Decreasing demand for publication papers in the U.S. is apparently having a counterintuitive result: higher prices. Or, at the least, higher minimum price levels during down markets.
There’s a logical explanation, and it doesn’t involve repealing the law of supply and demand. Nor does it mean that paper companies will be especially profitable in the future.
“Newsprint will never fall below $500/tonne again, and will probably spend little time below $600/tone,” Verle Sutton wrote in the April issue of The Reel Time Report. “Average coated groundwood prices [for 40# #5] may drop below $800/ton in 2012, but will not get close to the 2009 low point of $730/ton. In fact, the current cyclical decline might be the last one in which coated groundwood pricing falls below $800/ton.”
Sutton is no optimist about the paper industry. He questions whether recently announced price increases for coated paper will stick and is especially bearish about the industry’s long-term prospects, as discussed in Why Coated Paper Prices Look Ready for a Fall.
The phenomenon Sutton describes – higher pricing “floors” for publication papers in future down markets -- is actually the result of the gloomy outlook for publication papers. It's somewhat akin to predictions that printed magazines will continue to exist for the foreseeable future, but as luxury items with much higher price points than today.
Riding the roller coaster
For decades, the prices of coated paper, newsprint and other publication grades rode a roller coaster through loose and tight markets.
Over the long haul, the roller coaster’s trend remained pretty flat: The price at one peak was generally close to the previous peak. The same was true of the troughs. It’s not a particularly unusual phenomenon: The prices of manufactured goods rarely keep up with overall inflation in the long run.
In the old days – until about, oh, 10 years ago – rising demand encouraged investments in new paper machines and in machine rebuilds. Input costs – labor, energy, fiber, chemicals – kept increasing, but the investments resulted in fewer inputs to make each ton of paper.
The result was that mills couldn’t just pass along their cost increases to customers; there was always a competitor with a shiny new machine and efficient cost structure that was happy to take on customers at a slightly lower price.
No more new machines
But no one will build another publication-paper machine in North America for the foreseeable future – if ever. With so many paper companies in or on the verge of bankruptcy, significant capital investments in existing machines are rare. The most efficient machines today are likely to remain the most efficient for years to come.
That means the industry’s efficiency gains are too meager to counter the impact of rising input costs. A coated-groundwood machine that was barely cash positive at the last market bottom in 2009 would now be shut down long before prices could drop to $730/ton again.
What’s not as clear is whether market peaks will also be higher than in the past. Price spikes occur when demand outstrips supply, which in a declining market can only happen when supply decreases. But demand has been decreasing so rapidly in recent years that, even when a machine is shut down, market tightness lasts for only a few months at most.
Another wild card is imports. New paper machines are being built in some developing countries, especially China. But tariffs, a shortage of fiber, and clumsy management have limited the Chinese mills’ impact on U.S. prices.
Perhaps if the oil market crashes, Canadian currency would weaken enough to make idle mills north of the border competitive again. The Canadian paper industry has been so devastated, however, that it’s hard to envision it rising from the ashes to cause major market disruptions in the U.S.
What seems most likely is that North American paper makers will continue to scuffle along, closing the highest-cost machines and mills when declining demand and prices force their hand. But those "cry 'uncle'" spots -- the price levels that force shutdowns and market firming -- may never be as low as they were in the past.
5 comments:
I don't understand what you are saying. Does a "floor" mean that producers are simply refusing to sell the product below a certain price, or is the "floor" the actual cost of production?
"Floor" means the level below which producers won't sell. It's probably pretty close to the cash cost of the least efficient machines.
Another critical variable that must be factored is pending regulation -- specifically the EPA's Boiler MACT Rules. These plants are heavily dependent on industrial boilers, and the scope and timeline for compliance will loom large on which get upgrades and which go offline...potentially forever. Under the strictest scenario of theoretical maximum controls, organic byproduct treated as waste and not fuel, and a 3 yr shot clock -- that floor could easily rise 25% above current levels irrespective of demand. This is a near term concern. But under proposed legislation -- or if EPA and/or OMB substantively address detailed concerns -- a softer rise to lower heights will occur over the next half decade...IMHO.
This means Verso could do very well. When you consider that NewPage's Port Hawkesbury is still idle, a number of other Canadian producers just disadvantaged due to the high loonie, u have Verso that has closed sartell and a few other facilities. they have good location in terms of near rail capacity. and i'd argue that you have not factored in the energy investments these firms have made. Verso is supposed to get about 50mm in cost savings from their energy investments this year. that is a big deal.
the reason the "floor" exists is because as bad as the industry is, the operators have become very very proactive, shutting down a number of plants. the current prices for certain types of paper indicates that the market believes the decline in supply has outpaced the decline in demand.
The Chinese love Recirculated Paper. But when you deink it you may lose 5 - 6% of the fiber per turntime. That mean you will need more virgin fiber in the long run.
So, I guess European and North - American companies - who produce paper from the log to paper - can compete with the Chinese when RP prices increases.
I'm also sure that the market of A4 - copy paper will return when those bussineses who still use copy/printing paper will exeed those who is pulling down the use.
I'm also believe NewPage will come out stronger out of Chapter 11 and paying their debt in some ways.
'The Scandinavian'
Post a Comment