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Production of paper and paperboard fell 4% and 5% respectively in May 1996, due to high customer inventories and eroding prices in the spring of 1996. Even though markets for some individual products remain chaotic, prices in other market sectors may stabilize in the second half of 1996. Lumber prices were also volatile in the 2nd qtr of 1996, ending with an 11% gain. Most investors should not seek stocks in this industry in 1996.

Prices are declining in the paper, pulp, paper and paperboard industries as manufacturers attempt to maintain market share. Capacity for both paper and paperboard is expected to increase by 2.5% per year through 1998, with paperboard rising the greatest. Earnings will increase for lumber companies with fewer Canadian imports. Investors must be cautious when selecting these stocks, although the industry is timely in 1996.

The pulp and paper industries are in recovery, and pulp manufacturers are attempting to increase prices for the ninth time since 1993. Abundance of supply over demand may have an effect, however, and paper production is not keeping pace with paperboard. Most lumber prices are above their three-year lows, and panel products are strong. Earnings will peak in the next year for this industry and investors should focus on coated papers and newsprint.

Stocks in the paper industry have outperformed the market since June 1995. The balance between demand and supply of most paper grades is favorable and prices are expected to rise 5% in Oct 1995. Kraft board, boxboard and linerboard prices rose 30%-50% over 1994 prices, and lumber and other wood product prices also increased in June 1995. Stocks with favorable pricing forecasts are recommended for investment.