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Paper cuts
Less demand should drive down prices, even as manufacturers continue to cut capacity
Mark J. Miller
Story posted: November 6, 2008 - 6:01 am EDT
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With manufacturing and distribution prices on the rise, paper companies have been shutting down mills, resulting in at least 350,000 tons of papermaking capacity being removed from the marketplace. That removal has exacerbated what has seemed to be a trend of endless paper price increases that publishers have been dealing with.
But that trend might not hold into next year, as the series of hikes has prompted a plunge in demand.
“There's going to be a sobering day of reckoning when paper marketers realize what all the price increases have done to their product,” said Gerry Chisholm, VP-sales at paper-broker Gould Paper Co. “I think we've gone beyond the point of no return. The genie is out of the bottle.” He noted that some of his clients plan to cut paper orders by as much as 30% next year.
Here are four trends to watch heading into 2009:
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Up-and-down pricing
Paper prices continue to climb and will likely bump up more at the end of the year. But some industry watchers are doubtful that trend can continue into next year, particularly with the excess of coated groundwood resulting from a drop in demand.
“We're awash in groundwood,” said Mike Bennett, who is in charge of sales at paper broker Bulkley Dunton Publishing Group. Yet mills won't cut prices, he said, and instead are selecting the “right customers” to offer discounts to.
Bennett said paper mills are in a bit of a Catch-22: “They've got to raise prices to stay in business, but every time they raise prices, they cut demand.” And once demand disappears, he noted, it very rarely comes back.
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Drop in demand
Demand is declining in many ways. For example, Reed Business information has identified 12 different ways it can save money, including changing the trim size of its magazines and altering the basis weight and/or grade of paper. That is not good news for paper manufacturers.
Neither is the fact that many publishers are doing such things as “tightening up on advertising percentages and really producing less pages,” said Marie Myers, senior VP-manufacturing at United Business Media. Myers said she has budgeted for a few paper price increases in 2009, just to be on the safe side.
In addition to publishers tighten -ing their ad/edit ratios, marketers are producing smaller, more targeted catalogs and mailing less frequently.
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Going green
Michael Cohen, director of manufacturing and distribution purchasing at Reed Business Information, said the trend toward being more environmentally sensitive in making paper purchases could continue to grow as many publishers would like to be considered “green.” But the comparatively high cost of the products, coupled with the current financial crisis, could limit how far publishers are willing to go.
“I believe the jury is still out on the overall costs of recycled paper compared to paper made from virgin pulp,” Cohen said. “More paper is becoming available from environmentally certified forests, but there are too many different programs, which leads to additional costs to certify multiple programs.” Consolidation of the different certification programs would bring less confusion to the marketplace, he said.
“Publishers want to be environmentally responsible, but paper and distribution price increases have dried up any funds for investment in their products,” he said.
Myers said there are “too many ways to figure [a company's carbon footprint] to use it for a comparison and to set standards.” She is against using recycled paper in magazine printing: “What we appear to be doing with recycled paper is save a tree but add extra consumption in fuel and additional chemicals. Personally, I look for paper mills that have a responsible environmental behavior and good forest management.”
Chisholm said the demand for recycled paper isn't great because companies aren't willing to support it financially.
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Digital moves
Some publishers are putting more effort toward getting subscribers to ask for digital editions rather than print. “This continued and relentless increase in costs,” Cohen said, “will make more and more publications marginal and drive them out of the print format.”
Cohen was quick to add that he doesn't see print going away. “But publishers will need to redefine what a magazine is and how print supports their Web efforts,” he said. “It has evolved into a multichannel approach that requires publishers to interact with their readers in many ways, whether via print or electronic.”
Some publishers are excited about the prospect of electronic paper, which is a foldable or rollable screen that can display information in a much larger, design-friendly area than current mobile devices. It's still under development by several companies and isn't likely to be distributed to a mass audience for a few years, but some already see it as a potential game changer.
“I believe e-paper offers a tremendous opportunity to publishers, especially newspapers, if it is a truly mobile product that is updated on the fly,” Cohen said. “Great content that matches readers' needs is the key, no matter how it is physically delivered.”
Myers said e-paper may prove an excellent solution for publishers' paper problem. “We are increasing digital subscribers ... but for the most part I don't see this as where the publishing industry will be five years from now. E-paper may be the solution we are all waiting for,” she said.
Chisholm said paper mills aren't concerned about e-paper. “They're just trying to stay in business,” he said. “The point is that we're selling a product that is annually decreasing in demand. We can't stop it.”
For the time being, he recommends that publishers get into long-term relationships with mills so they have guaranteed supply. “But I would hold their feet to the fire to make sure the price is continually competitive,” he said. M
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