Paper manufacturers view the future

Magazine publishers, take heart: There is an easing of the paper shortage. But keep in close touch with your paper sources, because the easing will be temporary. Consider the following points:

* Paper buyers will witness continuing softness in coated grades, with freesheets even more available than groundwood, for the balance of the year. But--and this is important--we are not in for a "bust."

* With few exceptions, prices have stabilized, in part because the overseas mills will fight for a continuing share of our strong dollars.

* Except for proven and historical importers, such as Finland and Canada, publishers, printers and even paper merchants will exercise great caution in their foreign choices. There are too many horror stores around but mistakes made in the heart of the recent buying frenzy and middleman speculation.

Now is the time for the buyer of paper to make mid-course adjustments in his purchasing mix.

Will we over-adjust our inventories, as we usually do during periods of transition? Will we change suppliers for a small price advantage and ignore the long term? Will we make the mirror mistakes in soft times that certain of our suppliers--mills and merchants alike--make during times of tightness? Or can we take this opportunity to do some careful planning and implementation?

Looking ahead, and back

What I foresee is that we and our coated suppliers will witness fairly fast swings in the supply/demand tango. I do not think a period of soft demand will last long. The coated paper market will tighten again, although not so much as it did in 1983. And then, it will soften-all before 1990. The uncoated market is another story: It will be in deperate shape, I believe, for the paper companies until the end of the decade.

Last november, I predicted that coated paper demand would soften in the not too distant future, at least in certain market segments. Few experts agree with me then, and no one would have predicted, at least publicly, how quickly events were going to change.

At Paper Week in March in New York, the 108th annual meeting sponsored by the American Paper Institute, paper executives were still divided on the question of the paper market for the balance of 1985--stable or softer? But I found no suppliers who disagreed significantly with John D. Clifford, vice president of publication sales, Champion International, in his assessment of the first few months of this year, as it relates not only to his company, but also to paper suppliers and manufacturers in general: "Major customers implemented selective cutbacks starting early in the year, and backlogs have been drastically reduced." He added that the overseas pipeline caught Champion around year-end. And, indeed, industry statistics show that more than 50,000 tons of coated paper were imported in January.

"There is a lot of inventory around," according to Clifford Roth, national sales manager of printing papers at Crown Zellerbach. "I began to see this build-up toward the end of last year," he said, "and I really started to recognize it in January." Crown Zellerbach's backlogs were still good--at least at the time of Paper Week--"as major customers remain loyal." But, coated paper shipments from St. Francisville, the company's major groundwood mill, were running only nine days late at that time, "versus as much as 30 days at certain times last year," noted Roth. "Backlogs should soon automatically reach zero."

The 'bugaboo' of offshore paper

Again and again during Paper Week last March, the subject of offshore paper was emphasized. Scott McCampbell, manager of the printing writing division of the American Paper Institute, commenting on the intense interest in international trade flows in printing paper said, "Although there is confidence about the domestic economy, there is concern about the strength of the U.S. dollar."

Raimo Waltasaari, president of The Madden Corporation, noted that his company has been selling regular supplies of lightweight coated (LWC) paper from Finnish paper mills to publishers and printers in the United States for several years. In fact, he said, he is looking at "a moderate growth in sales in 1985 and beyond, building upon this solid base." But he goes on to observe that "the LWC market at this moment is softer than at the end of 1984. Part of it is inventory adjustment," according to Waltasaari. "Considerable quantities of coated paper came into this country at above-market prices from nontraditional European sources, and publishers are trying to work this paper off quickly."

Crown Zellerbach's Roth agreed. "Certain merchants and brokers were dabbling in the area of offshore supply, supported by the customer psychology of panic and deep concern," he said.

And Eugene Levandoski, president of Midtec Sales Inc., expects no down-time or price erosion this year--unless, as he says, the foreign sources "slug it out. We've just heard a lot about tremendous increases in European capacity. If they think the American paper industry is going to roll over and give up market share to them, they're nuts!"

So much went right in 1983 and 1984 for publishers, printers and other consumers of printing papers that it was impossible for every part of the busienss to keep booming. Two obvious examples of high-water marks: the Summer Olympics in Los Angeles and the national campaigns and election. The rest of the world, however, did not run with us on the fast track. That slow foreign growth, coupled with our incredibly strong dollar, had the predictable effect of drawing paper to our shores.

Manufacturer concerns

But let's look further. Make no mistakes about it. More is going on, but it is too early to measure the effects.

Feelings range from concern to discomfort about slackening demand among paper executives. Roth's impression is that direct mail might be doing worse than other areas. Midtec's Levandoski notes that "as the numbers have come in, magazine ad linage has dropped off from publishers' expectations." And Thomas Thomsen, president of Niagara of Wisconsin, worries that "with the tremendous deterioration in uncoated prices, at some point, the economics will pull certain business back from coated paper to uncoated. Free-standing inserts, for instance, just sort of appeared in our business, using tremendous amounts of coated paper because of quality competition at a time when the paper price difference for coated grades wasn't so great."

"We don't have people throwing themselves at our doorsteps any more," said the general sales manager at a major domestic lightweight groundwood mill. He, along with others, talked about the "ex-allocation tonnage temporarily available" and "better than expected operating rates." But there was an unspoken implication that other factors were also at work.

"Between now and the start of June we should be able to see what's happening," observed Thomsen. "There are ominous signs of storm clouds gathering, and a mood of pessimism."

"While 1984 was euphoric, 1985 is challenging," commented Levandoski. "There is no question about the fact that #5 LWC has become available. I think we're in the first-half 'business blahs.'"

Although Crown Zellerbach has no intention of standing by passively to witness any downturn, "in a way," said Roth, "you're kind of waiting for the dishes to crash."

"Creative marketing is what will determine which mills will remain tight," added Thomsen of Niagara.

A long-term view

Clifford's opinion is that Champion is "out of the 'no' syndrome, and looking for new long-term opportunities." But, he said, "come late '86, I have concern for new domestic and European coated capacity." Between now and 1987, about two million new tons will come on stream, he points out, mostly from the output of new machines. Approximately half of this paper will be manufactured in the United States and half in Europe.

And, looking for the moment only at north America, even more capacity is probably. A second coated machine at Weyerhaeuser's Columbus mill, a new machine at George Petty's Repap in New Brunswick, and an off-machine coater added to a Champion uncoated machine in the South, to name three.

Just as paper companies have marketing strategies, so, too, should magazine publishers have purchasing strategies. Let's learn from the past and plan for the future, bringing to bear top management and the best minds in the process of our "return to sanity."

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