Grade Profile

Coated free-sheet: Market improved in 1997 but prices may level off later this year

Grade structure. Coated free-sheet papers contain less than 10% mechanical (groundwood) pulp. They comprise as many as four of the five general categories of coated papers: Nos. 1 and 2 in which there is no groundwood, and No. 3 which may contain some groundwood. Nos. 4 and 5 are commonly groundwood grades but a small portion may be free-sheet. Coated free-sheet papers are used in magazines and catalogs, as well as in commercial printing, such as advertising brochures and inserts. About 88% of the paper produced is coated two-side (C2S); coated one-side paper (C1S) paper is produced for labels, with some used in books, commercial printing, business forms, envelopes, and other converted products.

Nos. 1 and 2 generally range in basis weight from 60 to 100 lbs, and Nos. 3 and 4 grades from 40 to 90 lbs. Most coated paper (about 75% to 85%) has a glossy surface; the rest is a combination of dull, matte, and embossed. Gloss finishes on the Gardner glossmeter are 45 or more for glossy, down to 25 for dull, and 20 or below for matte. Brightness ranges from 88 for high-gloss No. 1s to 72 for less expensive, lower brightness No. 4s with groundwood and chemical pulp and some clay filler. Bleached kraft hardwood pulp is used in making coated free-sheet, although some mills also use recovered paper. Coating solutions consist of pigments such as kaolin (clay), calcium carbonate, or titanium dioxide, and binders or adhesives (such as soluble starches).

Markets. U.S demand for coated free-sheet grades rebounded sharply in 1997, driven by increased consumption by advertisers and publishers riding on strong economic conditions. But consumption still fell short of demand because of inventory adjustments that took place in the first half of the year. Coated free-sheet inventories at the end of 1997 showed little change from
what they were at the end of 1996, although they were well off the peak. Producers still were discounting heavily in the beginning of 1997, but discounts started to come down in the second quarter and a price increase was announced for June 1. It took time for the increase to be applied, but the market and prices then remained steady-if not especially strong-throughout the second half of the year. A number of manufacturers instituted $35/ton price hikes for January 1998, with some telling customers that they would "guarantee" no further increases for six months. Several analysts forecast some leveling off of prices in the second half of 1998 as demand cools off due to a moderate drawdown of publisher inventories.

Preliminary totals put U.S. shipments
of coated free-sheet in 1997 at almost 4.8 million tons, up 10% from 1996 shipments of 4.36 million. Typically, No. 3s comprise the lion's share, followed by No. 2s. Coated one-side are about 10% of shipments. Canadian production of coated free-sheet was around 300,000 metric tons. Production (shipments) in 1998 are expected to be around 4.7 million tons in the U.S. with operating rates dropping to about 85% from an average of 90% in 1997.

Capacity. U.S. coated free-sheet capacity is forecast to increase at an average annual rate of 3.3% during the next three years, for a gain of 552,000 tons, according to the American Forest & Paper Assn. About half of this increase is scheduled to take place in 1998. The entire expansion is expected to result from increased production on existing machines. Canadian capacity is expected to grow by about 165,000 tons from 1997 to 2000.

Overseas, rapid capacity expansion is expected in 1998 in Europe and Asia; there are estimates that worldwide capacity could grow by 7% to 8%. While most of the product is designated for domestic markets overseas, the recent currency crisis in Southeast Asia has prompted concerns that there may be a significant increase in imports to the U.S.

BY JOYCE ROUTSON

News Editor