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January/February 2005                                                                                        VOLUME 121, NO. 1

market grade...

Uncoated Free Sheet Prices Surge Despite Weak Domestic Demand

by Harold M. Cody, Contributing Editor >> email: info@paperage.com

Boosted by changing trade trends, UCFS prices and shipments were up through 2004 but still lag overall printing and writing paper shipments

By Harold M. Cody, Contributing Editor

North American uncoated free sheet paper markets found new life in 2004. Despite continuing erosion in underlying demand, the effect of static domestic capacity and shifts in trade worked in conjunction to counter this weakness. As a result, prices began rising in late 2003 and continued throughout 2004, and currently are at levels not seen in nearly five years.

As noted in an earlier PaperAge report on uncoated free sheet (Nov./Dec. 2003 issue), demand remains well below late 1990s levels due to a maturing of major end-use markets, continued displacement of paper use by electronic information systems, and the growth of competitive grades such as groundwood papers. The current lack of demand growth during a period of continued economic expansion, on the heels of a nearly 2% demand decline in 2003, reinforces the fact that a fundamental shift or decoupling of demand and economic activity has occurred.

North American uncoated free sheet demand was showing signs of weakness in October 2004, falling 4.6% from a year earlier, and up only 0.8% year-to-date over the 2003 level, according to the Pulp and Paper Products Council. U.S. shipments through November were up 1.3% over 2003, but this is in stark contrast to overall printing and writing paper shipments, which were up a robust 4.3% over the same period.

Table 1. U.S. Printing and Writing Paper Shipments (000 short tons).
Grade Nov. 2004 Change from Year Earlier, % Year-to-Date Change from Year Ago
Uncoated Free Sheet 973 5.5 11413 1.3
Coated Free Sheet 340 5.4 4138 7.7
Coated Groundwood 394 4.9 4371 5.8
Uncoated Groundwood 150 11.2 1495 15.3
Totals 1857 5.8 21421 4.3

Trade Impact Changes Direction
For more than a decade, low cost imports have had a major impact on the domestic market for uncoated free sheet. They placed downward pressure on prices, displaced higher cost domestically produced paper, and were a major reason behind significant North American capacity withdrawals.

In contrast, recent trade trends have apparently been boosting the uncoated free sheet market and North American mills. As a result of the significant fall in the dollar, low cost offshore mills in Asia and South America are reported to be netting better returns by shipping product to Europe and Asia.

The dollar, which has been falling since 2002, has slipped to levels last seen in the mid-1990s. Many economists expect the fall to continue into this year. As a result, the pressure from imports has eased and exports, while small, are picking up. This trade shift is a key underpinning for the rise in prices.

As noted, despite the fact that demand has essentially stalled, prices for most grades jumped considerably-on most grades by more than $100/ton-during the past year. Following the recent run-up, prices for 2005 are likely to remain fairly flat although some slippage may occur during the current seasonally slow winter months. Nevertheless, unless the economy weakens considerably more than expected, prices are likely to remain near current levels. The weak dollar will continue to hold down imports, while supporting pricing and aiding exports.

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