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.