Coated Groundwood Marketing Mismanagement- Is it just me, or is the sales management of coated groundwood grades in the current bull market the worst ever? What happened to paper allocations? Lead times are out three months for many coated producers, and over two months for just about everyone. All companies are not equally culpable, of course. I have not heard any complaints about Kruger, or FutureMark for example, but the better managed backlogs are the minority. (By the way, I would be happy to publish any rebuttal to my criticisms – and would do so without identifying the source if that is preferred.)
So what are coated groundwood producers training their customers to do? They are forcing customers to protect themselves by inserting dummy orders into the system. And, in these situations, customers make certain that they error on the high side of what will be needed. This distorts demand, of course, and forces backlogs out to ridiculous levels.
In addition, since allocations are not in place, and there are only soft limits on order entry (of repeat customers at least), those paper buyers that can build inventories (predictable roll sizes) are now doing so. It is just common sense. Why pay $60/ton more for paper in Q4 if you can purchase it in Q3. This pushes out lead times even further.
In addition, some customers who order paper in inconsistent intervals, or who were slow on the dummy-order trigger, find themselves locked out – not because consumption is so strong – but because capacity has been managed so poorly. This poor management has, in effect, driven out legitimate coated demand, replacing it with dummy orders and unneeded customer inventories.
If customers understood that they had a specific (and limited) allocation, and could be confident that those tons were waiting for them each month, then backlogs would more closely reflect actual market conditions.
My first job in our industry was with Ecusta Paper in the late 70’s. The company was primarily a cigarette paper maker, but also had a printing papers division, which is the product I sold. The company had an interesting experience during an extremely tight market in 1975. Every summer the mill shut down for a week. Maintenance on the paper machines and other equipment was scheduled during this period, but all other employees had the week off. In July of 1975 the market was so strong that the company had a 12-month backlog (for its uncoated lightweight printing paper grades) when the mill went down for the July holiday week. However, market conditions changed suddenly the week the machines were down. By the time the mill was to start up again, there were not enough orders left in the system to restart the printing paper machines.
In 1996 the situation was not quite so dramatic, but order entry fell like a rock once buyers recognized that the tight market was over and paper was readily available. Customers cancelled dummy orders, and began to live off of their inventory savings. Demand plunged.
We are not going to see another 1975, or even another 1996, but the soft market that follows the current pricing uptrend will be very tough for the producers to deal with. This boom and bust cycle is inevitable, but producers could greatly reduce the impact if they managed their businesses better. But that is not happening this time around, and I can’t imagine why.
Coated Free Sheet Review: The dynamics of the coated free sheet market are quite a bit different. The small producers (West Linn and Appleton) seem to be doing a good job of being selective and intentionally keeping their backlogs down to reasonable levels.
The major three producers have mixed backlogs but the average is much lower than in coated groundwood. A friend in the business estimated that NewPage was at 30 days, Verso 30-60 days, and Sappi 60 days. If anyone from these mills wants to correct these estimates, let me know.
Why would the coated free sheet market be more in control than coated groundwood? Well, we have several clues as to what might be the cause. First, coated free sheet shipments were higher in June (371,000 tons) than any month since October of 2008. These shipments were not inflated through inventory reductions (mill inventories actually rose 15,000 tons). Coated capacity has been reduced quite a bit since 2008, and other capacity has been moved from coated free to uncoated free, so it is surprising that the coated free sheet mills could produce that much tonnage. Unless, that is, some of the uncoated production has been moved back to coated. We believe that this is probably occurring, and is keeping coated free sheet backlogs less extreme.
The second clue that our theory might be accurate is that NewPage coated free sheet backlogs seem to be lower than its competitors. This could be due to (1) better management of backlogs, (2) customers prefer other suppliers, or (3) the company is able to accept more coated free sheet business as it reduces its uncoated volume. Number 3 seems most likely. NewPage controls nearly 50% of the coated free sheet capacity and they are, by far, the largest swing producer of uncoated free on coated free machines.
The third clue is that on June 29 NewPage reduced its uncoated free sheet payment terms from 2%, the standard industry practice for this grade, to 1%. It is likely that NewPage reduced its payment terms in order to discourage sales of this grade and open the way for more coated free sheet.
Once again, I question the NewPage strategy – on two counts. Messing with payment terms is not the best way to discourage sales. This decision was probably made at some level above the sales group. This just annoys customers and does not benefit NewPage. The best way to reduce business is to select the least profitable accounts and raise their prices, and/or freight rates, and/or backlogs, and force them to go elsewhere. Why annoy all your customers equally and lose business you want to keep – either now or when the market softens and customers have an opportunity to move their business.
Then there is the question of whether NewPage should increase coated free shipments this summer by decreasing uncoated free shipments. Moving tons to coated free sheet has the advantage of higher margins at the present time, in addition to the fact that the company should be able to retain some of this business when a market reversal occurs. This might be the best strategy. However, making additional tons available over the summer will allow customers to build inventories and escape payment of the next price increase. In addition, allowing inventories to grow so easily will reduce (by some unknown period of time) the length of the strong market.