By Dick Gorelick
The statement, “All the rules have changed,” is commonly heard in relation to the current recession. The statement also applies to the paper industry. The concept of domestic supply-and-demand is no longer the sole basis for explaining paper pricing and availability.
The situation is complicated by many factors, including international demand, international supply, the unintended consequences of U.S. tax policy, currency fluctuations, the unpredictable nature of the global recession and the rate at which adoption of alternative media displaces print.
The bottom line: reduced U.S. demand does not necessarily mean lower prices. Let’s examine some of these factors in greater detail.
The “Black Liquor Tax Credit” has been a windfall for U.S. mills. “Black liquor” is a residue from papermaking operations that is repurposed to generate power. It has been used for years. Congress passed a law to encourage this type of activity. Domestic mills realized they could qualify for tax credits under this legislation and have amassed billions of dollars of credits. In the past year, the credits have offset operating losses. However, the “Black Liquor Tax Credit” is expiring at the end of 2009. That is increasing pressure to raise prices.
Asia has become an increasingly important factor in both supply and demand. One research company predicts that China will contribute 89 percent of the increase in demand for writing and printing papers during the next 15 years.
On the supply side of the equation, almost 2.5 million tons of mill capacity for coated paper will be added next year in Korea and China. Canadian mills are in a particularly challenging situation because the U.S. dollar is strengthening against Canada’s currency.
The consensus regarding the short-term future of U.S. paper prices: prices may increase in the coming months due to reduced inventories, the printing of census forms and envelopes, increases in the price of pulp, growing demand in Asia and perhaps a recovering global economy. Domestic mills must somehow compensate for the disappearance of the “Black Liquor Tax Credit” and will continue to try to bring their capacity into equilibrium with demand.
The bottom line: paper prices and availability are subject to a myriad of factors and are virtually impossible to accurately predict in the intermediate and long term, especially in the case of coated and uncoated free sheets. In the short term, don’t expect a meaningful decrease in prices. Having written this, I am prepared to be incorrect.
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Dick Gorelick is president of graphic arts consulting firm Gorelick and Associates.
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