Paper Money: A Hidden Threat Facing Magazine Publishers

Emboldened by recent tightness in supply, several suppliers announced last week the first round of price increases on magazine-quality paper in more than a year. But what should really concern publishers is not so much the ebbs and flows of the paper markets but rather the possible gyrations of the currency markets. With demand for coated and supercalendered papers on a multi-year downward march, publishers have become accustomed to plentiful supply and low prices. But there’s a hidden danger for our industry: We have become so dependent upon foreign paper suppliers that a sudden shift in the value of the U.S. dollar versus other currencies, especially the Canadian loonie, could lead to scarcity and price spikes. The strong dollar, after all, has helped keep American prices low, making the U.S. an attractive market for foreign mills. Magazine publishers are paying about 10% to 15% less than they were three years ago. But when some foreign suppliers convert publishers’ dollars to their home currencies, they are actually making more profit from U.S. sales than they did in 2013. About one-third of the coated groundwood (CGW) paper and about two-thirds of the supercalendered paper consumed in the U.S. comes from foreign mills, with the vast majority coming from Canada. Four years ago, a U.S. dollar was worth 98 cents in Canadian money. Now a greenback fetches about $1.32 north of the border. While U.S. mills have been mostly unprofitable, or shut down altogether, Canadian mills have been running full, happy to pay their employees and suppliers in cheap loonies to make paper that is sold for pricey U.S. dollars. Pressed by politicians from paper-making states, the U.S. Department of Commerce a year ago slapped Canadian supercal mills with tariffs of 18% to 20% for allegedly receiving unfair government subsidies. The push for tariffs was geared especially to propping up UPM’s supercal mill in Maine. It didn’t work. When the loonie weakened even further last winter, Canadian mills could afford to pay the tariffs and continue selling into the U.S. Unable to compete, the Madison mill closed in May. With the loonie recovering somewhat from the sub-70-cent levels of January, Canadian mills in recent months have become less willing to offer low prices. That means there are apparently no spoilers -- mills willing to keep prices low to unload excess inventory -- that would undercut the price hikes. When Verso announced U.S. and Canadian price increases on coated groundwood last week, several competitors quickly jumped on the bandwagon and hiked supercal prices even more. If those price hikes stick -- the paper industry’s track record on that score is a bit spotty -- the increases of about 5% on CGW and 7% on supercal are fairly hefty by historical standards. But they don’t compare to what would happen if there were a more dramatic or sudden strengthening of the loonie. With their currency advantage gone but the tariffs still in place, some Canadian supercal mills would probably shut down. There is nowhere near enough supercal capacity in the U.S. to fill the void, and it would take months for European mills to step into the breach. A restart of the Madison mills is highly unlikely. And unwinding the tariffs would take months at best and longer in the (likely) event of political opposition. The effects would quickly spill over into the market for CGW, which increasingly competes with the better supercalendered papers (called SCA+) for the same customers. Publishers who switched to SCA+ would clamor to switch back to CGW. Some U.S. mills could make less coated freesheet (the kind of high-gloss paper used by high-end fashion and art magazines) to increase CGW production, but that wouldn’t fill the gap. It’s been decades since paper was in such short supply that publishers had to ship rolls via air freight (expensive!) to get their magazines printed. The chances of that recurring within, say, the next year are low. But the odds are high enough and the consequences dire enough that you should plan for it. Keeping an eye on currency markets is not a viable plan. That would be like deciding to wait until the day before your next wreck to buy auto insurance. Professional traders make bets every day on where currency prices will move, and even they get it wrong. The kind of events that cause drastic currency changes -- wars, rumors of wars, disruptions in the oil market -- are inherently unpredictable. Maintaining healthy inventory levels rather than trying to buy paper on a just-in-time basis is one form of preparation. So is getting paper from multiple mills. Buying paper from your printer may offer protection, assuming the printer is hedging its bets and not overly dependent upon a single, shaky supplier. Regardless whether you buy from a printer, a broker, or direct from the mill, it’s a good time to explore long-term commitments or contracts. By agreeing to buy a certain amount of paper supplied by a particular mill over the course of a year, you could in return access to a more reliable supply and more stable prices.

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Paper Money: A Hidden Threat Facing Magazine Publishers

D. Eadward Tree

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