May 13, 2010

By John Maine, Vice President, World Graphic Papers, RISI

RISI ECONOMISTS: North American copy paper trends at home vs. the office - less paper, but far from paperless

BEDFORD, MA, May 13, 2010 (Viewpoint) - By John Maine, Vice President World Graphic Paper

When I first started forecasting copy paper markets more than 30 years ago, it was the easiest thing in the world to predict. The market would grow 5% every year, maybe a little more when the economy was booming, maybe a tad less during a recession. Offshore imports were virtually nonexistent, and there were even tariffs in place to prevent much trade between the USA and Canada. Producers would pull out a yardstick and slap it alongside the historical trend of demand, and draw a line to a point in the future where more capacity would be needed, and proceed with plans to expand.

Flash forward to 2010 and no one can tell you with any reasonable degree of certainty exactly how the market for copy papers will play out over the coming years. In fact, it is not really just copy paper anymore, with so many ink-jet, laser, high-speed, sheet-fed digital printers and other printing devices replacing xerographic copy machines. Demand is now generally believed to be falling on a long-term basis at some unknown rate of decline. Supply is being cut preemptively by the limited number of producers now making copy paper in North America in an attempt to preserve profitability in a declining market. And finally, wild swings in exchange rates and excess capacity in offshore markets add another degree of supply uncertainty to the market. Offshore imports feed about 6% of North American cut-size copy paper demand and these imports may be rising in the future despite falling US demand.

The demand trend (Figure 1) slowed dramatically in 2000, and reached what we believe will be the all-time historical peak in the market of just under 6.0 million tons during 2004-2006. The market began to slide slowly off the edge in 2007-2008, and then took a headfirst plunge off the cliff in 2009. The market stood at just under 5.0 million tons in 2009 in North America, but there are disturbing signs that the slide is continuing in 2010. The AF&PA reported that for the first quarter of 2010, US shipments of bond & writing paper (i.e., cut-size) were down 3.8%, while shipments of all other grades of uncoated freesheet gained 8% against year-ago levels.

In order to analyze these movements and try to come up with projections for the future, it is important to segment the trends into "office" vs. "SOHO" channels. SOHO is a common acronym for the small-office-home-office channel. We can arrive at estimates of the SOHO market for copy paper by following the distribution chain. Office superstores are dominated by Staples, Office Depot and OfficeMax, who have sales segments broken down into "Delivery" vs. "Retail." Most of the "Retail" in-store distribution is going to be going to the SOHO market. These stores distributed about 1.4 million tons of "copy" paper in 2008 (latest data), and 53% was sold in-store "Retail." Thus, we can estimate that about 750,000 tons of copy paper used by the SOHO market is sold through office superstores.

There will also be some distribution to the SOHO market through other retail stores (Walmart, K-Mart, CVS, Walgreens, etc.) and through warehouse clubs (Sam's Club, BJ's, etc.). We estimate that roughly 300,000 tons of "copy" paper is sold through these channels, most of which goes to the SOHO market. Thus, we get an estimate that the SOHO market used slightly less than 1.1 million tons of copy paper in 2008, although there was an apparent further drop in 2009.

We have been making these estimates every year since 2003 and also estimated historical levels back to the 1970s (Figure 1). At first, the decline in copy paper usage at the office, which began in the 1990s, was offset by growth in usage at the SOHO level. However, it now appears that copy paper usage in the SOHO market is also declining, so the prospects for future growth of copy paper demand in North America are dim.

Part of the decline in demand at the office in recent years can be attributed to falling white collar employment. We collected data from the Bureau of Labor Statistics household population survey and chose to include two major categories: management, professional and related occupations, and office and administrative support occupations. These two categories accounted for 70.3 million jobs in 2009, 50% of the employment levels in the USA in 2009 for ages 16 and older. Despite all the hoopla about white collar job losses in 2009, these job categories actually did better than manufacturing. Management, professional and related jobs fell only 1% in 2009, while jobs in production and transportation took a 10% hit. Jobs in the service industry actually increased in 2009 (see http://www.bls.gov/cps/cpsaat9.pdf).

Using these employment categories, each office worker consumed an estimated 106 lbs per year of copy paper in 2009, compared with 130 lbs in 2005 (Figure 2). Employment in white collar positions actually grew 2% from 2005 to 2009 (despite the drop in 2009), yet this was more than offset by the decline in paper usage per worker.

There were 131 million households in North America in 2009, up 4% from 2005, yet it appears that copy paper use at the household level is also declining. The average household usage of 15.7 lbs of copy paper in 2009 was down from a peak of 17.9 lbs in 2006. Apparently the boom in household printing has calmed, and more households are content to save on paper and store much of their information solely in electronic form (hopefully with backup!).

This analysis helps shed a little more light on the demand trends for this market and what we can expect for the future. Both of the major end-use channels, office and home, are now declining and will continue to do so for the foreseeable future. The rate of decline will abate from the trend of recent years, with a fall of 1-2% per year being a reasonable expectation. We will leave the still unsettled issue of future offshore supply of copy paper to the North American market for another Viewpoint.

John Maine, RISI Vice President for World Graphic Papers, author of the monthly Paper Trader, works out of RISI's Charlottesville, VA, office.

Tel: 434 978 2927 Email: jmaine@risi.com

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