next few years."

"It's been a tumultuous two years for paper," admits Alan Kotok, director of management technologies for the Graphic Communications Assn. (GCA/PIA). Despite some ill-will undoubtedly still lingering from the paper price runup of 1994-95, Kotok is gratified that all parties in the paper buying channel seem to be recognizing a need for cooperation.

Part of this desire, Kotok surmises, is simply the common threat of new media. But another element may be the realization that much confusion in the marketplace could be minimized with better information, if it were generally available.

What the paper business really needs today, according to several market observers, is a good database--of consumer inventory data, that is. "We need a neutral party to aggregate, anonymously and inexpensively, accessible data from both the mills and the buyers, including printers and publishers," states Brian Kullman of R.R. Donnelley.

For Kullman and purchasing officers at several other large printing concerns, GCA (Alexandria, VA) has a project on the right track. They're among the first participants in GCA's new Paper Inventory Database Program, a voluntary effort aimed at supplying important monthly data where an information "black hole" exists in today's market.

Here's how the system will operate. Participating paper buyers will supply GCA monthly data on their inventories, broken out into categories as defined by the American Forest & Paper Assn. (AF&PA) and Canadian Pulp and Paper Assn. (CPPA).

GCA also has developed bar code and EDI specifications for use by its members' own inventorying processes.

Monthly reports can be faxed to GCA or uploaded to its Web site at: www.gca.org. These submissions, and even the names of participating paper buyers, are kept confidential, accessible only on a private, password-protected basis to database subscribers. Participating contributors, as well as GCA members, will receive a subscription discount.

GCA will report the total inventories on a monthly basis, according to Kotok, in terms of five categories: uncoated free sheet, coated free sheet, uncoated groundwood, coated groundwood, all others. Also available will be annual consumption numbers, both estimated and actual). Data may be reported in either short tons (2,000 lbs.) or metric tonnes (2,000 kilograms).

For further information on the GCA Paper Inventory Database, contact Alan Kotok at (703) 519-8173.