Signs Point to Stability in '98 for Paper Prices and Supply

If you're planning to be a player in today's paper market, strap yourself in. Conditions influencing prices and availability are constantly changing, and the many variables that influence the paper market can stump even the best financial analysts.

This year will prove to be very interesting and challenging for paper purchasers with a strong U.S. economy fueling demand, additional manufacturing capacity coming on line and the impact of such factors as the Asian economy and U.S. Postal Service rate increases.

Paper prices have crept upward over the past year, but the exorbitant price increases of 1994-95 are highly unlikely in light of the heavy losses paper companies suffered when the bottom fell out of the market in early 1996.

Since then, consumers, shareholders and the financial industry have been pressuring paper manufacturers to be less opportunistic and more strategic in their thinking. The price increases over the past year have been more reasonable and more in tune with market conditions.

Keeping informed is the only way paper consumers can hope to make the best possible deal. Following are the factors Foster & Gallagher has considered when planning its nearly 20 catalogs:

The Asian factor. Until recently, the booming Asian markets were regarded as one of the major factors affecting the paper market. But with their recent downturn, paper consumption will decrease in proportion to negative economic trends, and the construction and expansion of mills will be put on hold or canceled.

As these factors balance supply and demand, Asia will become less of an issue in the short term. It will consume and import less this year and modestly increase its ability to manufacture enough paper to support its market needs. There may even be some excess capacity that gets exported to U.S. consumers, but don't count on Asia's having a major impact on paper prices this year.

USPS rate increases. The rate case is under review by the Postal Rate Commission and is scheduled to be approved by July. Will the rates be approved or, as in the past, will they change to reflect recent USPS financial performance and industry lobbying efforts? And when will the new rates take effect?

Direct marketers think that the postal service has little grounds for an increase after showing profits of more than $1 billion in each of the last three years and that, if there is an increase in 1998, it should be a very modest one later in the year.

The rate proposal would increase postage costs by less than 5 percent for the last half of the year if implemented in July, but there is reason to hope that the new rates won't be implemented until later in the year. The increase will not be a back-breaker and should have little or no impact on direct marketers' circulation or paper-consumption plans for 1998. Therefore, the outlook for paper prices or availability should not change substantially.

Demand. It is no secret that the U.S. economy is in great shape. This means there will be an excellent environment for growth in the main segments that affect paper prices — retail, direct marketing and publishing. Circulation and ad pages will increase this year, creating more demand for paper. Best estimates indicate a potential growth in demand of 5 percent.

Supply. Major projects affecting supply in North America and Europe include four new paper machines in Canada and Europe and a major technical upgrade of a United States paper mill, which will help stabilize or even reduce prices. All these machines were either on line at the close of 1997 or are due to be up and running in early 1998.

Depending on which grades of paper you purchase, this is either good or great news. Most of the expansion is outside of the Light Weight Coated (LWC) No. 5 grade, but the additional capacity in free sheet and Super Calandered (SC) Plus grades will provide opportunities to switch to higher or lower grades, which will take some of the demand and pricing pressure off the No. 5 market.

Free sheet prices will be attractive because of good supply, which will prompt some No. 5 users to upgrade. SC Plus prices will be substantially lower than No. 5 prices, which will be an incentive for some users to save while taking advantage of the higher quality provided by the new Gap Former technology in SC manufacturing.

The difference in quality between No. 5 and SC Plus is getting smaller, creating interest in SC Plus coming out of mills like Stora, Norske Skog and Consolidated. Foster & Gallagher has used SC Plus on some of its catalogs after successful testing of this paper against No. 5 coated. It found that results will vary from one title to another, and lifetime value needs to be considered when reading test results.

Pulp prices. These are considered to be a harbinger of paper prices. Pulp prices dropped from $610 per metric ton to $570 per metric ton on spot purchases late in 1997. As pulp is the major raw ingredient in paper, this would indicate a reduction or stabilization in paper prices as we get further into 1998.

After three price increases in 1997 and one at the start of this year, it appears that the remainder of 1998 will bring a reasonably balanced market in which producers and consumers have the opportunity to prosper on an equal basis.

There does not appear to be any major market influence on the horizon that could significantly change these conditions in the next 12 months. Therefore, prices and availability should remain stable through the end of the year.

Jim Paauwe is vice president of advertising and production at the Michigan Bulb Group of Foster & Gallagher Inc., Peoria, IL.

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