D. Eadward Tree's 2015 Postal & Paper Price Forecast
If you are trying to budget key price changes for 2015, forget recent history and put away the economics textbook. The monopolistic U.S. Postal Service will forego its usual January rate increase and may have to reduce rates during 2015. But publishers will pay higher prices for paper in spite of—and perhaps because of—federal antitrust regulators' efforts to maintain a competitive market.
You can usually project postage rate hikes based on changes in inflation, but 2015 could be a strange year for postal rates. In contrast, the pattern of paper prices defying inflation—with market prices hitting basically the same cyclical high and low prices over the course of several decades—may finally be coming to an end.
The uncertainty about next year's postage rates began a year ago when the Postal Regulatory Commission allowed USPS to enact a temporary 4.3% "exigent" surcharge on top of the usual inflation-based increase. The surcharge is on pace to expire next summer, after it brings in an additional $3.2 billion. But the Postal Service has gone to court arguing that $3.2 billion isn't enough to compensate it for losses from the recent recession.
If the surcharge does expire as scheduled, USPS is likely to enact a simultaneous rate increase. The agency had hoped that "the surcharge could simply be absorbed as part of the scheduled rate change." But with inflation running so low, it seems likely that the net change in postal rates would be a decrease of 1% to 2%.
Don't budget those savings just yet, however.
The three-judge panel hearing the appeal seemed to question whether the surcharge would fully compensate USPS for its recessionary losses, according to Stephen Kearney, executive director of the Alliance for Nonprofit Mailers. That may result in the judges remanding the case to the PRC for reconsideration.
"The big risk to mailers in the remand outcome would be a possible determination by the PRC that the exigent rates would need to raise more than the $3.2 billion in their original order," Kearney wrote. That could mean an increase to the surcharge, most likely in early 2015, or a delay of the surcharge's expiration.
As for magazine-quality paper, the big drama during most of 2014 has involved whether the Department of Justice would allow the two biggest North American manufacturers—NewPage and Verso—to merge. The outcome was uncertain at press time, but there's no question that paper prices will be rising in 2015.
Federal regulators have delayed the proposed merger, apparently concerned that the combined company would have enough market share (about 50 percent) to drive up prices unilaterally. But their effort may have backfired. Verso announced in October that it would close down its Bucksport, Maine mill and essentially exit the market for the kind of paper most often used by magazines, #5 coated groundwood. The proposed NewPage deal provides incentives to keep the mill open at least until the merger is consummated, but cash-strapped Verso apparently decided it could no longer wait.
Following the Bucksport news, competitors wasted little time in announcing price increases of $20 to $60 per ton (about 2% to 7%) for coated-groundwood and supercalendered papers. Prices for the more expensive coated-freesheet papers had already risen early this year from their cyclical bottom and seem likely to remain at least level going into early next year.
"I haven't heard of anybody being left high and dry" by the Bucksport news and two other recent mill shutdowns, says Bill Lufkin, owner of Lufkin Strategic Procurement. But paper makers have two months of order backlogs for coated groundwood, which underscores how tight the market has become—tight enough that the price-hike announcements are no bluff.
Lufkin notes that North American capacity for making coated-groundwood paper is now "exactly half of what it was" in 2004, as is customer demand. He believes that, long term, the shrinking market is bad news for publishers.
Paper prices tend to ride a cyclical roller coaster, but the high points and low points have been remarkably similar for the past couple of decades, he notes. In other words, over the long haul paper buyers have been immune from inflation.
Paper mills, of course, faced rising costs for labor, energy, chemicals, etc., but the industry's investments in new and refurbished paper machines increased the efficiency of paper manufacturing. I explained what those investments meant for paper pricing in my article "Weak Demand Will Mean Higher Paper Prices": "The result was that mills couldn't just pass along their cost increases to customers; there was always a competitor with a shiny new machine and efficient cost structure that was happy to take on customers at a slightly lower price."
But Lufkin now sees a different landscape for the industry: "They haven't added a new machine in a long, long time," he says of the paper makers. With mills making little investment in increased efficiency, future "down" markets are likely to lead to machines being idled or shut down before prices go as low as they have in the past.
The one piece of good news for publishers is that a global oversupply of petroleum seems likely to keep inflation in check for awhile.
Update: For more recent info on 2015 paper pricing predictions by D. Eadward Tree, check out his blog.
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