Price increases. There’s nothing worse than setting a budget, having an expectation on spend, then suddenly having a higher cost send your budget into a tailspin.
For a business that needs raw goods, materials or services to generate revenue, a price increase or disruption in the supply chain is more than an annoyance. It can significantly increase risk, impact profit or production, and leave the company reeling.
This is what many companies are feeling with the price changes and order backlog in the paper and print industries.
In an open market guided by the principles of capitalism, there are a number of factors and circumstances that can result in a commodity, material or product price increase. Let’s take a look at the current factors driving the price increases in paper and print.
The Current State of Paper Manufacturing and the Supply Chain
One way manufacturers can assess and optimize production is through a KPI known as operating rate. Operating rate is measurement of the total production capacity against what is currently being used. Comparing the amount of product being shipped in a day against the total amount of product that could be manufactured in that same day gives you the operating rate.
In talking to paper manufacturers and paper mills, we know that the “sweet spot” for their operating rate is about 90%. At that rate, they can maintain supply and demand, keep production rolling smoothly, manage the price, and handle backlog and inventory.
The problem is, with the sharp and robust recovery since the beginning of the pandemic, demand is much greater than current capacity. For some paper products, operating rate well exceeds 95% or more. Demand for some products is as much as 110% to 115% of current production capacity.
Businesses are buying more paper than manufacturers can produce.
Drivers Behind the Price Increase
There are several issues behind the gap between demand and paper manufacturing capacity, and the price increases we are currently seeing.
Demand for paper (except for kraft and corrugated paper) was sharply reduced in 2020. The pandemic shut down many businesses and industries. There wasn’t a need for paper purchases. There’s no need to manufacture paper if no one is buying. Several paper mills which were unprofitable or required significant capital investments to comply with environmental laws ended up shutting down permanently. Other mills coped with the pandemic by reducing staff and production time, or shifted operations to kraft and corrugated paper.
Now that demand is back to pre-COVID levels, or in some cases now exceeding pre-COVID levels, it is difficult for existing paper mill resources to make up for the lost capacity. In the past, an increase in demand could be fulfilled with purchases from foreign suppliers and markets, but foreign markets are struggling with the same challenges facing U.S. paper mills.
As we’ve seen with a number of industries, manufacturing is currently struggling with a worker shortage. During the pandemic, many paper mills and manufacturers were forced to let employees go, and as many as 1.4 million jobs were lost. Without work, there was no way to pay salary. Now that demand has dramatically increased, there is a need for workers. Companies are hiring, but a shortage still remains. According to a report by Deloitte and the Manufacturing Institute, only 820,000 of those jobs have been filled.
Manufacturing has been facing a labor shortage for some time. The pandemic only exacerbated that shortage. New workers entering the labor force are selecting jobs outside of manufacturing. With the pandemic, it seems many long-term employees have found alternate work and careers. Without workers to manage production, paper mills will struggle to meet demand.
Raw Material Challenges
The primary materials for paper manufacturing are wood and wood pulp. In recent months, wood pulp prices have increased as much as 20%. It’s a price increase driven by shortages and rapidly increasing demand.
Again, during the height of the lockdowns and the COVID pandemic, demand for wood dropped. Operations slowed and resources shifted to other operations. Today, demand for wood and wood pulp has dramatically increased, much of it being driven by new homes. This demand and the lack of supply has increased the price of raw materials.
Adjustment of the Product Mix
During times of increased demand, smart companies will focus efforts and resources on the products in their portfolio with the highest profitability. This is especially true in the paper industry, which has seen significant private equity investment in recent years. To increase revenue, financially focused owners will look at higher prices for oversold commodities to increase the return on their investment.
This can cause a ripple effect in the paper market. As we said, it leads to higher prices on some products. Other, less profitable products will see lower production runs and less inventory, driving up those prices. In this situation, no matter the commodity you need, you are likely seeing a price increase.
Managing Supply Disruption: Where Do We Go From Here?
Looking ahead, no one is sure when we’ll find a better balance between supply and demand in the paper and print markets.
Building up production capacity will take time. It takes years to build a new paper mill as a replacement for the ones that closed, and that may not be the right solution. Overall, there’s no easy way to know the overall capacity levels at paper mills, or if the capacity gaps at individual mills are being driven by supply challenges, labor challenges, or another issue.
Speculation continues on when the balance will be reached. Current estimates are that the price of wood will drop in 2022, eventually returning to pre-pandemic levels the following year. This will have an impact on the price of paper and print materials, but it’s not the only factor. Leaders in the paper industry estimate we may not reach balance between supply and demand until late 2022 at the earliest, and 2023 is more likely.
If you have further questions, or want to see how a supplier and industry advocate can help you mitigate these challenges and grow your business, then contact GO2 Partners. We’re ready to help.