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PAPERING THE INDUSTRY

Feb 1, 2000 12:00 AM


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Look for paper allocations in some markets and slightly higher prices as the Internet drives print business-at least for today

It's a fine time to be selling paper in the U.S. Amidst the gloom-and-doom predictions of the paperless office and speculation that e-commerce will kill print demand, something unpredicted has happened: demand.

There are many contributing factors. Asia is recovering nicely, consuming more of its own production. This means slower exports to the U.S. from this region and increased demand for domestic product. While overall imports continue to climb, the increase was only 8.3 percent for 1999 as compared to the 54 percent leap in 1998.

The dot-coms are using print advertising in a big way, driving a Universal McCann (a division of McCann Erickson Worldwide) forecast that advertising revenue for magazine publishers will increase by 7.5 percent in 2000. The Magazine Publishers Assn. projects ad spending in print media will be up more than 11 percent.

Beyond the advertising, on the back end of each e-commerce transaction is an acknowledgment, a receipt and, of course, a shipment in a paper carton. Pitney-Bowes recently released "The Role of Mail in E-commerce" study, which indicated that half of the firms surveyed who were involved in e-commerce had increased their volume of mail as a result (see Business Management, p. 11).

A number of industries will drive increased demand for direct mail. Banking and energy are deregulating. A recent Wall Street Journal article, "Drug Makers Prescribed Direct-Mail Pitch," suggests drug companies will use the medium to increase compliance. With the declining success of outbound telemarketing, direct mail will likely be the beneficiary. AT&T, for example, spent $900,000 last year promoting its services to business marketers-and spent it all on direct mail.

In addition, postal rates did not increase in 1999, resulting in some catalogers increasing print runs for the second half of 1999, trolling for new business during the holiday season. Recent negative publicity highlighting difficulties of online shopping may further benefit consumer catalog merchants.

As a result of this increase in demand, some web houses are on paper allocation. Printers are getting paid more for scrap as print plant waste paper prices are now moving up with the price of pulp. And as one might expect, Wall Street is screaming "Buy."

With the usual optimism surrounding the Presidential election and the Olympics just ahead, as well as a U.S. economy that is forecast to remain strong through 2000, for paper producers, it doesn't get much better than this.

Unfortunately this increased demand comes on the heels of declining capacity. Due to depressed paper industry earnings since 1996 and competition from the imports in 1998-1999, most paper producers scaled back expansion plans, resulting in total printing-writing paper capacity of 29.1 million tons, one percent lower than had been forecast a year earlier. In December, the Washington, DC-based American Forest and Paper Assn. (AF&PA) noted a 0.9 percent decline in domestic coated free sheet capacity as mills postponed or canceled improvement plans due to soft pricing caused by the imports. Coated groundwood capacity remained flat. Uncoated free sheet capacity moved up two percent.

In the AF&PA's 40th Annual Capacity Survey released in December, predictions for 2000 and beyond were characterized as "ultra-slow" as a result of mill and machine shutdowns as well as cautious attitudes toward expansion projects. The forecast for coated free sheet capacity is up 1.9 percent per year through 2002, as compared to growth rates that averaged 4.6 percent in the 90s.

Uncoated free sheet capacity is forecast to rise 0.6 percent in 2000 and continuing essentially unchanged through 2002.

Printing-writing capacity is expected to increase by 0.7 percent, on average, to 2002, compared to annual growth of 2.2 percent in the 1990s. The figure for printing/writing grades is likely to be high due to shutdowns that are not yet reflected in the numbers, because the survey method stipulates that mills and machines be dismantled or closed for at least a year before their capacities are removed from the survey base.

Mills are expected to increase their use of recovered paper 1.8 percent annually through 2002. While this figure is lower than it's been in the previous 10 years, it is noteworthy because it's more than twice the expected growth rate of paper capacity.

Predictions for 1999 were for rock-bottom pricing and not a lot of light at the end of the tunnel. And in fact, pricing was flat the first half of 1999, then increased unexpectedly during the second half. With demand continuing to increase and capacity essentially flat, price increases are expecte d to continue through 2000.

Bruce Kirk, industry analyst and author of "Outlook for Printing and Writing Papers 1999-2001: A Decade of Transition," forecasts an increase of seven percent to eight percent in 2000. "Very healthy earnings are expected for the paper-paperboard industry. However, the gains for some producers, such as those with large wood products businesses, may be restrained as interest rates have crept up. Higher interest rates bring new housing activity into question and lumber-plywood pricing is already down from the robust levels seen in mid-1999.

"Until 1995 printing-writing paper consumption grew at approximately one percent above real GDP growth. Since then it has drifted to approximately one percent below real GDP growth. For 2000, real GDP rates on the order of 3.0-3.2 percent are forecast. Printing-writing paper consumption will likely advance 2.5 percent in 2000 or possibly a bit higher, allowing for some inventory accumulation on the part of paper consumers. The apparent decline in paper demand relative to real GDP growth indicates that the composite of paper end uses, largely for advertising and communications, are not keeping pace with economic growth, which is increasingly fueled by technology sensitive sectors of the economy," notes Kirk.

Other industry analysts are more conservative. "Pricing for paper products should increase around three percent to five percent over the next 12 months," predicts Dan Temple, marketing director for Jacobs-Sirrine Consultants (Atlanta), strategic consultants to the paper industry. Global print and paper demand increases will play a key role in the amount and timing of any price changes in 2000. Global demand in 2000 is expected to slow somewhat from the fairly robust growth in 1999.

"One of the key concerns is that print and paper demand will only increase at moderate levels while pulp prices will increase too quickly, fueling a rapid price increase by the paper mills. The need to improve margins will force paper companies to initiate programs to increase prices, which could lead to larger changes than are now generally projected," observes Temple.

Even with potential cost increases and the need to improve margins, however, increases this year should be modest compared to the price run-ups seen in 1995," notes Temple. "The environment is different now. In 1995 demand was inflated by huge purchases for inventories plus we were coming off a recession and extremely low prices. This fueled concern by publishers and printers, which spurred large ordering and inventory build up. Currently inventories and prices are in better shape than 1994 and except for Japan, the world economy is strong, which was not the case five years ago."

In terms of future capacity, Indonesia and Malaysia are building paper mills, a logical follow-up to the pulp mills they built in recent years.

While these mills are designed to support Asian demand, Temple sees continued imports from these countries as well as Latin America, where labor and pulp costs are lower than the U.S. "The United States will continue to be a key market for every major exporter, in part because the market is so large and the dollar is strong," notes Temple.

The two key variables affecting offshore imports into the U.S. market are the strength of the U.S. dollar and freight cost, which has tended to fluctuate, resulting in varying profit margins and pricing of overseas product. Future capacity growth in North America is restricted by strong environmental regulations and laws, while global competition does not have the same regulations or compliance costs as U.S. and Canadian pulp and paper companies.

The Boston Consulting Group (Atlanta) has recently released "Paper and the Electronic Media: Creating Value from Uncertainty." The firm specializes in business strategy consulting for the pulp, paper and printing industries. "In the short term, the dot-coms are trying to make enough noise to be heard," notes Keith Russell, BCG's vice president. Longer term, Russell sees newsprint facing declining ad revenues as classifieds migrate to online outlets. "The glossy magazine has a richness and convenience that has huge value long-term."

Russell also points to the increased use and value of targeted direct marketing, both online and with traditional print. "At the moment online advertising does not have sufficient reach but in time it may be more effective. Russell predicts on-demand printing papers will be strong in the future. He also sees continued growth in cut sheet papers as people do more printing from home computers.

"Now that alternative media are available, will people choose to get information online rather than on paper? The bigger picture question is how long will it take to get there?" observes Russell. "This will likely be a much longer term, generation change."

On the distribution side, the situation continues to be interesting. With the merger/acquisition wave pervading the entire supply chain, the shell game of ownership, affiliation and partnership will continue to be dynamic. E-commerce sites such as printnation.com, paperdeals.com (recently acquired by imagex.com) and paperexchange. com will continue to penetrate the traditional merchant channels, but the mills are generally close-mouthed about the prospect.

Obviously the big news at Georgia Pacific is the distribution strength afforded by the Unisource acquisition. Other developments include the recent conversion to a new business software platform, providing capabilities in areas of shipment tracking and inventory visibility. Inventory visibility allows customers to "log in" to check current inventory levels by SKU. This could be either a specific inventory of items set up for that customer, or GP's entire available inventory stock. All this would be set up with appropriate security protocol.

On the e-commerce side, GP hopes to automate routine transactions, allowing its employees to spend more time handling special situations and developing new business. The company expects to roll out these changes to customers during 2000.

XpedX is working on business-to-business e-commerce strategies to help automate more basic transactions. The company has made great strides in the past few years, acquiring Taussig's Graphic Supply in 1998, followed by Zellerbach, then Alling and Cory. "We have gotten into those businesses that benefit our current customers," explains Brad Peters of the Covington, KY firm. These acquisitions also help the firm better service national accounts and consolidators.

"While the merger-mania has slowed a bit on the merchant side, it doesn't seem to be slowing down on the mill side," notes Don Clampitt, president of Clampitt Papers in Dallas. The firm is independent, a privately owned paper merchant with five locations in Texas. "We're watching this carefully because the acquisition of a mill may mean we no longer have access to a particular line. It gets complicated because our suppliers compete against each other," he explains. "I realize that each time we take on another mill, we become less important to our other vendors, but we also have to try to anticipate what might happen if a mill is bought out."

Clampitt is also watching the consolidators, who have the potential to buy a significant client and fold that company into a larger buying program with a national merchant. The regional supplier concedes that national merchants offer buying power, rebates and nationwide scope. Yet he has successfully differentiated his company, providing fast-turnaround converting, slitting and rewinding of roll stock. Clampitt also has a strong reputation as a spec house, with nine reps across the state and a paper knowledge school offered four times each year.

On the mill side, companies are responding to demand for short-run products. According to Beth Povie, advertising manager for Mohawk Papers (Cohoes, NY), the company will continue to have a strong digital papers portfolio, adding inkjet and color copier papers to the line.

Mohawk will continue distribution through its merchants, although "customers should expect changes based on XpedX, Unisource and Nationwide consolidations," notes Povie.

Westvaco continues to be one of the only major paper manufacturers to market its coated fine paper products direct to customers. The firm's National Customer Information Center in Richmond, VA, consolidates the company's customer service, production scheduling, inventory and distribution operations. On the service side, the company's express delivery program offers some lines in just one or two days.

Finch Paper (Glenn Falls, NY) is developing a line of digital papers. In terms of distribution, the company does not foresee participating in Internet options. "One problem we see with companies attempting to do business on the Internet is that they are interjecting themselves between the mill and merchant. But we don't see where they bring value to the equation," notes Jack Zanzig, Finch Paper's vice president of sales and marketing. The company has continued to partner closely with merchants to assist printers with inventory management, holding back-up stock at the mill through joint contractual programs.

"Over the past few years, higher brightness has been the trend with the coated papers, blurring of traditional grade categories," explains Matt Nightingale, vice president of marketing for coated products and supercalendared paper at Champion International (Stamford, CT). "We're also seeing increased demand for matte and dull finishes in the coated free sheet area as high tech firms aim to differentiate themselves."

A number of specialty lines are doing very well as marketers continue to look for ways to differentiate themselves. The New York Knicks "One Tough Ticket" campaign utilized Yupo's synthetic tear-resistant stock as a differentiator and as a means of making counterfeiting a near impossibility.

"Even allowing for recent price increases, most grades of paper remain affordable and have actually declined in real dollars over the past 20 years," according to Richard Muller, group market manager, Communication Papers Division at GP.

Buying decisions, however, may have more to do with short-term perceptions. "Our concern is that new media alternatives, and an ad community that's far more sensitive and more willing to use new media, will lead to a decreasing share of the overall budget for print," points out Dr. Joe Webb, partner at Trendwatch, a Rhode Island-based consultant.

While demand for paper is good in the short-term, the Internet is looming on the horizon with industry pundits spending a lot of time looking at how online advertising will inevitably affect future growth and demand for print. Most likely less capacity will be built as paper companies are less willing to step up and take risks on new paper capacity.

Ironically, the medium that was predicted to kill print and paper is at present fueling it, illustrating that while paper may not be sexy, it certainly isn't dead. Look for marketers to continue to experiment with various advertising channels, as they sort out the best way to drive new business.