Riding the price waves

Riding the price waves
From regular price increases to unforeseen natural disasters, conditions in the paper market can be volatile. Don’t let surges and swells in costs drown your business, says Steve Crowe.

But paper is not in short supply. Even with natural disasters, there is a steady supply available here and overseas.

Wayne Stanistreet, general manager for sales and marketing at Australian Paper, can foresee no drop in supply, and points out there has been a ready supply for quite some time, making the supply business a more difficult and competitive proposition.

“I don’t think there’s been a shortage of paper for a long time. You can have a one-off situation such as the earthquake in Chile affecting pulp supplies – and the Japanese earthquake reduced supply temporarily – but there’s no shortage of supply because other mills have generally stepped in to make up the shortfall.

“There are also a number of start-ups, and China is the major country in recent times to put on huge capacity. There are reports that the Chinese are talking about slowing down the rate of production increase in order to bolster returns.”

So ready supply means the price of paper is going down in the near future? Not likely, say merchants and mills.

Gordon Thomas, group general manager, sales and marketing, at Paperlinx, says: “A number of signs point to upward pressure on paper prices. Pulp is very expensive at present, energy is getting more expensive, and the Japanese disaster has placed pressure on production in Asia. Global prices have been moving up little by little in the past months, but the strong Australian dollar has masked it. Exchange rates are still the biggest influence, and it would be easier to forecast local price directions if you can accurately forecast the dollar.”

According to local paper suppliers, paper prices are, in relative terms, the lowest they’ve been in many years, and must go up to deliver returns for suppliers.

“In the whole chain, from paper through to print, I think everyone is under extreme pressure, and margins are very tight everywhere you look. I can’t recall paper per se being as low in pricing, relatively, as it is now,” says Stanistreet.

“I’ve been in the industry for 35 years, and in relative terms it’s incredibly tight. This is not always good for paper buyers. For example, on the merchant side of the business, really low prices don’t really help, because in many cases the dollar margin made is much lower.”

Simon Doggett, managing director at KW Doggett Fine Paper, sees price rises for the year ahead. “Paper manufacturers have recently incurred pulp increases and are also subject to increasing costs such as electricity. We expect these costs to be passed down the supply chain as no one is in a position to absorb cost increases. The unknown factor is currency, and the recent appreciation of the Australian dollar has largely offset supply costs that have been incurred over the last 12 months,” he says.

Stanistreet agrees. “There are other factors affecting price and it’s not easy to pick what will happen. Pulp prices are again on the rise and producers are finding it hard to continually absorb these plus other cost increases. And heaven knows what the Australian dollar will do. It has a very big impact, as we’re seeing now.

“We’re actually seeing mills putting up prices, but any price increases are being negated with the currency itself. There’s no doubt all suppliers need a price increase; whether that turns into a price increase in the market very much depends on what the currency is going to do. That has a major effect on the final price into Australia.”

Lock it in

This suggests printers would find some advantage in locking down prices from their merchants for the foreseeable future, but not many merchants are keen on this. Also, the savings that may be had from a locked price do not always materialise, and there are disadvantages, according to printers that spoke to ProPrint.

Bright Print Group director John Bright said the company has an agreement with its suppliers, but it is not set in concrete.

“We have an agreed rate that’s for the most part fixed. However, it does change whenever there’s movement in the currency or raw material costs. We pay a fixed price, and I imagine most print companies are in a similar boat.

“It depends on how you term ‘fixed rate’. If you mean, do I have a fixed term for six or 12 months, then no. I have a current rate until such times as we negotiate a change, and that’s generally after the rest of the market moves. They do seem to look after us pretty well,” says Bright.

Paul Richardson at Lindsay Yates Group does have a supply arrangement, but it’s not locked at a price.

“We do have agreements, but they’re more gentlemen’s agreements. Because prices have been coming down, you’re very wary to lock in on a price. It’s like mort­gages at the bank. Fixed mortgages are not the go at the moment. You’re hedging your bets that it’s not going to go up. We bought some indent stocks last year and we found that two months later we could buy it cheaper off the floor. If you’re a large supplier using a particular grade and you’re buying from a merchant over­seas you’ll lock that price in because you’re buying the volumes. But for what we buy we may as well let the variable rate dictate.”

Paperlinx’s Gordon Thomas says that pricing agreements require a two-way conviction in demand and supply, which places a degree of risk on both parties.

“Paper manufacturers will avoid long-term pricing unless there is congruent long-term certainty of demand – for example, a take-or-pay arrangement. Long-term forward currency hedging can help to manage swings in AUD terms, but becomes very risky if the punt is in the wrong direction,” he says.

“This brings to a head a constant source of frustration between merchants and printers. Printers are sometimes put under pressure to tender fixed price arrangements to corporate clients, and often succumb to that pressure without back-to-back arrangements on paper,” says Thomas.

Doggett says the company prefers not to offer agreements. “We do not offer fixed price paper supply given the volatility of many input costs and exchange rates.”

Stanistreet says: “There are horses for courses. We consider it on a case-by-case basis – the volumes involved, the relation­ship we have, what the product is. I guess we look at our overall value proposition as a starting point and work from there.

“More and more printers I know, and merchants through the channel, are getting more and more pressure to hold prices. We have to be mindful that it’s a two-way deal. Therefore, if you have a price in place, and a volume that goes with it, the commitment from the customer is locked in at the same time.”

So how can printers secure their paper supplies at a reasonable price? While printers have to weather the shifts in prices and the movement of markets, common sense is the prevailing advice.

SOS Print & Media director Michael Schulz says that printers are obligated to certain delivery expectations when accepting work, and they should expect similar performance and guarantees in return from their suppliers.

“We are asked to sign print supply contracts that make us responsible for a range of events directly or indirectly related to print. They define penalties when service levels are not met and have very clear definitions of expectations. However, we, and probably other printers as well, still have quite a traditional attitude towards our paper and other suppliers, and do not pass on some of these changes in procurement. It’s the same for service. While printers provide expensive online systems to their customers, many paper companies don’t even provide simple real-time online stock control systems.”

One paper executive says planning ahead is the best way to manage paper costs. “If a printer really wants to get down to it the best thing he can do is organise his forecasting, and if he can then actually indent some paper – actually make a commitment to a merchant or mill on a quantity of stock – have the ability to pay for it, and he has considered the implications for his working capital, that will minimise any increases.”

top tips

1. Forecast your paper requirements as accurately as possible
2. Choose just a couple of house stocks with steady supply
3. Align your business with strong strategic supply partners
4. Choose suppliers using criteria such as continuity of supply, their capacity, their environmental credentials
5. Make some commitments on volumes to suppliers, but only for guaranteed work
6. Check your forecasts again

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