Over the past 18 months paper manufacturers have announced a number of price increases which look set to continue for the foreseeable future. As merchants, we are compelled to pass on these increases to stay in business, but many of our customers are concerned to understand what is behind these regular price movements and whether they can be justified. Will prices stabilise or keep rising? Or will manufacturers overreach themselves and prices start to soften again? We don't pretend to have all the answers, but we can look at several factors which have a direct bearing on prices to try and bring in a little clarity for our customers.
Since the Brexit referendum in June 2016 the pound’s value has fallen significantly against the euro (over 12%) and other key currencies. Earlier price increases were driven by the weakness of sterling and the need for mills to restore profitability in the face of unsustainable returns from the UK market. Now that sterling has stabilised for the time being, the current round of increases is being driven by pulp costs and not currency. However, with so many uncertainties in the year ahead with Brexit looming it is very difficult to make reliable predictions as to currency in the future.
Globally, pulp stocks are at a 20-year low, following hurricane damage last year to pulp mills in the USA, as well as timber shortages in Northern Europe and Russia following difficult winter conditions in 2015, 2016 and 2017.
A further factor is the effect of the enormous Chinese market, which is still experiencing growth in demand for cut-size, uncoated paper. This is putting pressure on the global market, as China, due to her limited forest resources, imports very large tonnages of pulp from Canada, USA and Russia. The Chinese government is also under pressure to conform to international environmental standards and this has resulted in many old, smaller pulp and paper mills there being closed, again putting pressure on availability. Chinese pulp manufacturers have been able to increase prices more easily than in Europe, which has put pressure on other markets to do likewise.
Another very significant factor affecting the pulp price is the rising demand for tissue and medical wipes by middle classes in developing countries. Products that the West has taken for granted for years are now being increasingly sought after in developing countries where the population is becoming more educated and moving into cities from the country. The expansion in internet shopping is driving an increase in demand for packaging, which is also a major user of pulp. There is also international concern about the use of one time plastics in coffee cups and this is putting pressure on the pulp and paper industry to produce more acceptable environmental alternatives.
The effect of this on hardwood pulp (which represents approx. 70% in the virgin fibre mix for most speciality paper grades) has been drastic. This was trading at $650 per tonne in January 2017 and is now trading at $1,100 per tonne. This is now the main reason why paper prices are rising so sharply and may continue to do so for the foreseeable future.
SUPPLY & DEMAND
Back in the 1990s, when paper mills were expanding their production capacity to meet growing demand for paper, prices fell due to oversupply.
However, greater consolidation of paper manufacturers through mergers has resulted in a smaller number of global companies gaining increasing control of manufacturing and pricing.
This has resulted in many closures of smaller inefficient mills. As a result, supply and demand are fairly closely aligned even to the extent of merchants experiencing shortages or being put on allocation for certain grades.
We have tried to show some of the main reasons why prices have not fallen despite a declining demand for cut-size uncoated paper in traditional markets. With demand for pulp still very strong in the expanding tissue and packaging markets, and a more consolidated paper industry prepared to take out production rather than sell at a loss, it is unlikely that prices will fall back – unless more pulp supply comes on to the market. In the UK, we have perhaps been accustomed to being able to buy cut-size paper at unrealistically low levels. It is interesting to reflect that the first order that we took for A4 paper when we started out in business 41 years ago was at £1.99 ream. Perhaps this latest round of increases is simply trying to get us up-to-date.
Written by Clyde Director & Founder, Mike Steven - 41 years experience in the Paper industry.