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Paper Market Update - November 16, 2017

Paper Market Update



In order to better understand what is currently taking place within the paper market one really needs to go back almost 10 years.



During this time, printers experienced a significant reduction in overall requested printed materials. Many printers experienced between 33% and 50% reduction in overall volume. As a result, printers heavily loaded in servicing debt quickly disappeared. Some went out of business, some we bought by other struggling printers in order to capture the needed volume to offset what is a very capital intensive business model. Correspondingly, the paper manufacturers felt the same crunch. Mills closed, took mandatory shut downs and furloughed employees. Multiple mills consolidated and eliminated product lines simply to attempt to level load supply and demand. As well, the domestic paper mills in the US created legislation that levied hefty embargo's and tariffs on imported papers. This all being done to attempt to push the US paper consumer towards a more domestically driven marketplace. These factors combined with a significant reduction in demand caused pricing to hit all-time lows for paper mills across the US. Some mills, in order to fill machine capacity that typically produced only coated freesheet started venturing into the offset and opaque markets just to make ends meet. Other mills, dabbled in board grades as well just to fill machine capacity. Each one of these decisions were driven out an overwhelming sense of desperation during this economic recession period. By the end of 2016 we found two of the largest domestic mills entering into bankruptcy which ultimately allowed the larger of the two to purchase the smaller mill creating the single largest coated freesheet manufacturer in North America all the while being partially protected under bankruptcy law. This continued in the merchant world with the consolidation of the two largest merchants in the US. The offset paper manufacturers early on remained very disciplined to pricing and market fluctuations which ultimately placed them in a solid position as responsible business owners to both the printing segment but to the global market at large.



This year has been filled with the drama all its own. Of the five largest domestic coated freesheet mills two are now closed. Remember what happened earlier that coated freesheet mills took on making board and uncoated sheets between 2007 and 2016? So this current set of events have had the same effect as a rubber band being stretched to its limit then one side letting go. The reverberations are being felt in all paper segments. The remaining mills levied a moratorium to hedge against a huge spike in 4th quarter demand that would have been accommodated by the two mills that are closing. All the mills have implemented price increases and it is anticipated there could be additional increases throughout the 4th quarter in 2017. This may in fact provide the remaining mills just the demand spike they need to increase prices to a profitable level for the first time in a decade. The word allocation has been tossed around and it would not take much to push a fragile market like domestic papers into an allocated market.


Hurricanes Harvey and Irma Impact on Pulp & Paper Prices /Resource: Dejana Dosen, Strategic Sourceror

The price of wood pulp was forecasted to rise, though, at the time, a natural disaster as big as Hurricane Harvey and Irma were not foreseen nor built into the forecast. Damages caused by Hurricane Harvey have been estimated anywhere from $65 billion to $190 billion, while Irma is thought to have caused $50 billion to $100 billion in destruction. The packaging industries, as well as several other industries, have been impacted by the post hurricane effects. 


To give you some perspective, Hurricane Katrina was a category 5 storm that occurred in August of 2005 and caused $108 billion in damages, according to Time. This means that on the high end, Hurricane Harvey and Irma caused $182 billion more in damages than Hurricane Katrina. The Hardwood Market Report noted that the North American pulp and paper industry faced several challenges after Hurricane Katrina hit, which resulted in a 10-15% increase in pulp and paper prices by October of 2005. Additionally, the hardwood chip market saw price increases of 5-10%. The two main factors behind the price increases are as follows:


1.       The law of supply and demand, which tells us that commodity price increases, can arise from higher product demand. After Hurricane Katrina hit, supply was unable to keep up with demand, resulting in price increases. 

2.       Shortages of raw material supply, which forced pulp and paper producers to pass on surcharges to paper consumers. 


Both factors that drove up pulp and paper prices after Hurricane Katrina are the same effects that we are seeing after Hurricane Harvey and Irma. Demand for paper-based packaging products has been on the rise even before Hurricane Harvey and Irma hit, and continue to increase, while supply has decreased. Additionally, we are seeing shortages of raw material supply in the southeast region where Hurricane Harvey and Irma hit, which will force pulp and paper producers to pass on their costs to consumers, as seen with Hurricane Katrina.


What to do?

Contact your supplier. Understand very clearly your printers supply chain and how it interacts with your own. If you have larger projects that you anticipate producing in the 4th quarter, you may want to pre-purchase your stock and ask your printer to inventory it for you. This is 100% supply chain management and at the end of the day its success will be determined by proactively working with suppliers to ensure paper is available when it is needed. EDWARDS is committed to our customers, community and the world in which we live and will offer only the best solutions to satisfy your print needs and supply chain management.    


Doug Tompkins, VP of Manufacturing, EDWARDS