Wednesday, October 17, 2007

Paper Industry Acquisitions Continue Amid Rate Hikes and Supply Shortages

Paper Industry Acquisitions Continue Amid Rate Hikes and Supply Shortages
By Joanna Pettas

Verso Paper-a major supplier of coated mechanical paper-may be getting ready to buy Sappi, the top supplier of coated freesheet, a number of sources tell Folio:. "It's a rumor that's been kicking around for a while," says one source. If this rumor were to manifest, one could see it leaping over the NewPage/SENA merger set for next year to create an even larger giant-with even more control of supply and pricing. A Sappi spokesperson declined to comment on "market rumors."

When NewPage closes on its acquisition of Stora Enso North America next year, the company will produce 31.4 percent of all coated mechanical and 41.1 percent of all coated freesheet paper on the continent, bumping off Verso and SAPPI who are now at 17.6 and 22.0 percent respectively, according to marketshare numbers provided by RISI, an information provider for the global forest products industry. But if Verso and SAPPI merged, they could likely take the lead. What will the presence of these imminently growing market giants mean for already-rising prices and increasingly limited supply?

More of the same, apparently. Despite a possible marketshare leapfrog, profits and supply are still uncomfortably tight. Verso and Stora are already disappointing some customers, limiting allocation of certain grades and even canceling on orders, other sources say. Also an issue is how both companies are owned by private equity, which puts a premium on short-term profits. Foreign companies divesting from the U.S. paper market are increasingly selling to financial companies, and quickly. That Stora Enso sold its U.S. holdings to New Page for about $1.7 billion after paying $4.9 billion euros in 2000 indicates a concession to a tough market. "That's quite an indicator on just how bad they want to get out of the North American market," says Steve Frye, a publishing consultant.

John Maine, vice president of world graphic papers at RISI, says that recent consolidation is not having a material impact on pricing and availability. "The most likely scenario is that coated paper prices and availability in North America are not going to be greatly affected by [the NewPage/SENA] consolidation among producers." He continues, "Coated paper prices were already rising before this acquisition was announced, and they will continue to rise in 2008 and 2009 due to capacity closures announced earlier this year."

Others disagree on the consolidation point. "I don't think the consolidation trend is good news for publishers," says Ken Garner, president of United Litho. "While some weak suppliers will be forced out, if carried to its natural conclusion, shrinking supply will result in fewer choices and higher prices."

Greater control of supply and pricing can also mean lengthening delivery dates and increasing limits for buyers, which can leave printers and publishers scrambling-particularly smaller paper customers with no reserve supply. Sources say paper buyers might be forced to compromise increasingly on quality, delivery dates, and prices. Meanwhile, Jeff Bruce, a managing director at xpedx, a division of International Paper, believes "there's no question we'll see more M&A activity moving forward."

Unable to Deliver

According to Bruce, about 17 percent of North American coated paper production permanently shut down this summer due to limited profits on coated grades and a weak dollar. A number of mills, he says, are telling customers they can't deliver in time for their fall press date, especially on the popular and particularly-tight groundwood coated #5.

This is not a surprise to many who've been expecting a turnaround from paper companies that have struggled for years. Verso, the current largest supplier of coated mechanical paper, reported a $63.8 million loss in the first six months of this year.

"Mills have finally decided to reduce supply to create shortages and raise prices," says Bruce. "The plan has worked and we have seen two rounds of roughly 7 percent increases for coated #3, #4, and #5 grade-one in July and one in October. Another is heavily rumored for January '08."

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