An Insider's View of the Paper Market
Magazines and catalogs can be printed on a wide range of papers, but the overwhelming majority are printed on coated mechanical and coated woodfree papers—grades that rank among those experiencing the strongest growth in demand in today's market.
In general, a larger portion of coated mechanical papers ends up in magazines and catalogs than is the case for coated woodfree grades, which are also used in other higher-end advertising materials and manuals. In North America, roughly 75 percent of magazines and catalogs are printed on coated mechanical papers—or what is known in the market as lightweight coated papers (LWC), even though, technically, some grades have heavier basis weights. Coated woodfree papers make up another 20 percent of the market. Uncoated mechanical papers, including supercalendered grades, account for the rest of consumption.
Europeans Go For The Supercalendered Uncoated
This contrasts with the situation in Europe, where supercalendered uncoated mechanical papers (referred to as SC papers) account for a larger share of magazine and catalog paper usage.
These grades are basically uncoated sheets of mechanical-pulp-based papers that have a higher-than-normal glossiness obtained by passing the sheet between a series of rolls called supercalenders. There are many sub-grades that rank according to quality and cost, and in recent years they have become an attractive alternative to LWC.
Paper Demand Up Over The Long Run
According to the Pulp & Paper Products Council (PPPC), the long-term trend in demand for coated papers has been mildly positive. Between 1990 and 2003, global sales of coated mechanical papers to North American customers increased just over 20 percent, or 1.4 percent per year on average.
Demand is expected to have closed 2004 with an increase of 6 percent, as the recovery continues in the magazine and catalog markets following the sharp downturn in ad spending during the last recession.
On the coated woodfree side, demand has risen faster. PPPC figures show that North American demand rose more than 50 percent, or 3.3 percent per year on average, from 1990 to 2003. In 2004, demand will outperform the average as well by growing almost 5 percent.
Coated Mechanical Steals Market Share From Woodfree
A more recent trend has seen coated mechanical papers grow at a faster rate and take market share away from coated woodfree papers.
Part of the reason is simply a question of availability. North American production capacity for coated mechanical papers has risen by 6.2 percent or 330,000 metric tons since 2000, while capacity to produce coated woodfree actually declined 13 percent or more than 700,000 metric tons, over the same period.
The 2001 recession was particularly hard for coated woodfree producers as cautious high-end advertisers pulled out of the market in droves, forcing producers to adjust to lower demand.
Competition Washes Ashore
The effects of rapidly rising imports from overseas, another clear trend in the industry, compounded this challenge as competition stiffened proportionately. Imports into North America, which made up only 8 percent of the market in 1990, accounted for almost 17 percent in 2003. The increase was most significant in the coated woodfree sector, where market share of overseas imports rose from 7 percent to 24 percent over the same period.
This evolution owes much to all the capacity built in offshore markets in recent years, particularly in Europe. Almost all coated mechanical papers imports originate in Europe, from Finland and Germany in particular, although Germany's share has declined in recent years. Sources of coated woodfree paper imports are much more varied and include Europe, but also South Korea, China, Japan and Indonesia.
Improvements in paper-making technology and intense competition also have created shifts in consumption patterns amongst magazine publishers and catalogers. Although the bulk of coated mechanical shipments remains coated #5—a high-volume, lower-brightness grade typically produced for magazines and catalogs—the market has shown increased interest for higher-brightness coated mechanical #4 grades in recent years, partly at the expense of coated woodfree papers.
High-quality grades with very low basis weights, which could not be produced before, are another example of developments attracting the attention of the industry, as cost-conscious publishers look to offset the impact of increasing postal rates.
All in all, PPPC believes the outlook for magazines and catalogs is still fairly robust. Catalog publishers have learned to use the Internet in a smart way, and magazines remain a highly effective advertising medium.
As a result, demand for coated grades will rise, but high-quality imports will continue to present a challenge to North American producers.
A Tight Market To Continue
In 2004, demand for coated paper grades was more in balance with supply than in any of the previous three years, which helped support stronger pricing. This clearly reflects improvements in the advertising markets and in the economy in general.
In 2005, PPPC expects growth in consumer spending will not be as strong as in 2004 and that this will moderate growth in demand for coated papers, especially through slower ad spending, particularly in the second half of the year. However, capacity growth will be very limited in the coated mechanical sector in 2005 and only slightly stronger in the coated woodfree sector. The net effect will be a relatively tight market again in 2005.
Paul Leclair has a Master of Science degree in economics, and has been working for the Pulp and Paper Products Council (www.PPPC.org) for five years, analyzing communication-paper markets. He can be reached at: PLeclair@pppc.org.