Prepare for both good news and “warning, warning, warning, danger, danger, danger” in this much anticipated Graphic Paper Industry Update Q2 by Millcraft’s Chief Operating Officer Greg Lovensheimer.
The Big Q
Will There Be Enough Paper? Namely, will there be enough paper to supply ballot stock for the November election? “This is warning, warning, warning, danger danger, danger,” Greg says, relaying that there’s a lot at stake including the need to ensure the public’s full faith in the election process. “My canned comment is in perfect alignment with Af&PA [American Forest and Paper Association] in that, as an industry, we have done everything that we can do to protect the democratic process in the United States. The industry is standing on the guard, at the ready, able to provide all the paper needed to pull off ballots and official election material. That does not mean a politician may be able to get all the direct mail postcards they want for their re/election campaign.”- Don’t confuse material needed for ballot stock/election printing with political printing, dissociate the two, they are very different.
- Printers who are printing ballot stock need to understand and communicate needs as early as possible.
- Reset your timelines for volume, type of paper; timelines you may have used in the past are in the past.
- Recognize that deliveries could be different this year. That doesn’t mean they won’t happen, it means they’ll be different this year because there are absolutely supply chain challenges.
State of North American Paper Industry
- Good news: We are operating today in a balanced market, with uncoated at 6.12 tons supply/6.37 demand, and coated at 2.37m capacity/2.64m demand.
It may not feel this way to each individual, there are absolutely jobs out there that cannot be funded, and there’s no excess on either side, but what is being supplied is actually being consumed. “That said,” Greg says, “going forward, there are warning signs pointing to risk on the demand side of the equation again. Supply is what supply is, domestic sources and imports, the wild card is: What happens to demand based on some of the external forces out there?” - Inflation: The Federal Reserve raised its benchmark interest rates three-quarters of a percentage point in June, its most aggressive hike since 1994. The concern is that this inflation rate is getting entrenched (not transitory); the fear is that if we don’t aggressively deal with this now, we’ll be having this state of affairs for the next 10 years – expect to see further increases throughout the year.
- Unemployment: Expect more attention on driving down the inflation rate than the employment rate, because the U.S. is basically at full unemployment rate – 12 million job openings, 6 million unemployed, 63% of small business owners surveyed say hiring challenges make operating at capacity harder. Labor challenges are not going to go away overnight, no magical solution.
- Supply Chain (Trucks, Rail, and Containers): Domestic freight is improving on the truckload side, other than diesel, and the rate per mile is back in line with historical norms, approximately $2.88/mile. In maritime freight, “Containergeddon” is over but issues remain. Keep your eyes on the Ocean Shipping Reform Act 2022 (going after ocean carriers charging excessive fees) and the West Coast Port Labor Agreement affecting 29 ports, 22,400 workers (strike, lockout, slowdown).
- Supply/Demand Balance: “The concern is over the lack of surge capacity in the third quarter,” Greg says. “The flipside is, and this is important, they’re also worried about getting stuck with high-priced paper. That’s the conundrum everyone finds themselves in. ‘Do I buy this even though I don’t have a job, knowing there’s all these demands? With the risks out there with inflation, with the economy, what’s going to happen with demand? I don’t want to get stuck’. November will be a checkpoint for this industry.”
- Import Challenges: Declining import options, freight uncertainty. Asian, South American, European suppliers face a lack of natural gas, pulp prices are over $1,800/ton, ocean container costs are not getting better anytime soon. “All these challenges kind of sum up to the fact that there’s no imports coming to save the day, there’s no one coming to rescue. Don’t expect import levels to change over the next coming months.”
- Economic Confidence: Market volatility is shaking confidence, 44% of economists say the U.S. is headed for a recession in the next 12 months. “Brace yourself, there’s concern on the horizon,” Greg says. “The issue in our industry will not be on the supply side, it will absolutely be on the demand side.”
Heads Up Moving Forward
“The reality is 2022 is a different set of obstacles than 2021 was,” Greg says. What to watch out for in 2022 and into 2023?
- Highly Contentious Midterm Elections: Prepare for historic spending coming off the sidelines (Senate races in Ohio, Pennsylvania, Georgia, Arizona). “There will be dollars flying everywhere,” Greg says. “Postal grades will be tight, beginning late July, as everyone tries to get their hands on anything that will go through the mailstream aimed at political printing. I’ve had several customers, and potential customers, reach out saying, ‘What’s it going to take to get some kind of supply? Because I’ve already got political parties lining up to throw ad spend out there.’”
- Extended Producer Responsibility (EPR): This will absolutely drive up the price of paper, and may affect demand. “Watch out,” Greg says, “it’s going to take all of us, not just some of us.” Taking effect in Canada and on the docket in state legislatures in California, Colorado, Maine, and more, EPR is aimed at trying to improve community recycling. However, it puts responsibility on the people who produce packaging to pay a fee for the recycling of the product you put into the marketplace – to the tune of $70/ton to what you have to pay back.
- “Bullwhip Effect”: Small changes in demand can produce whip-like effects upstream. Understand your supply chain to mitigate, keep close track of inventory levels, watch for canceled orders, and monitor the coefficient of variance between supply and demand: What’s my average demand and variation in demand (standard deviation) from customers? What is the average orders and variation in orders (standard deviation) placed with suppliers?
When B is greater than A, the risk of the financial whiplash (bullwhip effect) increases. - CFS + UFS Price Increases: Assuming no recession, expect at least one more increase on both the uncoated and coated side.
Strategic Partnerships are Invaluable
“I truly believe merchant partnerships are absolutely your greatest advantage, and that you should take advantage of that competitive edge, especially in the tumultuous times we live in right now,” Greg says. “Merchants improve your working capital, give you sales growth by an efficient response, and they improve your supply chain by making it robust.”
Millcraft Sherpa Effect: “We’ve been up this mountain, we know where the basecamps are, we know when to go and when to stay,” Greg says, “That’s the value we provide, the path to success. We’re absolutely equipped to help you understand your needs, and help you align yourself with a supplier that’s sustainable to get you what you’re looking for.”
Supply Chain Sustainability: At Millcraft, we have leveraged our supply chain partnerships, we’re gaining additional volume, we’re absolutely up year-over-year, and we’ve deepened our inventory stocking levels. We have invested and continue to invest in our technology so we’ve got real-time analytics, and we’re absolutely on a firm allocation.
“Things have changed,” Greg says. “You can’t get orders tomorrow, or next week, but you can absolutely get what you need. You’ve just got to communicate and plan better.”
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*Industry update was released June 2022; with data through May 2022
Written By: Jen W. O’Deay