North American demand for uncoated free sheet papers continues to be sluggish, with U.S. demand through August 2003 off about 1% from prior year levels, and U.S. shipments down 1.7% over the same period at 8.3 million tons. Demand inched up slightly in 2002, but following declines in 2000 and 2001, consumption remains below the 1999 peak of 14.7 million tons.
Why hasn't an improving economy—GDP continues to expand, although modestly—led to any substantial rebound in demand or pricing for these grades? In contrast, coated and uncoated groundwood demand has rebounded versus year-ago levels. Several factors are at play, including traditional supply and demand influences on pricing and demand factors such as a shedding of jobs despite GDP growth.
Traditionally, cut-size paper demand tracks white-collar employment. However, one thing that is apparent is uncoated free sheet demand no longer follows in line with general economic growth. This is clearly shown in Figure 1, which depicts uncoated free sheet demand compared with GDP, and shows a marked divergence since the late 1990s.
Figure 1. Uncoated free sheet demand compared with GDP, 1986 – 2004(P)
Technology Shifting Usage
A key factor is that uncoated free-sheet papers, the largest graphic paper grade with North American demand at 14 million tons, have probably been affected more than any grade by recent technology trends. The real underlying causes are rooted in factors impacting individual markets/grades.
Figure 2 clearly illustrates that the few sectors that are expanding can no longer offset those that are contracting. Some developments, such as growing home/small office use, have increased demand. Business paper demand (which includes most cut-size grades) continues to expand, but growth is slowing in traditional office and copy paper markets.
Figure 2.Uncoated free sheet demand by major grade, 1986 - 2002
Shifts caused by the Internet and personal computer technology, such as electronic bill paying, email communication, and Internet related impacts on advertising, are either decreasing demand or eliminating growth for grades such as envelope.
Supply/Demand Influences
Low cost imports are another factor in the uncoated free sheet market, although they haven't become as dominant a factor as they have in the coated free sheet market. Nevertheless, at about 10% of demand, imports continue to put tremendous cost pressures on domestic suppliers of commodity grades such as copy and offset papers.
However, this has also had a painful but positive impact on supply and demand by forcing the closure of almost 2 million tons of capacity since 2000. Free sheet substitute grades such as high brightness groundwood sheets are also siphoning off market share by providing a lower cost alternative to traditional offset grades.
Prices for most grades have slipped from levels seen in early 2003 and, overall, remain weak. Producers announced a $60 price increase for October on offset and copy grades, but owing to weak demand for most grades and continued oversupply, it appears the increase has little chance of succeeding in the short term. The most likely scenario would be that the increase has the effect of pulling up the bottom on the most heavily discounted grades.
Continued economic growth should spur a modest rebound in demand next year. However, despite the shrinkage in capacity, operating rates will remain somewhat low, and any price recovery is thus likely to be modest. The challenges facing producers are unlikely to end anytime soon, and while demand may edge up gains in the future will be subdued and less than growth in the general economy and considerably lagging gains for other grades.
Shifts in currency may make imports a little less attractive, but it's hard to see how this would significantly change the global competitive cost picture where North American mills tend to be higher-cost than many mills. Basing a business model on exchange rates is certainly a dubious approach. Local mills do have advantages they can leverage such as proximity, which can be used to enhance customer service, and these factors will become even more important in the future.
