Seven Mysteries of the New Postal Rates

It sounds like a small price increase, but the new rates could have large implications for publishers, marketers, printers, and even paper mills.

Nearly three weeks after the U.S. Postal Service proposed hiking most postal rates, mailing experts and regulators can’t figure out what the proposal means.

Agreeing with a coalition of mailers’ groups that USPS’s filing was incomplete for all but First-Class Mail, the Postal Regulatory Commission on Monday extended the discussion period on the proposed April 26 rate increases for “market-dominant” mail classes.

Some mailers are skeptical of USPS’s calculation that the price increases, especially for the Standard and Periodicals classes, are just shy of 2%. But until USPS answers an extensive list of questions about the new rate structures and the new rules that will accompany them, no one can evaluate whether the proposed rate hikes are legal, the PRC said.

A pallet of magazines in FSS-optimized bundles

Even after the rates are fully explained, divining their implications for individual mailers, for USPS, and for others will be no simple matter. Here are seven important but mostly unanswered questions about the rates:

1) How much will my rates change? If you’re assuming the answer is less than 2%, you may be in for a rude awakening. These are is not across-the-board increases. Forever Stamps aren’t going up at all, enabling USPS to stick First-Class business mailers with increases that exceed 2%. The new rules may whack mailers that have mostly carrier-route or high-density mail but result in lower postage for some other mailers. Folio: magazine notes that some rates will double while others will decrease more than 20%; most mailings, however, involve multiple types and levels of rates. Many mailers won’t really know what the new rates will mean until their printer or other service provider can run an elaborate presort analysis, which can’t happen until the new rules and rates are clarified.

2) Will the rates alter how paper is priced and sold in the United States? The new rates would continue and extend the Postal Service’s efforts to de-emphasize weight in calculating rates. USPS acknowledges that it overcharges for weight, in the past using it as a proxy for some of its costs that are not directly weight related. The result is that paper mills tend to charge higher premiums for lightweight paper in the U.S. than they do in other markets, knowing that American postal rates give buyers a strong incentive to use lighter paper. (That’s especially true for magazine-quality papers, which in many other countries are used primarily for products distributed through stores rather than the mail.) But with Standard letters no longer having “pound” rates and with weight charges for some other mail declining, some mailers may switch to heavier paper.

3) For flats mailers, will the new mail-preparation standards be must-do, ought-to-do, or nice-to-do? This is an especially big question for flats mailers, and their printers, because of new preparation standards for mail going to ZIP codes served by the Flats Sequencing System (FSS) and new incentives to create pallets of carrier-route bundles in non-FSS areas. It’s still not clear what mailers will actually be required to do on April 26 and what will be optional but important – for example, valuable enough to overhaul how mail is prepared and shipped. And sometimes USPS incentives are duds, not worth the additional expenses or investment required to take advantage of them.

4) Will the rates and regulations create new competitive advantages for some printers – and disadvantages for others? For many types of printing, a major differentiator is the ability to minimize customers’ mail costs through mail consolidation, in-line customization, dropshipping, etc. Postal officials talk a good game about wanting to encourage co-mailing, selective binding, and other forms of mail consolidation, but that isn’t always reflected in new rates. Conversely, incentives to consolidate and dropship mail can hurt small printing plants that don’t prepare enough mail to obtain the best rates for their clients.

5) Will printers, other service providers, and USPS itself be ready for April 26? The proposed rate structure will have some new charges and apparently lots of new rules and incentives. But software providers can’t redo their coding or printers their mail-preparation procedures or equipment until they know what the new rules will be. And then there’s the question of whether the Postal Service will be ready for the resulting changes in how mail is prepared and delivered.

6) Will the new rules and rates finally make FSS start paying off? USPS’s multibillion-dollar investment in the huge machines was supposed to reduce dramatically its costs of carrying flat mail. But so far, higher handling costs have eaten up the resulting delivery savings, which has increased pressure on USPS to jack up rates for Standard and Periodicals flats. New FSS preparation standards are supposed to address that by changing how mail is packaged for ZIP codes served by the FSS machines, such as by eliminating carrier-route bundles.

7) Will the new rules cause more lightweight pallets and other “tail of the mail” problems? Printers and mailers note that recent changes in postal regulations have forced a lot of flat mail to be placed on extremely light pallets, which tend to cause such problems as reducing the amount of mail that fits into a truck. The new rates include incentives (or requirements; it's not clear yet what's optional) for creating 5-digit carrier-route pallets and FSS scheme pallets. But will that have the perverse effect of causing other mail to be packaged and shipped less efficiently?

Related articles:

• USPS Raising Rates, Imposing New FSS Rules, and Perhaps Inviting a Legal Challenge
• USPS Needs a Plan B for Flat Mail, Coalition Says
• FSS Postage Rates Will Raise Issues for Cataloguers, Publications, Printers, and USPS

You Won't Believe What This Fortune Teller Predicts for Publishing in 2015!

 Smart phones, not-so-smart publishers, and hot new trends: 24 crazy predictions for the new year

Media consultant

When glancing at my article in the current issue of Publishing Executive, I had a revelation: Now that one of the publishing industry's leading magazines had called on me for predictions, I’ve graduated from blogger to media pundit.

And then my heart sank as I realized I had violated a cardinal rule of the International Order of Pompous Media Pundits: In its six-plus years of existence, Dead Tree Edition had never published a year-end list of predictions for the coming year.

With 2015 already under way and prognostication being new to me, I scraped up 50 bucks – Dead Tree Edition’s entire annual research budget – and headed over to Madame Marie, a local fortune teller and door-to-door magazine saleswoman.

Here are her 24 startling (mostly) predictions about magazines, the three Ps (postal, paper, and printing), social media, and publishing in general for 2015. If some turn out to be true, you can be sure I’ll be writing “told ya so” pieces in the next 12 months. And you can blame the wrong ones on Madame Marie:

1) Postal rates will not decrease, even though the exigent surcharge is set to expire this summer. Not sure if that will be from a court order or Congressional action. When I asked Madame Marie to explain, she responded, “What, you think I have crystal ball or something? All I know is, don’t ever bet on government getting rid of a temporary tax or fee.”

2) More web sites will jump into the printed magazine business. But they will not be welcomed into the fraternity of consumer-magazine publishers because they won’t have bloated ratebases or sell annula subscriptions for $5.

A postal bankruptcy would be, like, a bummer, man.

3) Three-dimensional printing will grow almost as fast as the buzz about it. By June, ad agencies will start demanding makegoods if their clients’ magazine ads aren't printed in 3D.

4) USPS will announce a new strategic plan called Seven Six Three – delivering Amazon packages seven days a week, other parcels Monday through Saturday, and everything else three days a week.

5) If you think native advertising is bad, wait until you see foreign-born advertising.

6) Mark Zuckerberg’s new book club will spread like wildfire, until people start seeing spammy “sponsored” posts and photos of distant acquaintances’ new puppies in their books.

7) Despite a decent economy, the market for huge yachts will plummet as billionaires join in the new craze for tasteful displays of wealth – buying a daily newspaper. When I asked Madame Marie whether the newspapers would still struggle, she said, “If you have to ask how much money they will lose, you can’t afford to buy a newspaper.”

8) Congressional Republicans will try to push the U.S. Postal Service into bankruptcy to break the postal unions – until voters realize a USPS bankruptcy would turn Forever Stamps into Never Stamps.

BoSacks flyin' high: Our consultant's
source of inspiration and insight

9) Congress’ next attempt at postal reform will be putting USPS up for sale. FedEx and UPS will quickly say, “No thanks.” However, the idea of buying out the middleman will intrigue Amazon, until it runs the numbers and realizes that, with proper accounting for pensions and retiree benefits, the Postal Service would be profitable. And you know how Amazon hates profits. To console himself, Jeff Bezos will buy another newspaper.

10) Amazon will go back to working on delivery drones.

11) Wal-Mart will announce the development of anti-drone missiles that can be mounted on store rooftops.

12) A major publisher will redesign its web site, then realize the snazzy new look and upgraded user experience can’t be seen on smartphones, which represent 80% of the site’s visitors.

13) “Big data” will be so hot that tech companies will try to differentiate themselves with new projects involving “Really Big Data,” “Huge Data,” and “Massive Data.”

A source of insomnia -- and much cursing

14) Tablets will be linked to insomnia. We’re not talking about the recent study proving that using e-readers before bedtime disrupts people’s circadian rhythms and makes it hard to fall asleep. (That’s so 2014!) We’re talking about MediaVest, the ad agency that is refusing to pay for the portion of a magazine’s circulation distributed via tablet editions. As Madame Marie put it, while meditating on a 1978 copy of High Times with the BoSacks centerfold, “Magazine advertising executives will stay up all night wondering whether to grow a pair and tell MediaVest it needs a rectal-cranial extraction.”

15) With tight supply, rising prices (for now), and strong dollar, the U.S. will be the market of choice for manufacturers of coated paper around the world. Because of low energy costs and the recent shuttering of inefficient mills, North American producers will be able and willing to protect market share by cutting prices.

16) As usual, “that damned newsstand” will be a frequent utterance of magazine publishers. But in 2015 the phrase will refer to the long-neglected Apple Newsstand for marketing iPad editions of magazines. The regular newsstand system – the one that sells printed magazines – will actually register gains in 2015 after years of declining sales.

Google What?

17) The content-marketing bubble will burst when non-publishing companies realize how few people are viewing their content and that it's not generating actual sales. Some will find it more efficient to use -- perish the thought -- paid advertising.

18) Trying to ride the next big wave, a former content-marketing/social-media/SEO consultant will publish a book called How Publishers Can Profit From Chris Christie-sized Data.

19) Web advertisers will have a radical idea: Only pay for ad impressions that are seen by actual human beings.

20) Google will pull the plug on Google Plus. No one will notice the difference.

The next big thing in social media

21) The big news in social media will be a simple new app that lets people share their pain and disappointment by sending out messages saying, simply, “Oy!”

22) Magazine publishers will pour lots of resources into cool new ancillary enterprises that they will brag about at industry conferences. A few of these ventures will actually turn a profit.

23) Some magazine ads will still include QR codes. And consumers still won’t bother scanning them.

24) “Oh, one last thing,” added Madame Marie, still clutching her sacred copy of High Times. ‘Linkbait’ headlines designed to exploit people’s curiosity will take over the Internet. Even your blog will join the trend.” She’s already been proven right on that one.

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:

• Untangling the Verso-NewPage Deal
• Odd Verso-NewPage Structure Eyed Warily by Wall Street
• 10 Reasons Coated Paper Is Ripe for Collusion  

10 Reasons Coated Paper Is Ripe for Collusion

The proposed merger of NewPage and Verso Paper may be on the ropes, but it has brought much attention to the oddities of the U.S. market for coated paper.

Intrigued by the unusual proposal (which Verso was forced to reconsider last week), the bankruptcy experts at The Capitol Forum recently published comments from a federal prosecutor explaining why the U.S. coated-paper industry is prone to cooperation among competitors.

The U.S. Department of Justice’s likely presumption that the merger would encourage “coordinated interaction” of competing companies could be a stumbling block for the merger, according to The Capitol Forum (subscription only).

The article made me realize something I had never thought about: Though coated-paper companies have the means and the motive to cooperate on pricing, the same is not true for publication printers, even though they have a similar customer base. The anonymous prosecutor’s comments, The Capitol Forum’s analysis, and my own experience inspired this list of 10 reasons the U.S. market for coated paper is prone to collusion, both legal and illegal:

1. Price transparency: The prosecutor, who participated in the 2006 prosecution of Stora Enso and UPM on price-fixing charges, noted that “coated paper pricing is very transparent—a firm will announce a price increase to take effect at a future date, and wait for other competitors to follow,” The Capitol Forum said. [Editor’s note: Paper companies rarely announce price decreases, which tend to occur in a less orderly fashion.] 


2. The tradition of quarterly price changes: Except for spot purchases, most deals for coated papers involve quarterly adjustments based on market conditions. That, coupled with those publicly announced price increases, means competitors can implement a price increase simultaneously without ever communicating directly with each other. 


3. Concentrated market: No company has a large enough market share to push prices up unilaterally. But, for most grades, it only takes about three major players acting more or less in unison for a price move to stick. The Department of Justice probably views a NewPage-Verso merger as making such pricing coordination even easier for the mills, according to The Capitol Forum. By contrast, the printing industry is more fragmented, despite massive consolidation.


4. Mutually assured destruction: With stable supply and declining demand, paper companies are tempted to keep the machines running by pricing aggressively to grab market share. But they know that if competitors follow suit, they all lose. Paraphrasing the prosecutor, The Capitol Forum explained that “because declining demand can result in lower prices, firms in distressed industries may have the incentive to collude to stop further price declines. By contrast, when demand is steadily increasing, there may be less incentive to collude because coordination may not be necessary to make price increases stick.” 


5. Near commodity: Those price-increase announcements are meaningful because a statement about a “$60-per-ton increase for coated groundwood” is immediately understood by buyers and competitors. (Whether the price increase is fully implemented is another story.) Commercial printers make no such public announcements because there is no single price for printing; printing contracts often have multiple-page price lists. 


6. Not quite a commodity: Coated paper, however, is not such a commodity that it can be traded in the pits like soybeans or pork bellies. Varying roll sizes, basis weights, finishes, and transportation arrangements make each order a custom-manufacturing job. (There was one company that tried to create a futures exchange for pulp and coated paper. It was called Enron.)


7. Built-in market intelligence: Mills sell much of their output through paper brokers that also represent competitors. Those brokers can provide insight into competitive pricing and act as an indirect communications channel if a mill wants to signal competitors that it will hold the line on pricing. Many major customers also buy from more than one mill, so mills can glean information about what their competitors are up to by observing customers’ order volumes and how they negotiate on pricing. By contrast, most of those customers buy printing directly from the printers and use only one publication printer. 


8. Stable demand: In the short run, demand for graphic paper is inelastic – that is, not affected by prices. It takes months for a major catalog or magazine to carry out a plan of reducing pages or copies, so paper companies assume a 5% change in prices will mean a 5% change in revenue. (Demand for paper is more elastic in the long run, but paper executives – like postal executives and politicians – don’t think about the long-term effects of pricing.) 


9. The uncoated freesheet example: The North American market for uncoated freesheet paper (copier paper, for example) is a near duopoly. Despite having low production costs, the two big players would rather shut down machines than chase market share. This “market discipline” strategy has been profitable for the mills, as both Wall Street and the coated-paper manufacturers know full well. 


10. Safety valves: Idling a machine during slack times is a money loser: Employees still have to be paid, and the bondholders still want their monthly payments. But mills have ways of keeping the machines running without flooding their markets, such as by making more paper for export markets or turning off the coaters to produce uncoated products. Printers don’t have such options.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts
• The Infamous UPM-Stora Meeting 
• Odd Verso-NewPage Structure Eyed Warily by Wall Street

 

Weak Demand Will Mean Higher Paper Prices

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.

Why Mills Can't Keep the Coated Paper Market in Balance

There’s a simple way for North American mills to prevent the prices of coated paper from collapsing next year, the “Paper Guru” pointed out recently. Simple, but it won't work.

Responding to last week’s Dead Tree Edition article about the possibility of declining prices, Jack Miller, Printing Impressions’ Paper Guru, wrote, “Uncoated freesheet producers have reduced capacity, balanced supply and demand, and maintained prices.”

“With U.S. coated mills still under cost pressures from pulp and chemicals, and with margins where they are,” he suggested, the coated mills might take out capacity to keep the market in balance. But what works for uncoated freesheet will be hard to apply to coated paper.

The North American uncoated freesheet market is dominated by two big players, International Paper and Domtar, that are financially strong and have low-cost mills. That puts them in a position to idle machines or shut down mills if necessary to keep the market in balance.

But leadership of North America’s coated-paper market has one foot in the grave and the other on a banana peel. The #1 maker is NewPage, which is under Chapter 11 bankruptcy protection, making it nearly impossible to shut down a machine or mill in the short run. Besides, NewPage claims it has already mothballed all its high-cost machines.

The #2 manufacturer is Verso, a highly leveraged firm with a debt-to-equity ratio of about 18:1. Like NewPage, it’s not in much of a position to idle machines that could be generating cash.

SAPPI is the only other manufacturer with significant market share, but it produces coated freesheet almost exclusively. Coated groundwood (AKA coated mechanical) is where the big trouble lurks.

The bottom line is that no company with the financial strength to reduce capacity has enough North American market share to make much of a difference in the supply-demand balance. That’s why industry analyst Verle Sutton recently predicted that coated prices will decrease next year until losses force some companies to idle their machines.

Why Coated Paper Prices Look Ready for a Fall

North American prices for coated paper will decline and more paper machines will be idled next year, according to a leading industry analyst.

Even supercalendered paper, currently in short supply, could see declining prices by the middle of 2012, Reel Time Report editor Verle Sutton said in a webinar recorded a few days ago. The webinar, "Price & demand outlook 2012 for newsprint, publication papers", is still available for download from Industry Intelligence.

Sutton’s forecast runs counter to the brave talk coming out of the mills and the more bullish analysis from rival forecaster RISI. He noted that his and RISI’s 2012 price forecasts are as much as $120-per-ton apart. Sutton, always the iconoclast and often spot-on with his predictions, pooh-poohed claims that rising costs for pulp and other items will prevent prices from declining.

“Coated pricing will decline until capacity is removed. By the end of 2012, it is estimated that about 400,000 to 600,000 tons must be shut down [in North America] in order to balance supply and demand,” Sutton said.

Sutton based his prediction partly on the recent surprising weakening in demand during what should be the busiest buying season.

"Since 2000, even those of us who have been relatively pessimistic on the impact of electronic communications on demand have generally underestimated the true impact of the electronic revolution on paper demand. That occurred again in 2011 in a big way."

Sutton also provided insightful commentary on the newsprint market, why prospects for the idled Port Hawkesbury mill are suddenly looking up, the outlook for European exports to North America, and whether North American mills will use coated machines to make supercalendered paper next year. But as someone who respects copyrights (especially since my day job is in publishing), I won’t reveal any more details about the Sutton webinar.

Among the many previous Dead Tree Edition articles that cited Sutton or his Reel Time Edition newsletter are:

• Did Black Liquor Credits Pave the Way for Healthcare Legislation?:  Sutton showed why even a climate-change-denying conservative could hate that piece of corporate welfare known as the black liquor tax credits. He wrote extensively and entertainingly about the issue in his now-idle blog, including this gem. 
• There's Little Clarity About Some SCA Papers: The newsletter delved into the murky world of mills making coated paper but calling it supercalendered. 
• NewPage-Verso Merger Unlikely, 2 Experts Say

Why Mailers Support Radical Downsizing of the Postal Service

If you want to know why major mailers are generally supporting major cost cuts at the U.S. Postal Service, consider this recent quotation from magazine-industry veteran Tom Martin:

“When you look at the Three Ps, in 2000, printing was 45 percent to 55 percent of costs, paper was probably 20-25 percent of your costs, and postage was between 30 to 32 percent of overall costs,” the Cygnus Business Media executive told Folio: magazine. “But now the printer is probably sitting with only 32 to 35 percent of overall costs. Paper hasn't changed that much on a percentage basis but the number that has changed tremendously is postage. That's probably sitting at 42-46 percent of overall costs depending on the magazine.”

Martin’s insight rings true not just for the B2B magazines in Cygnus’ portfolio but also for the large consumer magazines – and in fact for every mail-dependent organization. While everyone else in the ink-on-paper world has been slashing costs in the past decade, the Postal Service mostly just passed cost increases along to its customers and only in the past few years got serious about real efficiency gains.

That’s why mailers think the Postal Service is ripe for some serious downsizing. (But they had better be careful what they wish for, as Dead Tree Edition will explain tomorrow in Mailers Getting Cold Feet About Postal Service Cuts.)

As for Martin’s statement, here’s what’s happened to the “three Ps”:

Prices for publication printing have been dropping at about 3% to 4% per year (NOT adjusted for inflation) for more than a decade. Prices for coated paper have fluctuated greatly but are almost exactly identical (NOT adjusted for inflation) to what they were 10 years ago.

But USPS rates for most types of postage rose faster than the rate of inflation rate during the first half of the past decade and increased in line with the inflation rate the past few years.

Postal executives complain that their rate increases are limited “only” to changes in the Consumer Price Index. But most mailers have no sympathy for those complaints: They’re happy if they can avoid cutting the prices they charge and would be ecstatic if they had the kind of guaranteed price hikes the Postal Service enjoys.

Mailers believe the Postal Service only got serious about cost cutting when it was forced to do so – by declining demand for mail and the CPI-based price cap. And despite USPS’s aggressive downsizing the past couple of years, mailers still see a system that has far too many post offices, sorting facilities, and people (especially supervisors) than it needs to handle current or future mail volume.

Related articles:

• The USPS's Radical Plan: Good in theory, potential chaos in reality: D. Eadward Tree's new article for Publishing Executive magazine, which explores why mailers should be cautious about how and how quickly the Postal Service is downsized.
• Postal Service Has Too Many Employees and Pays Them Too Much, Mailer Groups Say: USPS has 170,000 too many employees, according to a coalition of major mailer groups.
• Why Are the Postal Service's Financial Problems Such a Surprise?: Explores how USPS has been bailing out the federal government for years.

Increase in U.S. Coated Paper Prices Surprised Most Observers

The size of the recent run-up in coated paper prices seems to have surprised most industry participants and observers.

RISI, the paper industry's leading market analyst, will report in a few days that the July market price of 40# coated #5 paper in the U.S. was $805 per ton, an increase of $70 since March, Dead Tree Edition has learned. In a March online poll, only 21% of Dead Tree Edition readers predicted that the index would increase $65 or more by July.

Despite its reputation for having a bulish bias, even RISI's forecasts turned out to be too low. In March, it was predicting that the 3rd Quarter price for 40# would be only $765.

The other major analyst of U.S. paper-market pricing, Forestweb's The Reel Time Report, reports an even larger increase in coated paper prices since March -- more than $100 versus the $60-$70 range for RISI indices. That monthly report had warned about the possibility of sustained price increases this year, but it turned somewhat bearish in March after NewPage restarted two idle machines.

Slight recoveries in catalog mailings and publication advertising, along with the idling of a Kruger mill and rising prices for kraft pulp, have at least temporarily solved the capacity overhang that was driving prices down. Buyers trying to load up before the next price increase have helped to create an especially tight market during the usually busy summer season.

But inventory adjustments can't sustain a bull market for long. Before they get too confident, sellers of coated paper in the U.S. should find out how many of their catalog and magazine customers are spooked by the U.S. Postal Service's attempt to get "exigent" rate increases and are therefore redoubling efforts to shift more to digital media.

Coated Groundwood Prices on the Upswing, Poll Says

Coated groundwood prices in the U.S. are not only headed up, they will increase again in July, a majority of respondents to a Dead Tree Edition poll predicted.

Of the 58 respondents, 12 voted that the RISI index for 40# coated #5 would increase by $65 or more from the current (February) number of $735. Another 19 voted for a $35 to $65 increase -- which is also larger than the second-quarter increase of $30 that has been announced by nearly all mills.

Only 10 people (17%) predicted that prices would decrease. Another 17 predicted that CGW prices would rise less than $35 per ton.

Is Domtar's Exit a Game Changer for Coated Paper?

Today we discovered what NewPage had up its sleeve when it announced a price increase for coated groundwood paper on Friday: It knew that Domtar was about to close its Columbus, Mississippi mill.

The two companies revealed today that Domtar next month will permanently close the mill, which has a single machine with the capacity to make 238,000 tons annually of medium-weight coated #5 and #4. NewPage will buy the product lines and trademarks, though it’s not clear whether it will continue to make Choctaw and the other products on its own machines.

The simultaneous news releases this morning were seemingly followed every hour by another North American mill announcing a $30-per-ton price increase on coated freesheet, coated groundwood, and/or supercalendered papers. Even AbitibiBowater, which postponed a price increase on CGW only a week ago because most competitors didn’t go along, came back to the price-increase party and brought supercal along.

One industry watcher called the closing of the Columbus mill “a game changer” because it might finally bring the CGW market into balance.

And another asked a question I can’t answer: If indeed NewPage is about to run out of money (see today's earlier article, Are NewPage and Verso Headed to the Altar?), how could it afford to buy Domtar out of the coated paper business?

Related articles:

• Verso Joins in on Price Increase, Adds Supercalendered

• Where Are Coated Prices Headed? Let's Vote On It! 

Verso Joins in on Price Increase, Adds Supercalendered

Verso Paper told its customers today it was going along with the April 1 price increase on coated paper announced last week by NewPage and applying it to supercalendered papers as well.

The announcement from Verso, North America's #2 maker of coated paper, says the price for all coated freesheet, coated groundwood, and supercalendered grades will increase by $30 per ton ($1.50 per cwt.) Friday's announcement from NewPage, the market leader, did not mention SC papers.

Unprecedented increases in the price of market pulp (see BusinessWeek's excellent coverage) have paved the way for CFS prices to rise despite overcapacity. The idling of the St. Mary's supercalendered mill in Ontario, the Finnish port strike, and the Canadian loonie's move toward parity with the U.S. dollar may help firm up the SC market, which should not be affected much by the kraft-pulp shortage.

My guess is that CGW prices will move up slower than CFS or SC because producers seem especially reluctant to shut down machines in the face of declining demand. Judging by early results on the poll I posted Friday (in the right column, just under the first ad), there is no consensus in the marketplace yet about where CGW prices are headed.

Where Are Coated Prices Headed? Let's Vote On It!

Just when the wheels had fallen off the attempt to raise North American coated-groundwood prices, the wagon started rolling again today.

NewPage announced a $30-per-ton increase on coated-groundwood (CGW) and coated-freesheet (CFS) prices to take effect on Monday. The pricing for most contract customers cannot be changed until April 1, and many have locked in prices through June 30.

Today's announcement came only a couple of days after AbitibiBowater started spreading the word that it was “postponing” its Feb. 25 attempt to raise CGW prices by $60 per ton on April 1. Kruger, which seemed to be the only other mill that jumped on that bandwagon, has also reportedly backed down in recent days.

The North American coated-paper market still suffers from overcapacity that has kept prices low. But thanks to an earthquake, floods, a strike, and a government ruling, an argument can be made for jacking up CFS prices.

Last month’s Chilean earthquake, wet weather in the U.S. South, and other factors have caused prices for kraft pulp -– the main ingredient in CFS -– to skyrocket. Don’t be surprised to see shutdowns soon at CFS mills that rely on purchased pulp. And even integrated mills may be tempted to idle their paper machines so that they can sell their now-valuable pulp to a hungry market.

An anti-dumping decision in the U.S. and a similar case in Europe have also cooled Asian producers on selling low-priced coated sheets in the U.S.

The case is weaker for CGW, a market in which prices had drifted lower early this after seeming to stabilize in the fall. Most CGW products use relatively little, if any, kraft pulp, and Asian producers have not been a factor in North America.

A few years ago, a strike in Finland would have sent U.S. CGW buyers into a panic. But the weak dollar had already chased the Finns away, limiting the impact in North America of a port strike that is strangling the Finnish paper industry.

My guess is that CGW prices will start moving up only after CFS does and only after more CGW capacity is idled.

What’s your bet? On the right you’ll see a chance to vote on where you think the RISI index for 40# coated #5 (at $735 in February) will be on July 1. Warning: I tried a similar crowdsourcing exercise on CGW prices a year ago, and hardly anyone correctly predicted the market crash that came shortly afterward.

Related Articles:

• Coated Paper Prices: Can They Get Uglier? Results of last year's poll on CGW prices.
• A Price Increase on Coated Paper? What is Abitibi Smoking? AbitibiBowater's announcement of CGW price increases last month was based on desperation, not market reality.

A Price Increase on Coated Paper? What is Abitibi Smoking?

AbitibiBowater stunned its customers today by announcing a huge price increase for coated paper – a move that is already DOA, thanks to Abitibi’s competitors.

The announcement says simply that prices for all coated groundwood papers, from standard #5 to high-brightness #4, will increase by $60/ton ($3/cwt.) on April 1.

A couple of months ago, low inventories and an economic recovery caused mills and prognosticators to talk about a possible increase in coated prices this spring. Manufacturers predicted that the expiration of black-liquor subsidies would cause paper machines (usually, someone else’s paper machines) to be shuttered. Some coated mills were unseasonably busy early this year as customers restocked their depleted inventories in advance of price increases.

But machine shutdowns never happened, the shaky economic recovery has mostly bypassed print advertising so far, and spot prices started drifting lower rather than higher.

Hopes for a price hike any time soon were pretty well dashed in the past week as word got out that the largest coated supplier, NewPage, had restarted two mothballed machines. So much for a tight market.

Then #2 Verso bragged to stock analysts yesterday that it “enjoys a distinct manufacturing cost advantage vs. its competition” in its “key product areas” – ultralightweight coated #5 (ULWC) and coated freesheet #3. Verso's presentation included a chart that shows it having a $567 cost per ton to make ULWC, versus a $634 average for the competition.

Between the two of them, NewPage and Verso have a bit more than a 50% share of both the coated-groundwood and coated-freesheet markets in North America. A significant price increase can’t get rolling without a significant push, and perhaps a loss of market share, by one of these leaders.

Verso executives told the analysts they would continue to “take market related downtime to match demand with supply” and to develop new products rather than dropping prices to keep their machines full. But with its apparent low-cost position, Verso seems unlikely to shut down capacity in hopes of driving up market prices.

And NewPage, which single-handledly propped up the coated market a couple of years ago by shutting down high-cost machines and mills, is clearly no longer up to the task of providing such market leadership. It lost $308 million last year despite receiving $304 million in black-liquor subsidies, which it won’t enjoy this year.

Restarting the two machines seems to be a sign of desperation for NewPage, paper-market analyst Verle Sutton pointed out this week. The heavily indebted company may be “running for cash” so that it doesn’t end up joining AbitibiBowater in Chapter 11 bankruptcy reorganization.

And what about coated freesheet? Next week’s decision on the anti-dumping case against some Chinese and Indonesian mills might boost the North American market. (The European Union launched a similar probe last week. Two of the the complainants -- Arjo Wiggins, known as Appleton Coated in the U.S., and SAPPI -- are also involved in the U.S. case.)

But Verso claims an average cost advantage of $61 per ton for coated freesheet, including a whopping $284-per-ton advantage against two competitors. It will be in no hurry to shut down profitable machines. And struggling NewPage has a huge 40% share of the North American coated-freesheet market.

For further reading:

• "Black Liquor" Credits Are Helping Paper Buyers: NewPage claims that buyers, not paper mills, got most of the benefit from the multibillion-dollar black liquor credits in the form of lower paper prices.
• NewPage Turning Over a New Page: No More Shutdowns: The market leader has closed all of its high-cost machines in response to declining demand.
• Coated Paper Market: Been Down So Long This Looks Like Up: After crashing earlier in the year, prices for coated paper finally seemed to stabilize a few months ago.

The 10 Most Common Paper-Purchasing Mistakes

I wrote recently that I was on the verge of publishing “the best article I have ever seen on paper purchasing” when Google’s robots disabled this blog. Here it is, from guest columnist Bill Lufkin, one of the country's top experts on paper buying. As president of Lufkin Strategic Procurement, Bill has helped a wide variety of publishing, catalog, and printing companies save millions of dollars on paper through better purchasing and negotiating practices, as well as helping buyers negotiate new printing contracts. Bill is the former Vice President of Materials Procurement at R.R. Donnelley and has spoken at several industry conferences. Check out LufkinStrategic.com, which offers an additional article on the basic elements of a paper-purchasing strategy and another on how to negotiate a printing contract.

With paper being the second largest cost item for most catalog and magazine publishers, avoiding common purchasing mistakes can be one of the best ways to reduce expenses.

Lufkin Strategic Procurement recently completed a proprietary survey of more than 50 catalog and magazine publishers’ paper and print purchasing practices over the past ten years. The study found a number of recurring mistakes that, once corrected, saved some of the publishers millions of dollars.

For paper purchasing, the 10 most common mistakes, in reverse order, were:

10. Not understanding the potential value of paper underconsumption. So often a buyer focuses so heavily on the price per hundredweight that he overlooks the other part of the paper cost equation, the pounds the printer states are needed to produce the job. When catalog or magazine publishers purchase their own paper, most contracts stipulate that underconsumption (that is, using less paper than estimated) will be shared 50/50. On larger runs, 1% or 2 % savings on the waste allowance can be significant dollars. Since the printers are responsible for overconsumption, they tend to be conservative in their estimated pounds requirements. In 27% of the cases in this study, the buyers were not aware that potential underconsumption was a benefit of purchasing their own paper.

9. Publishers avoiding purchasing their own paper fearing that the administration and paper work is complex. This mythical illusion of complexity was an issue in 31% of the cases, influencing the publishers to buy paper through their printers when in many cases it may have been to the publishers strategic and economic advantage to buy their own paper. When a merchant or broker sells the paper to the publisher, much of the “paper work” is handled by the seller.

8. Assuming that the big printer’s volume equates to lower customer paper prices. While some of the large printers are able to secure low contract prices on paper, that doesn’t necessarily mean that the price to the customers will reflect that volume advantage. Again, in 31% of the study cases, this presumption influenced the publisher’s decision to go with printer-purchased paper. Many of the printers treat paper purchasing as a profit center and charge prices as high as the competitive situation will allow.

7. Moderate sized publishers assuming their modest paper volume lacks purchasing power. For 35% of the cases, these publishers thought volume scale was the biggest influence on price negotiation when actually market knowledge and relationships can be equally powerful. In a number of situations, the publisher can take advantage of spot purchases in a soft market through a broker that may equal or beat the large volume contract prices. Even with contract pricing, the price spread between large buyers and moderate-sized buyers isn’t especially large.

6. Receiving a $1.50/cwt. price decrease from the incumbent broker or printer when the market price really went down $2.50. Fifty percent of the time, buyers were so pleased to get a reduction they were unaware the market slide was more dramatic. Likewise, an industry-announced increase of $2.50 passed through to the publisher may have been delayed or reduced to the middleman. A number of printers or brokers use these abrupt price movements as an opportunity to increase their margins. Carefully benchmarking their prices against others can help the buyer keep pace with the competitive environment.

5. Accepting industry-announced price increases when resistance can often delay or reduce the increase. For 58% of the buyers there was a presumption that you could not be successful in fighting an industry-wide price increase. Again, market knowledge and relationships can play an important role in minimizing the impact of upward price movements. Another tactic that can control the pace and magnitude of price escalation is through some form of indexing.

4. Commitment to primary supply contract may preclude occasional spot purchases. A variety of large to small buyers totaling 62% of the cases had aligned 100% of their volume with one or two suppliers and had no tonnage available for opportunistic spot deals. With many publishers’ pages and print orders down substantially, they felt their negotiating leverage had disappeared. We found that a viable solution in several situations was to keep 10% to 15% of their volume uncommitted so they can still enjoy the supply assurance of a contract while taking advantage of spot situations that can help monitor current pricing.

3. Accepting printer’s paper pound requirements that may be padded. For some reason, over 65% of the buyers accepted the printer’s stated requirements without checking the level of waste allowance included. As mentioned earlier, paper is a profit center for many printers, and they are entitled to underconsumption savings when they purchase the paper. A quoted “competitive” price per cwt. may not be advantageous when the pounds billed on the invoice are higher than necessary. Just like manufacturing, paper requirements are negotiable and subject to competitive comparisons. In print contracts that were last negotiated several years ago, allowances that were previously competitive may have become out of line because of improved technology and efficiency gains. A printer is likely to retain such paper savings unless challenged in a competitive environment.

2. Trusting suppliers’ input on competitive market prices. For 77% of the cases, the buyer’s trust was being abused from slightly to significantly by the incumbent printer, broker, or mill. Because it can be cumbersome and time consuming to pursue competitive bidding every quarter, most publishers presume the incumbent supplier is providing valid market pricing input. Monitoring prices through an independent source that is not involved in selling paper is an alternative way to assure your prices stay competitive. If the incumbent supplier knows the buyer is diligently tracking the market, their pricing is more likely to stay within a competitive range. Also, by keeping a modest portion of their volume uncommitted, buyers can occasionally get a new quotation from a challenging supplier.

1. Accepting quarterly price volatility when six-month locks, caps, and/or collars may be available. This number one common mistake was an issue in 85% of the cases. For years paper buyers have become used to the paper industry practice of quarterly price movements. Mills would rarely hold prices for longer periods. Buyers who have been able to soften the volatility of their pricing have generally fared better than those who have ridden the roller coaster of soft and tight markets. Identifying the best strategies and dealing with the most trusted sellers have helped certain buyers save their companies significant dollars. Knowing when the best time to negotiate a longer term deal is critical to the success of these arrangements.

While the 10 mistakes outlined above were the most common, there were several others that came up multiple times and had a significant negative effect on the particular cases involved:

• Fragmentation of volume or suppliers or purchasing authority. Consolidation is still a good idea in most aspects of paper purchasing strategy. 
• Choosing paper grades or weights that have higher specifications than necessary for the catalog or magazine’s content. An office supply catalog using a coated freesheet for its body stock is probably spending more money on paper quality than is necessary.
• Allowing printer’s handling and storage charges for customer paper to influence an otherwise prudent decision for publisher to purchase own paper. The paper has to be handled regardless of who purchases it. The charge should be minimal to cover some of the printer’s administrative cost but not so high as to discourage customers from buying their own paper. 
• Allowing too many brokers to contact the same mills for bids. Mills will not provide their most competitive bids if they sense a free-for-all approach. A broker who is challenging a printer-purchased paper situation should not contact the incumbent mill.
• Frequent spot purchases may lead to “bottom fisher” label. During very tight markets, the buyers who consistently shop for the lowest spot prices have had difficulty getting supply at any price.

For many of the mistakes listed above, the solution was merely discontinuing the practice. However, since each case’s paper purchasing volume, specifications, and supplier situations are unique, there may be multiple alternative solutions. Which one is best for the particular client takes careful analysis, market knowledge, and experience in what has worked best in prior similar situations.

©2009 Lufkin Strategic Procurement. All rights reserved. None of this report may be reprinted without express written consent. www.lufkinstrategic.com.

Coated Paper Market: Been Down So Long This Looks Like Up

North American coated paper mills were generally busier in September than August, but that ain’t saying much.

Despite various announcements of price increases on coated freesheet and high-brightness coated groundwood papers, the unanimous word from the trenches is that no prices are moving up except perhaps for some really low-ball spot business.

The best that can be said is that the market seems to have stablized this fall after months of plummeting prices. North American shipments of coated paper were up in September versus the previous month – 8% for coated freesheet and 5% for coated groundwood, according to the Pulp and Paper Products Council. But compared with September 2008, shipments declined 15% and 8%, respectively.

Actual consumption of coated papers in the U.S., was even less favorable, according to data from printers compiled by Idealliance. September consumption of coated was down more than 5% versus the previous month. Usage of coated freesheet was down a whopping 32% versus September 2008, while coated groundwood dropped “only” 23%.

Consumption of uncoated groundwood held its own versus August and was actually up versus the same month last year for the fifth month in a row, according to Idealliance.

To keep their coated machines busy amidst the declining demand for coated papers, several companies have recently begun making supercalendered and other uncoated-groundwood papers on machines that have coaters. (See, for example, The Rush to Make Uncoated Paper on Coated Machines and There's Little Clarity About Some SCA Papers.)

The new supply continues to place pressure on uncoated-groundwood prices, which seem to be continuing a downward drift.

Though coated-freesheet prices are at their lowest in more than two years, there was speculation a few months ago that they could crash even more. The black-liquor credits subsidizing U.S. kraft-pulp mills to the tune of about $200 per ton threatened to make freesheet papers a virtual byproduct of the kraft process, with the resulting glut continuing to drive paper prices until the credits expire at the end of this year. (See "Black Liquor" Credits Are Helping Paper Buyers.)

But the surprising recent strength of global pulp markets, which by some accounts are experiencing their strongest rebound in history, has provided an outlet for all that subsidized U.S. pulp. And the weakening U.S. dollar has discouraged imports of paper into the U.S. from overseas.

Coated prices seem unlikely to move much for the remainder of the year. And what about next year?

Some paper-company executives claim that prices “must” go up because the black-liquor credits that have kept them solvent will disappear.

But a need for higher prices does not translate into higher prices. (Exhibit A: rates for magazine advertising). And bankruptcy reorganizations of major players don’t necessarily stabilize prices (Exhibit B: the newsprint market this year). Prices won't move up significantly until demand recovers significantly, which seems unlikely in 2010, or more machines are closed.

Coated Paper Prices: The Dead Cat Bounces

Verso Paper announced a price increase for its coated-freesheet papers yesterday, the first sign of life in the U.S. coated market after 10 dismal months.

(Update: A day after Verso's announcement, NewPage started spreading word of a similar attempt to raise prices on coated freesheet along with a $1 hike on Escanaba, its high-end coated-groundwood product.)

In a letter to customers, Verso said it was increasing prices on its Influence and Velocity grades by $2/cwt. ($40 per ton) "effective with orders entered September 15, 2009 and all orders shipping on or after October 1, 2009." The letter does not mention Verso's coated-groundwood or supercalendered products, which presumably indicates the company didn't think announcing price hikes for those products would be credible.

Not that getting higher prices for coated freesheet will be easy. Even if the economy is getting up off the mat, there's still too much overcapacity in coated paper. And the black-liquor credits, not scheduled to expire until the end of this year, give U.S. mills an added incentive to keep their CFS machines running by chasing low-priced sales rather than to be disciplined and take down time.

In Verso's favor are a weak U.S. dollar that is discouraging imports and a strengthening pulp market that provides an outlet for some of the pulp that subsidized U.S. mills are cranking out.

I will repeat what I wrote in March, when I noted (correctly) that prices for coated paper had further to fall: "Prices may indeed stabilize – even increase -- in a few months when the current inventory overhang is burned off and we enter the busier fall season, especially if the economy improves or energy costs rise. But that’s likely to be what Wall Street calls a “dead cat bounce” – a brief increase on the way to further declines."

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.

"Black Liquor" Credits Are Helping Paper Buyers

The “black liquor” tax credit is driving down paper prices, according to NewPage, North America’s largest maker of coated paper.

The company’s average selling price for coated paper probably declined by $40 to $50 per ton in the 2nd Quarter from its 1st Quarter level of $975 per ton, NewPage revealed in a recent financial report. The number of tons sold actually inched up.

“We believe that pricing has declined primarily as a result of producers passing on the benefits of the alternative fuel credit to customers,” the report said.

No, NewPage hasn’t suddenly turned into a naïve bleeding heart that thinks its competitors are generously sharing their new-found riches with customers. The point is that the tax credits give U.S. companies a huge incentive to keep their kraft-pulp mills running full bore and then to turn that pulp into paper, even if it has to be sold at rock-bottom prices.

The credits, originally intended to subsidize non-petroleum motor fuels, are being granted to owners of U.S. kraft pulp mills for using black liquor, a pulp byproduct, as an energy source. Analysts have estimated that the program, scheduled to expire Dec. 31, will hand out $6 billion to $8 billion this year to U.S. pulp mills for doing something that has been common industry practice for decades. (For more on the black-liquor program, see "Pulp Fiction: Eco-Credits for Black Liquor" and "Why U.S. Pulp Mills Are Like NBA Players"

NewPage isn’t exactly complaining about the IRS’s sudden largess. The struggling paper giant is in the process of renegotiating its debt, in some cases paying about 50 cents on the dollar, in a way that Standard & Poor’s has dubbed “tantamount to a default.” So its $67 million in 2nd Quarter black-liquor credits, about 9% of revenue, was certainly welcome, especially because it was the difference between a huge loss and nearly breaking even.

The report suggests NewPage has shifted to making a higher proportion of papers that use a lot of kraft pulp. By most accounts, prices for various grades of coated paper declined by at least $60 per ton, and in some cases $100 or more, during the second quarter.

So NewPage’s decline of only $40-$50 per ton suggests it is making more high-priced, kraft-intensive papers like coated freesheet and less heavy coated-groundwood papers that contain little if any kraft.

There has been some talk of paper prices stabilizing or even rising in the second half of this year. But as long as there's a roughly $200-per-ton subsidy on kraft pulp and plenty of excess capacity, don't expect mills suddenly to become more disciplined about taking downtime rather than chasing deals at low prices.

Coated Paper Prices Have Crashed

Despite all the talk of "green shoots" in the economy at large, prices for coated paper have recently dropped even more than expected.

Less than two months ago, we polled readers about where they expected prices for 40# #5, then at $900/ton, to be in July. Most thought the RISI index for the grade would decrease, but only 29% voted for the index to be below $820 ($41/cwt.)

Most of the voters (including me) have already turned out to be wrong: Though it hasn't released its full report yet, RISI has revealed that its 40# index for May was $810. It is also projecting that the bottom of the market for all types of coated paper will be much lower than it previously predicted.

Demand may perk up a bit as inventories are burned off and we enter the busier half of the year. But the problem is supply: There are simply too many North American mills churning out coated paper.

Market leader NewPage has indicated it has no more high-cost machines to shut down, and the black-liquor credit has given many U.S. mills a huge subsidy to keep their pulp and paper machines running. It seems likely that paper prices will keep dropping until the least efficient machines or mills can't even cover their variable costs.