Why Paper Prices Are Likely to Remain High for Publishers

Decades of historical precedent suggest that, now that the shortages and price increases of 2018 have ended, publishers should soon benefit from lower paper costs. But don’t hold your breath waiting for history to repeat itself. Prices for publication papers have stabilized since late last year, and the usual post-peak glut and price slashing don’t seem to be on the horizon. In fact, more paper shortages could develop in a matter of months. Welcome to the new normal for magazine and book papers. Structural changes in the industry and the market have empowered paper companies to put the brakes on the paper-pricing thrill ride. During past cycles, as prices rose, printers and publishers would stock up on extra paper ahead of expected price increases and possible shortages. Eventually, something – a new machine, a downturn in demand, more imports, or printers running out of room to store paper – would cause purchases to drop lower than the available supply. Mills would respond by pricing more aggressively to keep their machines running. Once buyers realized that the paper price hikes and shortages were over, they would cut back their purchases to reduce their bloated inventories. That would only exacerbate the sudden weakness in the paper market, leading to a race to the bottom among paper suppliers. (The joke was that paper companies were losing money on every ton but trying to make it up on volume.) Prices would continue dropping until the highest-cost machines were idled, sometimes to await better conditions and sometimes permanently. Despite the recent hype about magazines (and catalogs) making a comeback, their footprint is still shrinking. Netflix’s much-ballyhooed decision to print a one-off magazine for a few thousand Hollywood types won’t put a dent in the paper industry’s lost sales to the likes of Money or ESPN magazines. In the past, such shrinking demand would have led to overcapacity and cutthroat pricing. But two developments have permanently altered that pattern: The ecommerce boom is creating more demand for cardboard and other packaging papers. Rather than continuing to run unprofitably or being idled altogether, several machines that used to make paper for magazines or books have been overhauled to produce boxes for the likes of Amazon. Because of consolidation and shutdowns, most segments of the North American publication-papers business are dominated by only two or three manufacturers. For both coated freesheet (used for glossy magazines and brochures) and uncoated freesheet (copy and book paper), two companies have more than 90% of the continent’s capacity. With suppliers now having relatively large market shares, they are more willing to handle oversupply by temporarily idling a machine rather than by cutting prices to maintain share. And they are managing the expected long-term demand slide with plans to overhaul machines to make products that have a better future. A recent announcement from Verso Corporation, probably the largest supplier of paper for U.S. magazines, indicates just how much conditions have changed. On April 30, Verso said it will permanently shut down an entire Maryland mill that represents about 14% of North American coated freesheet capacity. Production at the mill will end May 31. Such announcements used to come only at the bottom of a market cycle. In this case, however, Verso responded proactively to the first signs of a slowdown in demand and increased competition from imports, rather than participating in price cutting to maintain market share. (Verso made a point of telling investors that the mill is unsuited to making other types of products.) By shutting down about a quarter of its coated-freesheet capacity, Verso is ensuring that the rest of its machines will continue to be highly profitable. To compensate for the capacity reduction, Verso may shift other machines to make more coated freesheet and less coated groundwood paper, the type most commonly used by magazines. The result would be less of both products. "While Verso is the industry leader in production and sales of graphic papers and we intend to remain the leader, we will continue to decrease our dependence on graphic related products and grow our business in specialty papers and other paper products," said Leslie Lederer, Verso's interim CEO, during a quarterly earnings call last week. Still, the question is whether the market can absorb such a sudden loss of capacity without causing temporary shortages. Fortunately for publishers, the U.S. is still an attractive market for foreign paper manufacturers. In fact, as long as the dollar remains strong in comparison with the euro and other key currencies, competition from imports is likely to impede any efforts by the North American oligopoly to jack up prices even further.

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Why Paper Prices Are Likely to Remain High for Publishers

D. Eadward Tree

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