Fine demand helps boost paper fortunes.

Fine paper producers have been seeing ad rates rise and demand strengthening as some price increases have occurred. On the one hand, the fine paper market is proving quite buoyant these days as a number of industry metrics indicate that things are looking up for producers both in Europe and in North America. Added to that, the sector expects to see profitability improve this year--even if the full effects may not be seen until the fourth quarter in some cases.

Of course, the paper industry being the paper industry, it is not all plain sailing for the companies involved. Higher energy costs are proving to be a burden on margins and further increases in the price of pulp could also be problematic for some players.

Perhaps the most worrying development for producers though, is that fine paper companies in Europe could face antitrust fines.

ODD THINGS

The EC's investigation was prompted by an internal inquiry at UPM, Helsinki, Finland, which reportedly found some "odd things" going on. Based on the results of its own investigation, UPM took advantage of European law, which states that the first member of a cartel to come forward--the whistleblower--can obtain immunity from subsequent fines.

In January, the company reportedly forwarded documentation to the EC and authorities in the United States and Canada.

At this stage, it is not clear what the exact nature of the charges might comprise, but press reports from Finland and elsewhere indicate that the allegations could center around alleged price collusion in several areas, including the timber trade, publication paper, fine paper and wastepaper.

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The process is likely to take several years, if examples from other such cases are anything to go by, and the stakes are high as the EC has the power to impose fines of up to 10% of the group's turnover (sales) if the allegations are proved.

Added to that, a class action has also been launched in the United States on the back of the investigation.

An EC anti-trust case into price fixing in publication papers between 1995-1996 took until 2002 to conclude that there was no evidence of collusion. However, the EC did impose fines of over EUR 300 million on 10 companies in 2001.

DON'T WORRY

Needless to say, while the lawyers were happy at this turn of events, stock markets initially knocked 2%-4% off the share prices of those public companies caught up in the investigation when news of the raids came to light. However, financial analysts remained sanguine on the whole. As one London-based analyst noted. "Well, even if price-fixing is proved it is likely to be a year or two before anything happens and since we don't know how strong the evidence is yet, there's really no point in getting too worried about it at this stage."

While most other analysts generally agreed with that position, there was some concern that the EC inquiry could indirectly create other problems. As one pointed out, "The fine paper market has been getting some good news recently. Shipments are up, prices are moving and there have already been announcements for price increases in September. The problem is that with all the sensitivity about the EC investigation, companies could be worried about making similar moves at the same time and that could affect the chances of the next round of increases going through. That's not to say it won't happen, but it could be just that bit more challenging."

ALL UP

While it remains to be seen whether or not such fears are justified, there is little doubt that the fine paper market is enjoying something of a resurgence at the moment. The latest figures from Cepifine (Chart 1) indicate that coated woodfree (coated freesheet) deliveries for the year-to-date are up 8.6% on the same period in 2003. For uncoated woodfrees, the figures show a more modest rise of 1.6%, although for both grades estimated demand in Western Europe is well up on last year.

The positive news seems to be following a similar trend in the United States where analysts report that the uncoated freesheet market remains tight and the latest June price increases have gone through on the back of strong demand. The story was even better for coated freesheet in the United States as shipments surged in April and May ahead of a price increase. A recovery in the general economy and increased ad spending are both fueling increased demand.

According to the Publishers Information Bureau, May advertising data showed a 4.8% year-on-year increase in ad pages. And on top of that, higher pulp and energy prices are also driving these increases.

European producers are slightly behind this curve, but the trendline is certainly heading in a similar direction. As the figures from FOEX (Chart 3) confirm, an upward price move can be seen over recent weeks, although as one analyst pointed out, mill utilization rates are not yet in a position where big price hikes can be implemented at will. "The big developments are being seen in North America right now and Europe still have a bit more capacity than it needs. So although it's improving, things are slightly more muted," he said. Other analysts predict favorable more market conditions for European producers later this year.

COMPANY VIEW

The paper companies are also optimistic. Europe's largest coated woodfree producer, Sappi, said recently that "we are seeing signs of a turnaround in profitability in coated fine paper." The company pointed to strengthening advertising spending levels and noted that third quarter results should be up on the current quarter as the group implemented a 5%-7% price increase for coated paper in June.

UPM noted that uncoated fine paper demand was up 1% in the first quarter compared with the year-earlier period with coated fine paper up a healthy 5%. At the same time, Stora Enso said that the outlook for coated and uncoated fine paper is 'fairly good' with the company reporting strong order books. M-Real was slightly less optimistic.

Seasonally slack demand over the summer is likely to curb any prospects for a serious price move before the fourth quarter, but if demand continues to firm European producers may enjoy a favorable market conditions later this year.

MAY 2004: WESTERN EUROPEAN FINE PAPER STATISTICS

Tonnes ('000)                 May              Year-to-date
                           2004  2003       %  2004  2003         %
                                       change                change

CWF
 Total deliveries          738   697    5.9%   3900  3592     8.6%
 - to W.E.                 518   502    3.2%   2869  2682     7.0%
 - to outside W.E.         220   195   12.8%   1031   910    13.3%
 W.E. demand (estimated)   535   515    3.9%   2951  2746     7.5%

UWF
 Total deliveries          599   605   -1.0%   3127  3079     1.6%
 - to W.E.                 510   508    0.4%   2699  2644     2.1%
 - to outside W.E.          89    97   -8.2%    428   435    -1.6%
 W.E. demand (estimated)   610   599    1.8%   3242  3127     3.7%

Chart 1: May European coated and uncoated paper deliveries. Source: Cepi

APRIL 2004: WESTERN EUROPEAN FINE PAPER STATISTICS

Tonnes ('000)                 April            Year-to-date
                           2004  2003       %  2004  2003         %
                                       change                change

CWF
 Total deliveries          789   789    12.6%  3168  2895     9.4%
 - to W.E.                 580   507    14.4%  2357  2179     8.2%
 - to outside W.E.         209   194     7.7%   811   716    13.3%
 W.E. demand (estimated)   598   521    14.8%  2422  2230     8.6%

UWF
 Total deliveries          621   625    -0.6%  2530  2473     2.3%
 - to W.E.                 541   526     2.9%  2190  2136     2.5%
 - to outside W.E.          80    99   -19.2%   340   337     0.9%
 W.E. demand (estimated)   643   615     4.6%  2633  2528     4.2%

Chart 2: April European coated and uncoated paper deliveries. Source:
Cepi
* UWF Uncoated woodfree grades are printing and writing papers made of
chemical pulp.
* CWF Coated woodfree grades are UWF printing and writing papers, where
on each side a mineral coating is added.
* W.E. Western Europe

BIG-5 = 77% of total

Sappi Europe  19%
M-real        16%
Stora Enso    14%
UPM-Kymmene   14%
Lecta         13%
Burgo         10%
AWA            4%
Scheufelen     2%
Arctic Paper   2%
Marchi         1%
Others         5%

Coated fine paper capacities in Europe 2003.

THE PIX LWC, CTD WF AND A4 B-COPY BENCHMARK INDEXES

                LWC                 Ctd WF        A4 B-copy
                60 gr offset reels  100 gr reels  80 gr sheets
                EUR                 EUR           EUR

Date
29-June-2004    684.35              725.69        820.74
22-June-2004    687.88              731.40        822.99
15-June-2004    687.63              726.36        824.46
08-June-2004    685.25              724.07        821.60
01-June-2004    685.40              721.73        816.83
25-May-2004     683.03              718.02        815.68
18-May-2004     683.25              717.04        817.19
11-May-2004     682.48              717.28        818.31
04-May-2004     681.86              718.83        817.49
27-April-2004   683.39              720.25        820.70
First index

values
03-August-1999  762.58              727.93        818.01

Source: FOEX
Chart 3: Upward price moves can be seen in recent weeks.

IN THIS ARTICLE YOU WILL LEARN:

* Why a new Emissions Trading Scheme (ETS) may hit paper companies with huge energy charges.

* How the new pricing mechanism may hurt large energy consumers.

* Paper companies' options for modifying the ETS.

ADDITIONAL RESOURCES:

* Cepi web site: www.cepi.org.

JIM KENNY, CONTRIBUTING EDITOR

ABOUT THE AUTHOR

Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company. DSI. Contact him by phone at [phone], or by email at [e-mail].

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