Coated Paper Prices: Can They Get Uglier?

The rapid decrease in prices for coated paper the past few months caught nearly everyone by surprise. Now the question is whether the drop is over.

Just four months ago, Dead Tree Edition conducted a poll asking readers to predict where the RISI index for 40# coated #5 would be in July. Only 29% said it would be less than $820 per ton ($41/cwt.) RISI itself was predicting that the index, then at $900, would bottom out at $845 in the 3rd Quarter.

RISI revealed its July numbers yesterday, showing that it and most of our readers were way off the mark The index was at $770.

The market had become accustomed to coated mills, especially market leader NewPage, closing machines or even entire mills to bolster pricing amid falling demand. But by spring, most of the obvious North American candidates for mothballing were gone. That left large, efficient machines able to produce more coated paper than North America needs.

The mills battled back with down time, making uncoated products on coated machines, and winning business from offshore mills. But it still wasn't enough, as many customers caught short by the rapid decrease in their own consumption simply stopped buying for awhile and used their inventories instead.

Some people argue that prices will start rising because the mills are hurting so bad. By that logic, magazines will see their ad pages start bouncing back and the Postal Service can stop worrying about the loss of First Class Mail. Wishes don't always come true. In fact, mills that are struggling to stay afloat are more tempted to drop their prices rather than idle their machines -- unless the prices no longer cover their cash costs.

With the Canadian dollar, energy costs, and pricing for market pulp all rising, paper prices may be nearing cash costs for some mills. In fact, Kruger recently announced the permanent shutdown of the small coated machines at Trois-Rivieres, Quebec. But most North American coated paper is made at U.S. mills by companies like NewPage, Verso, SAPPI, and AbitibiBowater that have their own kraft mills that for now are heavily subsidized by the federal government.

StoraEnso, which owns one-fifth of NewPage, isn't counting on a rebound any time soon. It recently wrote down that investment, citing "poor prospects of an upturn in the [North American] market."

Perhaps the paper market is like the U.S. economy, where GDP sank by "only" 1.5% in the 2nd Quarter versus 6.4% in the 1st Quarter: The paper market may not be improving, but it's probably getting "less bad" than it was in the spring.