What's Behind Rising Paper Prices? And How to Prepare for Future Increases

Written by Travis Mlakar, President, The Millcraft Paper Company
 

This past month has seen price increases from every major paper supplier. Why?  The short answer - because they have to.

Over the past few months, we have seen unprecedented changes in the industry.  These changes, which culminated with International Paper closing one of the largest and most cost competitive mills in North America, are being driven by the fact that paper prices have been, and remain, too low for manufacturers to survive.

In order for this industry to stay competitive, we need to have healthy manufacturers, distributors and printers. We must find ways to promote the ROI of print as compared to other media choices (for help on that just look at NewPage's "Ed" series or "Print &" from Sappi).

So what can we expect in the future? We will see capacity continue to be taken out of the market in order to match demand. The reality is that the low prices the industry has maintained no longer make it cost effective to stay put in a situation where we have over capacity. IP's recent closure of nearly one million tons annually should be a wake up call to everyone in the industry.

It is time to select partners and support them. We can no longer expect the industry to "be there" when we move business around, back and forth from one supplier to another.  The lowest transaction cost may actually be the highest cost in the long run as our choices of supply may lead us into situations where we no longer have a choice - at any price. Now is the time to align yourself strategically with those players who will be there in the long term.  Work on programs that take volatility out of the equation.

In fact, if you look at PIA’s recent Financial Ratio Study that compares profit leaders in the industry to all firms, it further supports this approach. 

The profit leaders in the industry actually pay more, as a percentage of sales, for their paper than “all firms.”  The difference however, is that they get more productivity out of their people.  The question that people need to ask is "how much can I possibly save on paper vs. the cost of quoting it out each day to multiple suppliers and going through the hassle of “switching” suppliers from job to job, day to day?  What is the cost benefit when you factor in receiving multiple deliveries, handling multiple invoices, interacting with multiple suppliers and having to adjust equipment for varying stocks?

As we move forward, look for availability to get pushed out (longer lead times) and prices to increase.  In order to combat this, industry participants must find out what their "volume" can earn them - not by shopping it out, but by committing it. Work with suppliers to commit your volume for smoother pricing and better availability - don't "work" suppliers for a better cost. The players in the future who will thrive in this tight market will be those who don't work on a transaction basis but rather focus on setting up steady, consistent programs that allow them to work on running their business efficiently.