Coated Update: The Subsidies Are Over So Is Coated Pricing Moving Up?

Shipments and Inventories: For months we have been promising Reel Time subscribers that it would finally happen in November. And it did. U.S. coated shipments (both grades) were higher in November 2009 than in the year-ago November. It has been a long time coming! For coated free sheet it has been exactly two years since the last monthly (y/y) increase, and for coated groundwood, 17 months.

U.S. shipments of coated free sheet at 326,100 tons were up 7% (y/y), and coated groundwood shipments at 297,000 tons were up 15.5% (y/y). The data was not all positive, however. Shipments were down from a strong October 2009 with coated free sheet off by 31,000 tons and coated groundwood down by 41,900 tons. Still, there is much more good than bad in this data for both producers and consumers. It provides evidence that the slide in demand is over, and offers hope that even consumption has bottomed out.

Mill inventories edged up just a bit in both grades. Coated capacity available probably ran full. There is, of course, quite a bit of capacity that is not in a position to produce coated paper due to closures of indefinite duration, and to grade substitution.

U.S. Coated Imports: Imports of the two coated grades had been moving lower at about the same rate in 2009 – until September that is. In September, and now again in October (the most recent month of available AF&PA data), coated groundwood imports have been much stronger than coated free sheet. Most of that strength is in imports from Finland, which averaged 37,300 tons/month the last two months compared to 20,000 tons/month the previous six months. This will be an important statistic to monitor as we move through 2010.

It is important to note that October coated groundwood imports from China (13,200 tons) were down 35% from the previous month, and nearly 50% below the monthly average during the first half of 2009. It appears that China reduced exports to the U.S. in preparation for the possible implementation of tariffs and duties.

Subsidies Over, Prices Up?:  This was the message of many of the coated paper producers for several months, but that is just not the way the market works. See our #1 Absolute Truth. Prices are not currently below variable costs of coated producers, so the fact that subsidies expired at year end had no impact on current prices.

From what we can gather, coated prices have remained more-or-less stable as we entered 2010. Some downward revisions are occurring but an overall decline is prices is not evident.

As always, the supply/demand balance will determine future pricing levels. Our pricing forecast has not changed from mid-November when our 2010 forecast was published.

Consumption and Demand in Early 2010: Producers do, however, have reason to hope that the supply/demand balance necessary for a price increase could be getting closer. Anecdotal reports from industry contacts point to modest market improvement. Demand will remain higher (y/y) in the coming months, and it appears that even consumption might be edging up a bit from the horrendous first quarter of 2009.

In addition to anecdotal reports, the Wall Street Journal ran a positive story on advertising on January the 3rd, reporting that print advertising picked up significantly late in 2009.

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