Wind Behind Coated Paper Markets

Positive economic data has always been a catalyst for coated paper consumption increases and firming prices.

Indeed, pick up any newspaper and you'll not only read about increases in gross domestic product (GDP), but increased spending in advertising, government, and retail sectors, all

financed at low rates. Thus, industry pundits predict that the commercial printing and publishing sectors are headed for health again, and coated paper is along for the ride.

Sights on customer

Paper producers have been busy of late. The industry's necessary but unpleasant restructuring appears to be nearly complete, and rationalization has been brisk. Almost all of the global players have new chief executives, with new partnerships in place and new production strategies to keep prices firm.

Coated paper is a global commodity, but service surely is not. The new paper industry seems to be edgier, and ready to scrap production-driven market moves in favor of a balance between customer need and care.

Though consolidation may be ending, paper companies are shedding assets, especially timberland. Most have already boosted their dividends and balanced production. The extra cash could finance more acquisitions (though this seems an unlikely result), or fight for market share with service and start-ups.

Many companies have opened up design groups, software houses, and other service-related products to support big paper shipments.

Ad spending effect

When all of the figures have been calculated, ad spending in 2003 will have risen about 6% after a soft year in 2002 (-3.2%) and a dismal 2001 (-10%).

If the economy continues to strengthen, and small boosts by political contests and the Olympic games are factored in, ad spending should increase 6% to 8% in 2004.

Magazine ad pages likely will get a healthy share from retailers and pharmaceutical companies, but not tobacco firms. Strong marketing attention will be aimed at ethnic enclaves (Spanish language), electronics, and digital applications in the form of short-run, label, and reply card printing.

Prices for coated paper have been flat for years. Soft demand, lots of imports, and a growing European presence in domestic markets account for the stable pricing. Coated freesheet inventories were dropping at the end of the year as were imports, possibly setting the table for an increase. The dollar's weakness provides additional pressure for price rises, though most analysts say this is not enough.

Meanwhile, coated groundwood prices already have been announced. Prices are not likely to go up any more than 5% or so throughout 2004, primarily the result of the value of the dollar, material cost increases for the mills, and margin improvement demand by the financial community.

Where the paper is

For decades, coated paper shipments had tracked GDP from peak to trough and back again, with some small multiplier. The relationship changed a bit in the 1990s, as the Internet craze took its share of marketing dollars and TV's ad share increased. A few catalog houses folded and magazine subscriptions fell off, and coated paper found itself down double-digit percentages into 2002.

For 2003, U.S. coated paper production will have increased about 1% while consumption will have risen about 3.5% to 10.9 million tons, split almost equally between coated freesheet (commercial printing) and coated groundwood (publishing).

Imports for coated freesheet are pouring in from Asia, mopping up poor West Coast demand and finding its way into markets in places like New York City and Houston. Imports from Europe, primarily coated groundwood, are growing steadily and may jump if the economy in Europe does not pick up soon. North American capacity is actually declining, but new machines continue to make appearances in Asia and Europe.

Prices are not likely to push too high soon, but they already are seen in 2004 contract proposals and some fourth-quarter 2003 shipments. European producers are setting a 6% hike on most coated groundwood grades, and domestic producers are likely to follow. Coated freesheet prices are not expected to change at all.

Supercalendered (SC) paper prices also will be sleepy for 2004 because of capacity increases and quality competitiveness from other grades. Buyers should take advantage of annual contract tonnage now rather than wait for later in the year, when forecasters see continued global economic strength, less tonnage, and higher demand for 2005.

Breaking nine million tons

U.S. coated paper production will probably break nine million tons in 2003, stronger yet off 2000's peak of 9.6 million tons. Capacity is net zero through 2005, with a small increase in coated groundwood and more reductions in coated freesheet.

Newsprint leaders Bowater and Kruger started up new lightweight coated lines (LWC), pushing each companies' focus on wider portfolios for publishers. Permanent LWC shutdowns were announced by International Paper (IP), MeadWestvaco, UPM-Kymmene, and others. Coated freesheet start-ups are non-existent here, though Stora Enso is converting a machine in Wisconsin from LWC to premium coated. Shutdowns of coated premium papers are reducing capacity by about 3% every year.

Slightly more than 500,000 tons of coated freesheet ends up in magazines and books, while over 1.6 million tons of coated groundwood is used by magazine publishers, 75% of which is lightweight coated or 30- to 40-lb. paper in rolls. Catalogers use a healthy percentage of coated groundwood–-nearly 20 billion units in 2003, or 1.8 million tons–-while newspaper publishers use a bit for Sunday inserts.

SC paper is also used in Sunday magazines, inserts, and direct mail, but consumption suffered (-20%) from competition from LWC and more focus on national display ads in newsprint designed for color printing.

At over three million tons, commercial printing still is the primary use of coated freesheet. Though most purchases are for No. 3 (economy coated), gaining in higher-margin applications are No. 1 premium, No. 2 (double-coated), and specialty coated grades.

Market activity

Sappi Fine Paper is the top producer in the U.S., with 5.1 million tons.

Sappi vice president of publishing Jennifer Miller believes that "companies will step up promotional activities to tap into receptive consumers by refocusing on brand building, rather than discounting." Miller says that print campaigns are the preferred media to support brand recognition, which is sometimes more important than price and reliability in purchasing.

"Recent trends in television watching (like TiVo), Internet surfing (pop-up blockers), and telemarketing (do-not-call listing) provide advertisers with a safe haven," she states. "Studies we follow show that the top 25 magazines reach more adults than the top 25 TV shows and Web sites, and that people are more likely to buy from print."

Sappi is investing in technical services to support coated freesheet applications, which provides a "premium benefit" in color reproduction and other critical aspects of printing. The company also is driving new product development for digital printing applications, specifically on HP Indigo and Xeikon machines.

MeadWestvaco also sees a rosy year. Jim Tyrone, vice president of commercial printing, thinks the increases will be across the board, including government and commercial printing. The firm is completing the installation of its enterprise resource planning system to allow customers greater access to orders, product inventories, and services.

Driving efficiency seems the best way to approach sleepy prices in commercial printing, believes Tyrone.

"MeadWestvaco is focusing on premium coated grades [Signature], where our product portfolio is broad and attractive," he comments. Signature's latest sample piece went after Sappi's McCoy brand with comparison prints using a new grade called True.

IP , the country's largest producer of coated paper, is determined to expand services for publishers. It has a new workflow software product called EZ Suite, and a new service called Solutions Team. IP probably will not be buying mills or cutting more production, having fully integrated new assets both here and abroad.

Bowater and Kruger both added more LWC capacity last year. Bowater is pushing its product mix in brightness, but still is working the lower end (catalog) with more tons made off line.

UPM-Kymmene shifted capacity to a rebuilt machine to make more high-brightness grades here and in Europe, and is adding a machine in China.

Stora Enso also is moving some lower-grade papers to coated freesheet, supported by new promotional campaigns aimed at designers and educators.

Madison's new machine in Chicago is shipping a No. 5 LWC product called Alsip to complement its SC lines from Maine and Europe.

Canada's Tembec realigned its coated groundwood grades, now called Delta Brite and Orleans.

Domtar's Luna line recently released a promotion for color matching.

Smaller mills, too, are addressing the folio needs and special orders of their customers.

West of the Mississippi, West Linn Paper added 7- and 9-pt. reply cards (matte) and a new matte text (book) grade.

Meanwhile, Smart Papers released a new line for digital printing, primarily aimed at packaging, under the Kromekote banner.

	1999	2000	2001	2002	2003*	2004*
U.S. Coated Paper
Consumption	10.7	11.2	10.2	10.4	10.9	11.1
Coated Groundwood (CGW)
CGW Shipments	4.4	4.6	4.4	4.5	4.5	4.6
CGW Imports	1.2	1.3	1.2	1.3	1.4	1.5
Coated Freesheet (CFS)
CFS Shipments	5.0	5.1	4.3	4.3	4.5	4.6
CFS Imports	0.8	0.9	1.2	1.2	1.4	1.5
Uncoated Groundwood (SC)
SC Shipments	2.1	1.9	1.5	1.5	1.7	1.8
SC Imports	2.8	3.6	2.9	3.0	3.0	3.2
*=Forecast

Coated Groundwood
IP	19
Stora Enso	17
Kruger, Nexfor, Norske Canada, Weyerhaeuser	13
Bowater, UPM-Kymmene	12
MeadWestvaco	10
Tembec	10
Coated Freesheet
Sappi	32
MeadWestvaco	20
Stora Enso	13
Domtar, IP, Nexfor, Pasadena, Smart, West Linn	12
Appleton	5
Supercalendered Paper
Abitibi Consolidated	34
Norske Canada	14
Bowater	11
Stora Enso	11
Katahdin	7
Kruger	7