John Maine, Vice President, World Graphic Papers, RISI
Jan. 28, 2013
At the end of 2012, we saw a very tight coated mechanical market in North America, with mills operating at 100% of capacity, mill inventories hitting an all-time low and prices on an upward slope (perhaps more accurately described as a price recovery from previous declines). A number of obstacles threaten to disrupt this balance in 2013. The key factors are (1) a sharp drop in end-use demand, (2) grade switching by end-users, (3) oversupply in Europe combined with a weaker euro and (4) rising mill costs.
The market was very tight in late 2012. Mill inventories in North America had dropped to only 100,000 tonnes, an all-time record low that represented less than 10 days of supply and was all presold. The ratio of shipments to capacity (before adjusting for seasonality) was at 102% in the third quarter and 100% in the fourth quarter. It was no surprise that prices for coated paper were headed up in late 2012.
The first factor that will disrupt this in 2013 is another large drop in demand. RISI is forecasting coated mechanical demand to fall more than 6% in 2013, led by a sharp decline in usage by print magazines. A weak economy combined with a further loss of ad dollars and circulation to electronic editions will drive the print end use down. Furthermore, it is likely that the 400,000 tons of newly available SC will be priced very competitively and could take some end-users away from LWC in 2013, particularly in the retail insert and catalog markets. Then there is always the seasonal factor to consider. Seasonal demand always declines in the first half of the year, and 2013 will be no exception. We expect operating rates to plunge from 100%+ in the second half of 2012, to 91% in the first half of 2013.
The next issue to consider is European imports. The European market is weak and oversupplied. Some European producers have even announced additional downtime for 2013 and expect operating rates to be in the mid-80s. But, if the euro decides to tank from current levels, the mills could opt to ship product to North America instead of taking downtime. Already, prices in North American are very attractive compared with Europe. If the value of the euro were to drop to $1.20 or less, we could certainly see a rise in coated mechanical exports from Europe to North America.
RISI publishes a 5-Year World Graphic Paper Forecast. For more information please contact John Maine at firstname.lastname@example.org or visit:
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John Maine, RISI Vice President for World Graphic Papers, is the author of the Paper Trader and the North American Graphic Paper 5-Year Forecast and North American Graphic Paper 15-Year Forecast. He works out of RISI's Charlottesville, VA, office and can be reached at email@example.com.