The Paper Industry's Peril

By Ambroz, Jillian S. | Folio: the Magazine for Magazine Management, October 2001 | Go to article overview

The Paper Industry's Peril


Ambroz, Jillian S., Folio: the Magazine for Magazine Management


Low paper prices have softened the economic blow to publishers this year, but market saturation and decreased paper consumption have put the paper industry in dire straits. Will it take a drastic price hike to save it?

The magazine industry has been hit hard this year, suffering blows from advertising losses and postal increases-in addition to the pressures of a toppling economy-even before the tragedy of September 11 exacerbated market conditions. Yet the downturn followed a record year. The paper industry by contrast, is experiencing a devastating year following a poor year, says George Doehner, president, Bulkley Dunton Publishing Group, a New York Citybased paper merchant.

The sagging economy and loss of ad revenue has eroded newsstand sales and forced a number of magazines Out of business--which in turn has triggered a decrease in paper consumption, followed by declines in paper prices and mill closures. Magazine paper consumption for 2001 is expected to be down 6.5 percent, or 3.8 million tons, says Mark McCready, senior consultant, multiclient services, Jaakko Poyry Consulting, Inc.

"We have fewer pages, so we use significantly less paper," says Carlos Gonzalez, manufacturing manager for 101 communications, publisher of Federal Computer Week. "The magazines are getting skinnier, so the demand is not high for paper."

As the holiday season approaches, printers and paper manufacturers usually enjoy a boom in business. A year ago, all mills were fully booked; now they are able to take additional orders, which creates a shaky climate for pricing, says Brian Kullman, vice president, supply chain strategy, for R.R. Donnelley. "This is the first time in eight years that our year-over-year physical impressions printed actually declined. The market weakness is real." Kullman notes that in the paper crisis of '95 and '96, there was little impact on the number of pages that R.R. Donnelley printed. "This is a good time for magazine publishers--brought on by misery," says Kullman.

While publishers grapple with the ad downturn and two postal increases, the lower paper prices offer little consolation. Instead, they reflect the poor state of business overall and create an atmosphere of uncertainty as publishers prepare budgets for next year. "Any magazine publisher would rather have a stronger economy and stable prices for paper and printing than this horrible situation and trying to make up for it with lower prices," says John Clifford, president, Clifford Paper Inc., a New Jersey-based paper distributor.

Prices are not expected to increase until well into next year. "Prior to September II, the expectation was that prices would pick up--not rapidly, like in '95 or '96, but begin a slow increase," says Kelly Ferguson, worldwide editorial director, Paperloop Inc., publisher of Pulp & Paper. "We'd still have to go through the rest of this year and into next year before things really began to improve. We're in limbo now as we wait to see what happens with the general economy."

At this point, consumption is expected to continue to drop, says Ferguson.

PRICE HIKES

If the market continues to bottom out, paper manufacturers may be forced to implement significant price increases to stay in business, which could hit magazines hard. "If things get so bad for the paper industry and it's not able to make money to keep current structures in place, we could have a whiplash situation where massive amounts of capacity would have to be shut down. Prices could go up again on a cyclical basis, more dramatically than they normally would, so the paper industry could stay in business," says Clifford. Five years ago, when demand outweighed supply, prices skyrocketed by 6o percent, as mills got up to capacity, and then stabilized slowly.

One reason there hasn't already been a major price hike is that the mills and paper companies are controlling the supply side through production downtimes and plant closures.

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