Suddenly, Paper Is On A Burn

Anyone who doubts the strength of the recovery should consider this: Six months ago, the paper industry was mired in its longest downturn in decades. Today, prices of some grades of paper are jumping by 25% in a month, and there's panic buying: Newspaper and magazine publishers, small print shops, and manufacturers are stocking up before prices rise further. "I don't know anybody who planned for this," says John Clifford, president of Clifford Paper Inc., a large U.S. distributor of papers used for books, magazines, and catalogs. "Right now, the world is sold out of every grade of printing and writing paper."

Papermakers, of course, couldn't be happier. Their latest downturn, which began in 1990, was unusually severe, even for the notoriously cyclical industry. Earlier this year, inflation-adjusted "prices reached 50-year lows in pulp and paper," says A.D. Correll, chairman and chief executive of Georgia-Pacific Corp. By then, companies such as Boise Cascade, Champion, and Stone Container had bled lots of red ink, while others with large wood operations, such as Weyerhaeuser and International Paper, eked out profits mainly because of rising lumber prices. But now, papermakers are humming at nearly 96% of capacity vs. 93% last year, and their inventories are the leanest in 40 years.

The startling turnaround began with rising demand for linerboard, used for corrugated boxes. Manufacturers needed more cartons, and U.S. exports of linerboard surged, especially to rapidly growing markets in Asia and Latin America. As a result, prices have jumped nearly 50% since late last year. Pulp, the basic raw material, also took off. Last December, prices were so low that some manufacturers briefly shut mills rather than run at a loss. And new mills scheduled to open in Malaysia and Indonesia were delayed, keeping expected supplies off the market. So pulp has nearly doubled, to $700 a ton. "Prices are going to the moon by a missile," says analyst George B. Adler of Smith Barney Inc.

PULP FRICTION. The biggest surprise has come since August. The price of basic uncoated white office paper has jumped on three occasions since then, to nearly $700 a ton. Coated-paper supplies are also tight, as increased advertising has fattened magazines and mail-order companies have sent out larger holiday catalogs. As long-term contracts come up for renewal, buyers face hikes of as much as 25%. "Demand is stronger and stronger," says L. Scott Barnard, executive vice-president of Champion International Corp.

That's partly because paper buyers, who once counted on instant delivery, are trying to build inventory. "We're seeing a change in inventory policy as well as a real acceleration in demand," says Dean Witter Reynolds Inc. analyst Evadna Lynn. Excess capacity and price wars have kept down prices of toilet paper and diapers. But rising pulp costs may push up tissue prices next.

Corporate earnings may soon reflect all this. Third-quarter paper profits remained modest, but far bigger gains are expected for the fourth quarter and in 1995. "We're looking at two to three years of guaranteed tight markets, as long as we don't go into recession," says John Maine, a paper analyst with Resource Information Systems Inc., a Bedford (Mass.) consultancy.

In fact, the biggest threat to the industry may be its penchant for overinvesting as profits grow. So far, however, only a few companies have announced new capacity, mainly in linerboard. Instead, many need time to repair balance sheets and pay off debt. Says Union Camp Corp. planning director C. Stuart Howell: "Given the depth of the cycle, there's going to be a lot of reassessment before people invest."

Indeed, the U.S. industry has spent $7.5 billion in the past five years for equipment needed to process recycled papers. About 30% of the material used in corrugated boxes and about 40% in newsprint is recycled. Demand has lifted wastepaper prices, too. Old newspaper has almost quadrupled this year, to more than $80 a ton. That means profits for such waste collectors as Browning-Ferris Industries Inc. but higher raw-materials costs for papermakers.

With global demand growing, especially in China and Latin America, most analysts expect paper's upturn to be as prolonged as the recent downturn. For the industry, it's a breath of fresh air. For paper buyers, however, it could mean that tight-chest feeling for months to come.

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