Coated mechanical inventories surge as battle lines are drawn for upcoming price hikes

By John Maine, Vice President, World Graphic Papers, RISI
RISI has been predicting a major reversal of the trend in North American coated mechanical paper "apparent" consumption, and the new data that was just released by the PPPC show that the turnaround showed up with a vengeance in May. The year-to-date figures had been up 3.4% though April, which was perplexing given all of the weakness in the major end-use markets such as magazines and catalogs. Despite this weakness, these end-users continued to buy paper, amassing a sizable inventory, while their true consumption of paper plunged.
The statistics released in May were shocking: North American demand declined a whopping 13.5%. End-users had finally run out of room for inventory and started cutting orders sharply to match the performance of their true consumption of paper, which has been very weak all year.
The result of the slump in orders for May was a sharp rise in mill inventory of paper. Up until the last two months, all of the inventory build had been at the printer or end-user level, while mill inventories declined and remained very lean. During April and May, mill inventories jumped 85%, rising from 155,000 tons in March, to 289,000 tons in May. These inventories are still below year-ago levels, so they are not out of line. However, the speed with which these inventories are rising (2 months) is dramatic, and the fact that end-user and mill inventories are now both high while demand is weak is very disturbing to the market.