Thursday, May 15, 2014

A Shortage of Paper? You've Got To Be Kidding!

Demand for graphic papers keeps dropping, usually faster than the industry can reduce capacity. Struggling paper mills are often playing a giant game of chicken, scuffling along on thin margins (or negative margins) in hopes that a competitor will shut down a machine to balance the market.

So why are paper companies suddenly announcing price increases for coated paper, and why is the biggest printer in the U.S. worried about possible paper shortages?

SAPPI surprised nearly everyone late last week by announcing a $40/ton price increase on coated freesheet (CFS) in the U.S. Then Verso delivered an even bigger shock this week with $40 hike not only on CFS but also on coated groundwood (CGW), which is in even greater oversupply than CFS.

But, first, let’s look at the rather cryptic statement from a recent R.R. Donnelley filing with the Securities and Exchange Commission:

“Management believes that the paper supply is consolidating, and there may be shortfalls in the future in supplies necessary to meet the demands of the entire marketplace. Higher paper prices and tight paper supplies may have an impact on customers’ demand for printed products,” the document said. “Contractual arrangements and industry practice should support the Company’s continued ability to pass on any future paper price increases, but there is no assurance that market conditions will continue to enable the Company to successfully do so.”

What does Donnelley know that the rest of us don’t? With or without consolidation, how do you run out of something when demand for it is declining?

Donnelley seems to be worried about the proposed merger of Verso and NewPage, North America’s two largest makers of coated paper. “NewVerso" would control half the continent’s capacity for coated paper, which could stifle Donnelley’s legendary ability to negotiate very huge and very sweet deals.

The paper giant could play the “Our way or the highway card,” as NewPage has often tried to do (usually more to its own detriment than that of its customers). And it may be in a position to balance markets by aggressively idling or shutting capacity.

If the merged company is successful, smaller competitors might give up on certain parts of the market. Then a single NewVerso miscalculation – about demand or imports, for example – could quickly lead to shortages.

And if the highly leveraged company isn’t successful, Donnelley’s (and everyone else’) ability to secure coated paper could depend upon the mercurial moods of a bond market that cares nothing about the health of the paper, printing, or publishing industries.

Or maybe Donnelley is saying, “We really don’t know what consolidation of the paper industry will mean to us, but it could be a big deal. So our lawyers told us we’d better cover our donkeys in case a few know-it-all private-equity boys screw everything up.”

As for the nearer term, market participants say SAPPI’s move is a bit early and aggressive, but there is some hope that capacity reductions, the strong euro, a decent economy, and this year’s election will bring the CFS market into balance later this year. SAPPI is trying to set the table for a July 1, or maybe an Oct. 1, price hike for contract customers who have quarterly price protection.

“They’ll need others to follow and for demand to pick up for it to succeed,” one paper broker commented.

But Verso’s move on CGW seems to be more a matter of wishful thinking by a money-losing supplier. And so far it’s been met with silence by competitors. CGW faces two challenges that CFS doesn't: 1) High-quality supercalendered (SC) paper, which increasingly competes with CGW for some applications, but at a lower price. 2) The weak loonie (Canadian dollar), which means Canadian CGW and SC makers are happy to grab market share in the U.S. by pricing more aggressively than their American counterparts.

Here’s how one paper-market veteran summed up the pricing announcements: “Watch everyone announce, then [watch] the guessing game of who actually went up and who maneuvered for market share. All in all, they probably each have some bottom business they can raise, and that's who it [the price hike] will be applied to.”

Related articles:


BoSacks said...

There are lots of scuttlebutt and multiple discussions of pain when it comes to the pricing of printing and paper. Printing numbers are down and consequently so is paper usage. In some cases paper companies lose money on every pound sold.

I have been predicting the survival of print, and my steady position for the past decade has been that printing will be/must be a luxury item and that means paper will be, too. For everyone’s survival both print and paper need to cost more. That is the brutal honesty of the situation. Print is no longer the commodity that it once was, and as the numbers continue to decrease, the scarcity of the product is on the increase.
There was a time when newsstands were plentiful and all participants in the process – retailer, publisher, printer and paper maker – were rolling in success. It was almost like printing money. Those days are gone, and each component of the supply chain is striving to understand what happened and how they could have gone from riches to rags in a decade.

I guess all I am saying is that I am not surprised that paper prices must go up. So, too, should the price of all the other components. Mark my words, when the dust clears, print will be more expensive and should be for the survival of the entire industry.

I can hear my publishing friends cringe when I say that, but in the end publishers, too, must make a superior quality product that demands a higher price from the consumer. There is no other way for print to survive.

Anonymous said...

Did anyone read the recent round of earnings releases? Two mills negative EBIDTA and one largely negative operating income. Either price is coming up or mills are going down. This business is a train wreck.

Anonymous said...

The recent price increase announcements are critical for all of the CFS and CGW mills right now - and when I say all, I mean all of the mills. Even the most cost-effective and productive mills are struggling, including the ones with strong order books. People seem to forget that the current prices are $80 - 100/ton LOWER than they were just a few years ago - if only the cost of fiber, energy, distribution, and labor had also dropped during the same period.

BoSacks is right - the price of printed products will continue to increase, though we are far from being a luxury at this point - more of a higher-priced option than a tweet, e-blast, or other digital item. Paper will reach luxury status eventually - but not quite yet.
For now, to keep the printers in paper, paper mills have to regain their ability to maintain profits. Therefore, this and further price increases will be needed AND paper mills must continue to cut their costs. The Verpage merger, recent Sappi belt tightening, and continued efforts by the industry will be critical to keep the CFS and CGW industry relevant and profitable both short and long term.

BoSacks said...

Note to Anonymous:

There was a time when print was the least expensive, least complex way to reach a mass audience. Now print is the most complex and most expensive way to reach a large audience. It is a fundamental shift from the way things were.

Add to that the enormous cultural shifts in information gathering and distribution, and print has an even bigger problem.

Finally consider that the public as only a set time for reading anything. More information delivered in unlimited ways doesn’t add to the time people have to read. In the last report that I saw print received 6% of the time, while TV got 42% and radio received 9%. The internet got 20% and rising of time spent in media. The internet was the only category to be continually rising. Time spent in the other categories was dropping. The trend is inescapable.

Anonymous said...

There is an estimated over supply of 750,000 tons in the coated stock markets. Until more machines go off line, which the merger would dictate I would think there won't be an shortage. At the same time, we can't expect any company to operate at a loss forever...

Some predict that VERSO is waiting for New Page to fall into BK so they can buy it out BK and not get stuck assuming the New Page debt... I would not want to be working at mills in Wisconsin or Maine these days...

Anonymous said...

This is spot on. Everyone is losing money. Paper machines are going to be shut in 2014-2015. Once that Verso/New Page deal goes down, it will change the domestic landscape. Who needs 3 mills in Maine ? The game of pushing back on the mills is ending. they are moving away from fine papers in droves to packaging, etc...where there is growth. Hats off to RRd they actually get it. Buyers who take the last nickel off the table are worthless to the mills.

Anonymous said...

Interesting... If you want to really know if there is a shortage or not just check the seconds houses. The mills have mostly had the ability over the years to raise prices, dump to seconds houses and then see if it sticks.

That said, I have been in the printing / paper business since 1966 and have seen a lot of strange things. Printing will stay for awhile but will continue to slow and live side by side with today's and the future digital world.