What's Causing Rising Paper Prices?

If you are at all related to the commercial print industry, most likely you've seen the recent rise in paper prices. And if you're like many out there, you're not sure what's behind the increase. We asked our resident expert and president of Millcraft Paper, Travis Mlakar, to give us his take on the reason behind the increases.

"There are two key factors driving up prices in our industry right now - diesel fuel and capacity closures.

First, let’s look at diesel fuel. The price of diesel fuel for the week of March 19, 2012 averaged $4.14 per gallon nationwide. This is the highest it has been since the week of August 25, 2008! Compared to last year at this time, the prices are up just 6%; but when you look at the price of diesel fuel in March 2010, prices are up 41%. Looking back even further, current prices are up 105% compared to March 2009.

Why is this so important? Because it takes four trucks, on average, to get you your paper. Let me explain…

A paper mill requires roughly two in-bound trucks for every single out-bound truck hauling finished paper. Typically, the out-bound paper ends up on the merchant’s floor. Then you - the customer - orders it, and it gets loaded on yet another truck for final delivery. In this scenario, rising fuel prices hit the supply chain as many as four times, driving prices up exponentially.

Second, let’s consider capacity closures. This requires us to go back to basic economics and the supply and demand curves. When supply goes down - even if demand stays flat - prices go up, right? Well, that’s exactly what’s happening in the paper industry. In 2012 alone, over 425,000 tons of capacity have been taken out (or announced for closure). Since 2009, more than 1,881,000 tons of capacity have been taken out of the uncoated freesheet market. That’s a serious reduction in supply which has driven industry operating rates (actual operating volume versus operating capacity) into the low 90% range. (Anything over 95% is considered “tight”.)

But, the mills haven’t been the only ones to cut capacity. Recently we have seen a number of merchant operations also “take capacity out” by reducing the number of locations they have, pulling back from certain markets, and redirecting their focus and energy.

Thus, we have a situation where we have less capacity to serve, a flat (to slightly declining) demand curve, costs that are exponentially rising for the supply chain, and margins that are so squeezed across the industry that there is no longer room to simply absorb these increases. The result...massive price increases which will extend down through the entire supply chain, adding to our industry's challenge to compete in a diversified media landscape."

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