Master Manufacturer : Paper Outlook—Will Prices Continue to Drop?

With paper consumption on a downward slope, mills face big trouble. What can you expect in the short- and long-term future?

The record-breaking decline in paper consumption has brought prices down with it. In the short term, we can all enjoy the price plunge. But two big questions loom.

First, what’s the trajectory for pricing through the rest of this year? Will prices drop further or is backlash in store?

Second, what are the consequences of the demand drop on the paper industry overall? The current price cuts can’t boost consumption back to levels the mills need for profitable operation. What other responses might the industry have?

Prices: Defying Economic Logic
It would be nice if we could apply classic economic theory to the impact of the recession on the paper market, but theory has been tossed out the window. The scale of the problem is so large that it’s hard to wrap a theory around it.

According to data tracked by forest-products-industry information provider RISI, apparent consumption of coated mechanical paper dropped 34 percent in the first quarter. Free sheet was down 26 percent. These declines come from the one-two punch of a recession and a general retreat from print as an ad vehicle. We can’t easily separate these two strands, but we must do some pondering, since an economic recovery will not bring back the losses that stem from a permanent migration from print.

Consumer magazine ad pages dropped 26 percent in the first quarter, as reported by Magazine Publishers of America’s Publishers Information Bureau data, and declined 29 percent in the business-to-business segment, according to American Business Media. Not surprisingly, paper demand went right along with it. Similar drops occurred in catalog and free-standing insert consumption—down was the only direction.

Price cuts can’t stimulate demand under current conditions. All they do is allow the mills to fight each other for the business that remains. And, so, price cuts do most of their cutting against the mills themselves, reducing profitability while generating a few more orders at the expense of a competitor.

We extrapolate, with caution, to sketch a price trend for the rest of the year. Since these cuts are only the sign of the mills clawing each others’ eyes out, they don’t solve any strategic problems. Mills are approaching transaction prices that match 2007 lows, and can’t go much lower without selling paper at an absolute loss.

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