Why Is Paper So Expensive?

“I can’t get my paper for 12 weeks? And it’s going to cost 12% more than my last order?”

 

 

Buying paper has become a convoluted process, putting stress on inventory management, procurement and vendor-client relationships.

The paper industry is experiencing a confluence of factors, a perfect storm of negative impacts. First, there’s the supply side. Globally, paper mills have been closing for years, reducing sources for many standard printing and publishing grades. Some mills have also converted from commercial printing grades to packaging grades, further reducing overall paper supply.

Second, there’s the cost of manufacturing. This year, mills have experienced dramatic increases in the cost of pulp and the chemicals needed to produce paper along with rising labor costs.

The third factor is transportation. Fuel and energy prices are up, plus there are disruptions in the global supply chain impacting international and domestic shipping. There is a shortage of trucks and drivers to move paper and other goods in North America.

And the fourth factor in the perfect storm is demand. Demand for paper is increasing. After the second quarter downturn in 2020, the demand for printing, marketing, direct mail and publishing has increased significantly. Printing shipments are up 22% year over year for the second quarter, while still far below what they were in 2019.

Is it really a “Perfect Storm?”

The perfect storm analogy implies triggers that came on suddenly and unexpectedly. The situation we face in 2021 is more like “climate change.” The signs and contributing factors have been there for a while, with the exception of volatile print volumes seen during the COVID-19 pandemic. However, these factors are all coming to a head in 2021. Printers need more paper. Mill inventories are at a five-year low. Less paper is being produced. It costs more to make paper. And it takes longer and costs more to ship it.

Since 2017, mill closures and mill conversions have reduced the overall supply of commercial-grade printing papers resulting in 39% less coated groundwood and 48% less coated freesheet paper being produced. Groundwood papers are primarily used in magazines, newspaper inserts and catalogs. Freesheet papers are primarily for transactional documents, commercial printing and direct mail.

For those buyers placing orders directly with mills, the industry term “LDC” used to mean “Last Date to Change” paper orders with the mills. Changes included changing paper types and increasing quantities. With current market conditions, mills are pushing buyers to place orders earlier, and LDC now means “last date to cancel or reduce” orders. Mills generally are not accepting paper changes or increases in quantities.

The global economic impact of COVID-19 resulted in additional mills closing and more planned conversions to packaging products. Demand for printing papers began growing as companies began increased marketing efforts during the third and fourth quarters in 2020. Increased demand has reduced mill inventories – further reducing overall supply at the end of 2020 and into 2021.

Paper mills can accurately predict the total volume of paper produced from each machine on an annualized basis. Annual tonnage of paper produced is tracked for every mill. Interruptions in supply chain and labor challenges have negatively impacted overall production. Several large national print service providers have indicated mills are not taking new orders for the balance of 2021. Large printers have contractual agreements from mills to supply allotments of paper. And large buyers of paper are being told by their distributors and mills that they will not accept new orders.

Transportation Delays

The global supply chain challenges extend beyond the news about shipping containers. Importing paper has also become less predictable. A procurement manager told me about a railcar full of paper that has been stuck in a Chicago rail yard for over eight weeks due to freight train delays. There are significant shortages of drivers and trucks in North America. Over the next decade the trucking industry will need to hire roughly 898,000 new drivers (90,000 drivers per year) to replace retiring truck drivers and meet industry growth.  It is estimated that America will be short 175,000 drivers by 2026.\

Demand is back.

In 2019, the comparison of annual shipments to capacity across all mills in North America was 89% for coated freesheet. In 2020, it dropped to 81%. There’s a different story for 2021. From January through April, the shipments-to-capacity comparison is 102%. And the forecast for the rest of the year is 93%.

Mill inventories are down 50-75% across paper grades compared to 2020. In response to increased demand, mills are maximizing efficiency by reducing the total number of basis weight offerings and eliminating some product lines. Print service providers have reported having to order different stocks because of lack of availability of specific brands and paper weights. It’s the only way they can meet production demands for delivery.

This year the paper mills in North America are like a sold-out rock concert. They have sold all the tickets they can produce. And there aren’t any ticket scalpers outside the gate.

Weathering the Storm

What’s a printer or procurement manager to do? Communicate regularly with your paper suppliers, client service team and customers. Gather data to better predict volumes required and understand the lead times needed for ordering. Inform your operations staff to manage inventory closely and report any ad hoc requests that require significant amounts of paper or envelopes.

Industry forecasts predict short supply for many paper grades through the first half of 2022. To anticipate delays in shipments and the impact on your production cycles, stay in communication with your suppliers, closely monitor orders and confirm delivery dates. Clients can handle bad news much better than surprises. They will understand increased costs and longer lead times. They will appreciate if you are providing them information so they can make informed decisions about their printing and mailing programs.

Given the rapid digitization of business today, who could have forecast that paper would be getting pricier? But it’s happening — a unique combination of events is constraining paper and packaging supplies, leading to a swift price uptick. 

Prices for pulp, the raw material of paper and corrugated boxes, have shot up 30 to 40 percent since last summer, says Nicholas Meade, senior economist for the pricing and purchasing service at IHS Markit. 

While manufacturers and distributors have absorbed some of that increase, prices for paper products that use pulp are up 7 to 15 percent across the board and 10 to 20 percent for packaging materials. 

That upwardly mobile price point for many paper products means that managing a company’s paper spend is becoming trickier. But buying chiefs can still manage costs by looking into underlying factors propelling this trend. 

The Root Causes of the Paper Pricing Spike

As the economy has grown, so has the demand for paper and packaging materials. Especially with e-commerce skyrocketing in popularity, the need for cardboard and other packing materials continues to spiral upward.

Meanwhile, paper manufacturing capacity in the United States has fallen. Several major mills have reduced their production. Georgia-Pacific, for example, scaled back operations at its facility in Camas, Washington. Others, like West Linn, have gone out of business. 

“As a result of that, more than 10 percent of North American manufacturing capacity for printing paper was taken out of the system in just a six-month period,” says Travis Mlakar, president of paper distributor Millcraft. 

As the demand for bond paper declined, some mills that formerly produced bond switched to producing corrugated and packaging products because of the higher margins. Now the decline in bond paper production has pushed prices up for that popular type of paper.

Plus, there’s fallout from changes in environmental regulations in China, which leads the world in paper production. Complying with new rules has increased the cost of paper production for Chinese mills. 

Additionally, a massive change in Chinese recycling markets has made yet more waves in the international paper market. China previously took in 55 percent of the world’s scrap paper for recycling, turning it into corrugated containers and cardboard boxes, according to a report from Public Radio International. But as of January, the new environmental regulations prompted Chinese mills to reduce that practice to control pollutants coming into the production stream. 

Both of these factors have put more pressure on pricing in the market for pulp and packaging materials, Meade says.

Transportation Demands and Other Factors

A less obvious element pushing up paper prices is the skyrocketing cost of transportation. The price of diesel fuel rose 32 percent from July 2017 to July 2018, Meade says, and freight capacity has tightened as demand increases have pushed freight rates higher. 

Paper products must be shipped all around the country, and as fuel and freight prices rise, so do paper prices. What’s more, there aren’t enough people to drive the trucks that carry paper products, causing a disruption in supply. 

“At one point, for every truck that a manufacturer could secure, they had five loads waiting to go out,” Mlakar says. 

Tariffs also have buyers and suppliers on alert. The possibility of price creep came on business radars after a tariff imposed on newsprint from Canada prompted a price jump of 30 percent on newsprint. Other tariffs in place inhibit the import of coated paper from certain countries and uncoated paper from others. 

Finally, currency fluctuations have altered supply to the U.S. market and led to price hikes. For instance, given the currency difference between the dollar and the yuan, the price of paper in China is now higher than in the U.S., incentivizing suppliers around the world to favor selling to buyers in China, Mlakar says. 

 

“The run-up of prices has been so unprecedented that it’s going to have to be reined in at some point.”

Tips on Paper Procurement

The good news is that although there may be some price increases in the next six months for all types of paper because of the underlying cost of pulp, analysts expect prices to stabilize next year. Meade thinks there might even be some price reductions.

“The run-up of prices has been so unprecedented that it’s going to have to be reined in at some point,” he says. “We are already seeing cracks in the run-up in pulp prices.”

For that reason, Meade recommends that procurement professionals think long term about their buying, holding off on large bulk purchases until prices begin to drop.

Mlakar advises paper buyers to make sure they know their supply sources to better gauge and avoid risks. 

“Understand your supply chain — which companies make it up from end to end,” he says.

Even if a business’s main supplier is stable, its second- and third-tier suppliers and producers might be less so, which could lead to unexpected price increases. 

Some paper manufacturers also may be inefficient producers because they have not upgraded their facilities with the latest equipment. That affects time and labor costs. Buyers also should consider the distance that suppliers and distributors are from their facilities, which can impact final price in a tight freight market, Mlakar notes. 

Given the disruptions in freight, buyers have to consider the likelihood that paper products may not be delivered on time and plan for those scenarios, he adds.

Finally, make sure to have a backup supplier in case an unexpected event disrupts your supply chain. Even though 2019 looks better for the paper market, geopolitical events could quickly change the scenario. 

 

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