The adage that history repeats itself might soon apply to the printing industry. At issue is paper—a product which, for most printers, constitutes the largest expense, even more than equipment costs. And paper prices are on the rise. To be fair, paper prices have not moved much since 1996. Modest increases have gone through in the last couple of years largely in pace with inflation. But now, real pressure is starting to build. Mill increases are starting to come through in rapid succession.

Three factors are involved:

1. the number one cost of paper is pulp. Pulp, like oil, is basically a commodity product—if demand goes up, prices follow. Pulp represents roughly 50% of the cost of uncoated grades and about 40% of coated grades. A lot of mills have been absorbing increased pulp costs in the last year and are unable to cover further increases;
2. very little additional capacity has come on-line during the past three or four years. New mills cost about a billion dollars. In the absence of growing demand and rising prices, who wants to build a new mill? In the last several years, it’s been more profitable to simply buy an existing mill—a strategy which does not increase capacity;
3. possibly the most pressing factor behind the recent increases is the generally poor return on assets for paper companies. The financial markets have not been very excited about the paper business. Company stocks haven’t done that well relative to the stock market as a whole which makes it pretty tough to raise additional capital. In order to grow, therefore, paper companies need to generate higher profits.

It only makes sense that if any new capacity is going to be added down the road, prices will have to rise. And with a white-hot North American economy, demand will indeed push prices upward.

Profits soared and price books where out of date before they were printed

Now, recall that old adage about history repeating itself. Here is the problem for those who can remember 1995. After five bad years of recession and lousy paper prices, demand picked up. Prices took off, with the price of some grades almost doubling in a year. Profits soared and price books were out of date before they were printed. Merchants were put on allocation. Then disaster struck. Within three months, prices and profits collapsed. The cost of printing had climbed so fast and high that customers looked around and found cheaper alternatives to printing. No industry has a monopoly. If prices get too high compared to alternative products, demand inevitably collapses.

In 1996, paper prices and profits dropped to below what they had been before the great price hikes. The industry ended up worse off. It took almost four years for the market to recover. Everyone lost—pulp producers, paper mills, merchants and printers.

The reality is that paper mills need better, long-term profits in order to put in new paper machines and increase capacity. If prices and margins rise on a steady basis over time, that will happen. If the great price hikes of ‘95 return then history weill repeat and prices and profits will be short-lived. The question is: do we have to go through this again?