This year's number one in PrintWeek's annual power list certainly raised some eyebrows in the print industry (and kick-started a heated debate). But, in the cold light of day, readers shouldn't have been too surprised that David Allen, regional president of Paperlinx, topped the list. After all, the head of the UK's largest paper merchant is part of a sector that can make or break a print business at the moment.

With estimates suggesting that paper represents up to 60% of the cost of a print job, the importance of the substrate can't be underestimated. And with the strength of the pound, difficulties in securing credit insurance and oscillating levels of demand all occupying the minds of printers over the past 12 months, it's never been more important to keep your paper supplier on side.

The industry as a whole has been struggling as a result of the recession and there doesn't appear to be a quick or easy way out of it. But despite the crippling combination of factors cited above, UK printers have surprisingly enjoyed a brief respite from paper price increases that have been a feature of recent years.

At the start of 2009, the signs all pointed to continuing paper price increases in the ensuing months. A study by PPL Research confirmed that prices would rise over the course of the year and that the UK paper and board sector was facing an "unusual set of circumstances". This was despite an anticipated reduction in consumption both locally and globally.

By the end of 2008, the report noted that prices for the majority of UK paper and board grades were running significantly below the levels in mainland Europe, adding that unless there was a shift in currency rates, UK prices would start to move closer to those in the euro-zone through price adjustment.

As ever, the PrintWeek online community had a different take on the looming spectre of price rises. One blogger noted that demand was dropping all over Europe faster than capacity was being taken out. Another claimed that he tells his paper suppliers they'll never get another order and "hey presto, [the] price comes down 5% overnight".

Supply and demand
Yet the gloomy prediction have so far proved unfounded. More than halfway through 2009, the industry has yet to see this predicted rise in prices. Admittedly prices for some paper grades did increase at the end of last year "but this was a necessary move for the mills to attempt some kind of recovery after being hit with overcapacity, escalating energy and raw material costs and, for the European suppliers, unfavourable exchange rates," explains Philippa Charlton, marketing director at Robert Horne Group.

Since then, however, the upward move on prices has gone off the boil, according to Mike Gee, managing director at independent merchant Denmaur Papers. "The two rises during the year so far were due to the fall in sterling but, fortunately, the lack of demand and the reduction in energy costs have kept the prices down. Energy prices have come down and this has helped the paper manufacturers," says Gee.

That's not to say that there won't be any rises in the future. Paper manufacturers are keen to recover their costs, and while energy costs may have come down in recent months, that certainly wasn't the case a year ago. The problem now is that instead of being able to increase their prices, manufacturers are bound by the current imbalance between supply and demand.

"There's no doubt that there is pressure to use less paper," explains Malcolm Sinclair, marketing director at paper manufacturer Tullis Russell. "There has been a desire for manufacturers to recover their costs, but that hasn't happened."
Some market sectors are inevitably under more pressure than others. Publishing, for example, has suffered a significant reduction in paginations due to magazine advertising revenues dipping significantly. Some publishers have taken more dramatic steps, in some cases pulling the plug on under-performing titles.

Gee admits that these measures leaves Denmaur - a supplier of magazine paper - exposed. "Our own volumes have held up well," he claims, "and in the last two months figures have gone up. However, that has more to do with us winning a bigger share of the market."

And it's not just the publishing industry that's been hit hard by the recession - many other sectors are also struggling. The timing of the financial crisis couldn't have been worse coupled as it was with a general decline in paper consumption, due in large part to environmental considerations.

"It is undoubtedly a very difficult time for our industry and no-one could have predicted the speed and impact the recession would have on print and paper usage," says Robert Horne Group's Charlton.

The gloomy state of the market has seen print firms struggle to secure credit insurance, according to Denmaur's Gee, who notes that a lot of insurance has been withdrawn from printers due to the volatile nature of the industry. "When suppliers are evaluating credit, it is a lot tougher," he adds. "Printers have not got the insurance that they traditionally had and that has put them under a lot of pressure."

Under scrutiny
Thanks to this sorry state of affairs, the level of bad debt has risen and those seeking insurance are finding that providers are taking a root and branch approach to a company's accounts. In the past, the previous year's results might have sufficed, but with the market changing on an almost weekly basis, insurers are poring over accounts from the last six months of trading.

Gee says that printers who have forged good ties with their paper suppliers should be the ones who will benefit the most during the current turmoil. "We are working more closely with our clients," he says. "People who are in control of their business and provide us with up-to-date information are the ones who will prosper. Those who refuse to co-operate with their supplier will find it difficult."

Indeed, a more joined-up approach could help a print firm save money. Robert Horne Group believes its role is to fulfil customer needs in terms of security of supply and providing alternative solutions to meet budget needs. This includes lightweighting or bespoke sizes and bundling orders together to help lower the overall costs of supply.

Howard Smith Group is another merchant keen to emphasise that it isn't leaving printers high and dry. Managing director Malcolm Lane-Ley says the merchant's ‘cost-value proposition' (CVP) strategy helps customers lower costs, but still retain an added value factor for the final printed product.

"This is where we work closely with our clients in pursuit of value through services aligned to each customer's needs," he adds. "This, combined with high-impact products, provides their printed matter with more impact at a lower cost."
For example, Howard Smith Group offers products to be delivered in ‘bulk-packed only'. This means that printers receive only the paper they need. Printers who use the service at an average of three times per week can achieve savings of between £5,000 to £20,000 depending on their workflow, the company claims.

So what about the future? This is a tricky area for even the most clued-up economist, never mind paper merchants who, like everyone else, are keen to see some green shoots emerge. 

"There have been a few encouraging signs over the past few weeks, but it's difficult to predict what form the recession will take," says Denmaur's Gee. "A lot of paper mills are opting to shut down due to a lack of demand."

Fighting through
Tullis Russell's Sinclair agrees that it's tricky to make an accurate assessment of what form the post-recession industry will take. "It's tough to say if demand will pick up following a recovery or if this is how the industry will always be. But we are cautiously optimistic. We are structured in a way that we can fight our way through."

Volumes have been falling for some time, so the current lack of demand won't have come as too big a surprise for merchants, but it was the speed of the market's decline that caught everybody unawares and it's unlikely that any upturn in trade will be as fast or to the same levels as was previously enjoyed. Recession or no recession, the issues facing the paper sector are monumental and those companies that will survive, and in some instances thrive, will be the ones that best adapt to the new business landscape.