Driven by rising worldwide demand, the paper industry is booming. Mills across the country are posting whopping profits as prices have jumped 30 percent to 75 percent, depending on the grade of paper, over the past year.
This trend has generated mounting anxiety for companies for which paper represents a high share of their costs, such as newspapers, publishing, paper goods and packaging. Others are seeking to adjust their budgets to cover the higher costs or to reduce their consumption.
What's the outlook for paper prices and their impact on $l companies that are heavy users of paper?
Tore L. Stole
Analyst, A. G. Edwards
We are not seeing the rapid increases we were seeing late last year or earlier this year. As the economy slowed in the second quarter we are not seeing the frantic pace in the paper industry that we were seeing at the end of last year.
But with a strong export market setting prices and little if any added paper-making capacity within the industry, it seems that prices will stay at a high level for a year, maybe more.
There are a number of factors that still exist that would indicate that paper prices will remain strong over the next 6 months to a year.
The export market is still strong. Some of the major commodity prices, such as coated white paper, container board and pulp, are priced globally and there is strong overseas demand that is keeping the prices high.
Normally companies begin increasing production during this point in a cycle of rising prices. But we're not seeing any significant increase in output at this time. Companies that use paper are just paying more. They need to adjust. We hear a lot of screaming from newspaper publishers and the heads of other companies where paper is a big part of their total costs.
Brown Brothers Harriman
Packaging costs are going up. Newsprint prices are going up. White paper prices are going up. Across the board paper prices are rising. They probably won't rise as quickly as they have for the past year. I think the momentum will slow.
The past year was characterized by a lot of price catch-up. Prices, particularly newsprint, had been extremely depressed for number of years. What we're seeing now is a righting of the markets.
Very little capacity has been added to the industry. It is almost insignificant.
There are a number of reasons for this. It takes time. It usually takes about two years to bring a new paper machine on line and companies don't move to add new machines until they see a better outlook for earnings.
Strict new environmental regulations are also discouraging companies from adding new capacity.
I don't see any easing of prices for the next couple of years, I really don't.
Companies that use paper are striving to be more efficient. Wall Street is beginning to restrict the number of reports on companies and more information is being distributed electronically.
Moody's Investor Services
In terms of going forward, I have some some questions about the second half of 1996. We could see prices begin to decline then or in 1997. It will depend greatly upon what happens to the nation's economy.
Paper prices usually track the economy. I don't see a lot of capacity coming on stream anytime in the future, and I don't think prices are going to go down the way they did in the early 1990s.
But we could be in for a surprise. Prices could go down more than we expect. By 1997 and 1998 I would expect there will be significantly reduced earnings in the paper industry as prices begin declining.
Director of research,
Basically the paper industry was going through a very, very tough recession in the early 1990s. Prices were so low many major companies were losing money.
I would guess that with the economy slowing down we should start to see some stabilization of paper prices. But this might take some time. Not every product line has caught up yet and some more price increases are coming.
I would say that from here on the rate of increase will slow down, but it's hard to say exactly when and by how much.
This is a fairly economy-sensitive industry, and if the economy slows down, I would expect paper-price increases to slow down.
But if the dollar stays as weak as it has been in recent months, that would tend to keep the heat on prices because paper is an international commodity.
Companies that use paper are having their costs go up and sellers are seeing their profits go up.