I can’t get my paper for 12-weeks? And it’s going to cost 12% more than my last order? Yes, this is what procurement managers and paper buyers are hearing. 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 beginning in the third quarter of 2020. Printing shipments are up 22% year over year for the second quarter while still far below what they were in 2019(1).
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 5-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(2).
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 3rd and 4th 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.
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 8 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(5).
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% (3).
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(4). 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.
For more tips on prepping for paper shortages, look back to this 2018 post from Elizabeth Gooding on Mitigating Risk in the Paper Supply Chain. Déjà vu?
Stay tuned for my next article – Paper fears leads to hoarding
(2) Quad Graphics Market Update June 2021
(3) RISI PPPC
(4) Quad Graphics Market Update August 2021
(5) Sources: American Trucking Associations Truck Driver Shortage Analysis 2018, FleetOwner, Truck Driver Shortage on Course to Double in a Decade 2019, and Truckdriverssalary.com