State of the Printing and Paper Markets
A new year is upon us, and again we peer into our crystal ball. The goal: to try and forecast where two of our biggest costs are headed. For two years it was strongly believed that printing and paper costs had to go up, because we were experiencing historically low costs in those areas.
We endured a 1-2-3 punch: the dot-com advertising crash, the Sept. 11th tragedy and subsequent wars, and financial debacles at major U.S. corporations. Yet we were still standing. In the past, any one of these events might have been enough to drastically alter the economy. Here all three occurred in a relatively short period of time, and the American public and the U.S. economy remained remarkably optimistic.
It was our confidence during these hard times that kept the economy from taking a serious and terrible downspin. Don't misunderstand me: our economy suffered, especially advertising and related industries such as publishing, direct-marketing, printing, and paper.
Everybody suffered. Lack of demand kept paper prices down, and fostered a price war among printers. Printers were offering attractive incentives for customers to renew contracts before they expired. They aggressively pursued new work at low rates just to keep things running without major layoffs or shutdowns.
What's been interesting, though, during this downturn is that technologies in both the paper and printing industries have improved. Paper quality has gone up to match foreign characteristics, tensile strength improved to where web breaks are rare, and more specialty finishes are available.
Printing presses have, finally, joined the computer age. Electronic prepress reduced make-ready times, cameras monitor ink registration and folding, publisher ink density preferences are stored for future use, and improved online finishing services have all contributed to faster output at lower costs.
There are now strong signs that the recovery is well under way. Magazines are stable, and maybe even growing a little. If my mailbox is any indication, the catalog industry is stronger than ever. Printers tell me they are experiencing some growth. Times seem to be getting better. So what's in store?
More of the same old prophecy: expect prices to rise. But this time around, there are differences in the reasoning. Currently the paper manufacturers are trying to pass along price increases based on their financial requirements, rather than higher demand, which has been the historical reason for increases.
Publication-grade papers have been selling well below their 10- and 20-year averages.
The mills aren't selling at a profitable rate, and they need to increase prices. They're attempting to ratchet up prices even though demand doesn't warrant it. The foreign market is suppressing increases in domestic demand with lower priced stocks. Yet North American mills desperately need to sell paper at higher prices, and are attempting to do so.
What's happening behind the scenes is even more telling. Over the past 10 years, domestic manufacturers have merged and consolidated. There are fewer players than ever. Even though the same number of brands are available, these brands no longer compete; rather, they are now 'sister' stocks offered at the same price, minimizing price pressures.
The domestic and foreign companies have grayed. As in the automobile industry, where Japanese models are made in the U.S. and vice versa, the paper markets have become integrated. Foreign companies now own many North American mills, and so competition between the two has become more controlled.
Also, mills and machines have been shut down, so there are fewer surpluses, even in a down period. In the past, when demand was low, mills continued to produce paper, because it was very expensive to turn equipment off and on again. This contributed to unwanted surplus. Today they shut the equipment down, and don't feed the surplus.
Another difference today: when demand increases, there won't be excess surplus to make a smooth and gradual increase in the market. Paper prices will increase as fast as the mills can get away with it, because demand will be greater than surplus.
Then there are the printers. Even though you hear printers complain about how they've been devastated, in many ways, they've faired well. By increasing efficiencies, decreasing staff, lowering their cost of business, and shutting down inefficient plants, they've managed to survive.
But they don't need to merely survive, and they're not non-profit businesses, so expect printing prices to increase as well. However, unlike the paper industry, increases in printing prices will be directly related to demand. Printers have a lot of capacity to sell before they hit the maximum levels of four years ago.
We will continue to see affordable pricing and attractive incentives throughout 2004. Even though rates might increase, by the end of the year we should have pricing that is much lower than what publishers were paying in 1999 and 2000.
If you negotiated your printing agreement prior to September 2001, you'll probably find better prices, and actually see costs decrease. However, if you've negotiated after that date, you've probably already realized the lower prices that the market offered, and this year might offer minimal if any gains.
What should you be prepared for this year? Definitely higher paper prices. To be safe, budget anywhere from 5% to 10% more than 2003. Printing costs will remain stable or increase slightly, but deals can be found. Considering we're all paying far less than we did for both paper and printing than in 1984, we should count our blessings. When ad pages come back and costs go up, they'll still be less than 20 years ago.
- Steven Frye
Steven Frye is manager of Frye Publication Consulting, a printing and publishing consultancy, in Bellevue, Idaho. He can be reached at Steve@SteveFrye.com.