Media Business - July 2010

Paper prices on upswing
Producers see reduced capacity, lower
inventory as opportunity to reverse slide

Outsourcing cuts Advanstar’s costs

BY MARK J. MILLER

The paper industry has suffered quarter after seemingly endless quarter of alling or flat prices, consolidation and machine shutdowns. Since mid-2007, the coated-paper industry in North America has seen the elimination of 2. 7 million tons of production capacity, according to William Lufkin, a former executive at R.R. Donnelley & Sons and president of Lufkin Strategic Procurement.

But things have finally started to turn around for papermakers in one important area: Prices have started to go up.

In April, mills implemented an increase of about $1.50 per hundredweight. “But that didn’t stick with too many publishers, particularly the bigger ones, because they had negotiated price lock-ins for the first half of the year,” Lufkin said.

Things, however, are looking up for papermakers in the second half, Lufkin said late last month, predicting a hike of $3 per hundredweight. “That $1.50 was a signal more than anything else that things are starting to recover and we’re going to pull this price up,” he said.

Publishers, too, expect papermakers to
fare better. “I believe the magazine paper mar-
ket is poised to do very well over the next few
months,” said Michael Cohen, director of
manufacturing and distribution purchasing at
Reed Business Information. “Consumption in
the U.S. is rising modestly. Mills are keeping a
tight rein on capacity, allowing them to imple-
ment and actually realize price increases.”
Gerry Chisholm, senior VP-sales at Gould
Paper, attributed the upward pressure on
prices to machine shutdowns at the Kruger
and Domtar mills in the second quarter,
“along with a big reduction in printer, mill
and end-user inventories.”
Lufkin recommended that publishers that
purchase paper through their printers contin-
ue to do so in the near term. “Stay under the
protection of your printer, but challenge the
magnitude of any increases and ask for them
to be documented,” he said. He also advised
publishers about to enter into a new contract
to insert a clause that allows them to give 90 or
120 days notice and get out of it.

Chisholm said paper buyers should lock in
the longest contract possible with the paper
supplier “while always making sure they
have a guarantee of supply.”
Of course, conditions can change quickly
in the paper industry. “One of the wild cards
is continued economic turbulence—this time
in Europe,” Cohen said. “If the economic crisis
in Greece extends to other countries and trig-
gers a second global recession, then I’d expect
prices to decrease due to lack of demand.” Co-
hen also noted that recent earthquakes in
“It looks like the paper-
making industry has got a
good handle on managing
supply now, and some un-
controllable events fac-
tored in to their advan-
tage,” he said.

Chisholm said he expects another price increase in October and wouldn’t be surprised if yet another follows in January. “The mills will continue to raise prices quarterly as long as they can,” he said.

Papermakers are trying to make up ground after losing money for some time. The largest coated-paper manufacturer in North America, NewPage, recently announced that its profit dropped 62% in the first quarter despite higher sales. Last month, NewPage President-CEO E. Thomas Curley and Chairman Mark Suwyn announced their resignations from the company.

“When the momentum changes from the one side to the other, the mills will try to capitalize on it,” Lufkin said, adding that even then papermakers still face something of a no-win situation.

“The higher the prices go, the more publishers will start pushing digital products and taking more paper out of the system,” he said. “I wouldn’t want to be a young person in the paper industry right now.” ;

“It looks like the
paper-making
industry has got
a good handle
on managing
supply now.”
Michael Cohen, director of
manufacturing and distribution
purchasing, Reed Business Information

Keith Hammerbeck started in the magazine business back in 1982 as production manager for one of Advanstar Communications’ health care titles. Now, as corporate director of media operations at Advanstar, he oversees production for all the company’s brands.

Media Business:What is your biggest current project?

Hammerbeck: Helping to transition all our operations to an offshore, third-party supplier. We are in the process of outsourcing all of our magazine production, print collateral, directory, classified, Web operations, circulation fulfillment, pick-n-pack, copy center and mailing services. In addition to this, I recently added facilities to my list of duties, so I am now involved with all aspects of leases and the other related tasks for our offices across the U.S. and in the U.K.

MB:What are the big challenges facing production departments and howare you preparing for them?

Hammerbeck: I think the biggest challenges are managing costs in a market with declining print ad revenue. Our current transition to using a third-party supplier for our operations is a big step in that direction. We now have a true variable cost model, so as ad pages decline, our cost for operations goes down in proportion. Hopefully, market conditions will change, and we will be able to enjoy a larger margin due to our reduced cost structure for operations.