Friday, October 31, 2008

Paper Prices Heading Down

Stick a fork in it: The bull market for paper is officially done.

Confirming what many market participants were already seeing, RISI released a report today declaring that prices have peaked for virtually all grades of publication paper, from newsprint to coated freesheet. RISI has a reputation for accurately reporting current prices but being a bit bullish when it comes to forecasting. So when the respected information provider for the forest products industry says prices have peaked, you can bet on it.

The firm's monthly Paper Trader report took a dramatically bearish turn, showing that market prices almost across the board were lower in October than the company had recently projected. Prices for some grades declined in October, while others hit their peak prices, the report stated.

The exception is uncoated groundwood grades, but even there RISI has turned less bullish on the super-tight supercalendered paper market. It projects that the price of the benchmark 35# SCA will peak early next year and then hold steady, rather than the previous month's forecasts of rising prices into the year 2010.

Respecting RISI's copyright, Dead Tree Edition will not reveal RISI's current or projected benchmark prices; Paper Trader is available only by paid subscription. But we will report that we are seeing and hearing about more aggressive prices for coated groundwood and that in the tighter coated-freesheet market mills are reportedly offering price caps to lock up business for next year.

Much of the contract pricing in the supercalendered market is set for six months or even a year at a time, so there had been much expectation that prices would move up dramatically in January to match this year's ratcheting up of coated prices. But the strong dollar, lower costs for energy and freight, and the deteriorating economy have put the lid on those increases -- and are wreaking havoc for coated groundwood.

Mr. Paper Executive, do you hear those phones ringing at your favorite paper brokers' office? It's not the end users who are calling; they're too busy adjusting their bloated inventories in response to declining ad pages and reductions in catalog circulation. It's the European mills, who have noticed that the dollar has risen nearly 20 percent versus the euro in barely three months while prices were rising, suddenly making the U.S. an attractive market.

Woe to the paper executives who thought "market discipline" had something to do with whips and chains rather than just holding the line on prices. You are likely to find RISI's forecast of a gentle downturn to be overly bullish.

Paper buyers, still smarting from your arrogance when markets were tight, are now watching waves of layoffs and shutdowns roll through their industries. They won't hesitate to push prices as low as possible to keep more titles, and their own jobs, from going under. And they'll find plenty of suppliers willing to price aggressively to keep their machines running, despite your brave talk of ROI targets and shutting more mills.

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