The Paper Chase: Inside the Shifting Paper Market

Where did all the paper go? If there are such things as existential questions for the printing industry, this surely is one of them.

Printers aren’t agonizing over it now, and realistically, probably never will. But, the current tightness of the market for the kinds of paper that commercial and in-plant printing firms rely on reminds printers to take nothing for granted where the availability of their substrates is concerned.

Nothing Serious, But Still …

Kristen Hampton, division director for print and mail management at the Michigan Department of Technology, Management & Budget, says that apart from a pinch in roll stock for transactional work, her operation hasn’t run into anything serious in terms of supply. She adds that the shop, which serves all of Michigan’s state agencies, is “protected somewhat” by a statewide contract for paper with its supplying merchant.

However, this doesn’t mean that printers like Hampton don’t feel the need to keep a watchful eye on the bigger picture, which sometimes makes them uneasy.

She says she’s been advised by her paper vendor that when International Paper (IP) follows through on a plan to convert a paper machine at its Selma, Ala., mill from uncoated freesheet to white-top linerboard and containerboard, the result will be the loss of 235,000 tons of capacity in this grade annually. Hampton notes that this would be over and above the 1 million tons of uncoated freesheet capacity her merchant says has disappeared since 2017.

As director of procurement for IWCO Direct — one of the country’s leading providers of direct mail marketing services — Karen Weil pays the same kind of careful attention on the commercial side. She points out that as demand-supply relationships for communication papers began to grow strained, “not all mills were prepared to handle those unexpected conditions.”

Karen Weil, director of procurement, IWCO Direct.

Weil says one outcome was the imposition of short-term moratoriums by some of the mills, during which they refrained from taking new orders. The blackout periods didn’t last long, nor did they impact production at IWCO Direct, “but we were very aware of it,” she acknowledges.

When they face blips in availability from regular sources, print shops may not have many other options.

“The supply of lightweight coated sheets can be difficult at times,” John Sarantakos, director of printing, mailing and document services at the University of Oklahoma (OU), observes. “For the most part, we have to schedule as far out as possible to ensure stock is available.”

Although switching to different grades in lieu of what can’t be obtained is one possible solution, OU’s in-plant seldom resorts to it. “There are comparable sheets, but cost can be an issue,” Sarantakos explains. “Foreign sheets can be an answer, but that has a number of issues also: long-term availability, tariffs, customs delays and inventory stocked in U.S. warehouses.”

“Too many variables and unknowns,” he concludes.

Known and understood is the fact that the paper industry is delivering less of the papers that printers of all types use.

According to the December 2018 Printing-Writing Monthly report from the American Forest & Paper Association (AF&PA), total printing-writing paper shipments decreased 7% in December 2018 compared to December 2017, which matches the total decrease for last year. Purchases or shipments of uncoated freesheet, coated freesheet and coated mechanical papers showed declines; only in uncoated mechanical papers did purchases increase.

AF&PA, a trade association for U.S. pulp, paper, packaging and wood products manufacturers, doesn’t comment on its statistics or discuss their implications for printers. But print and paper industry insiders believe they know how to interpret the trends.

“About 20% of paper capacity — most in the ‘fine’ category for advertising and literary media — will be off-line [read ‘gone’] by Christmas,” Vincent Mallardi, chairman of Printing Brokerage/Buyers Association International (PBBA), noted in a post to the PBBA membership last May. He says that what his members have been telling him since then tends to bear the prediction out.

Because of paper manufacturers’ decisions to close mills, take papermaking machines off-line or rededicate the machines to grades for uses other than printing, “we can sell more printing than we can produce,” Mallardi contends. “Printers are really stuck.”

Paper Mill Closures by Multiple Suppliers

Actions by paper producers aren’t solely responsible for present market conditions, but the impact of disruptions at the mills is undeniable.

Michael Ratcliff, president of the Midland Specialty Paper and Film Div. of Midland Paper, Packaging + Supplies.

“The biggest challenge to the supply chain has come when mills have suddenly ceased production for a number of reasons,” Michael Ratcliff, president of the Midland Specialty Paper and Film Div. of Midland Paper, Packaging + Supplies, points out.

“Think of Appleton Coated, West Linn Paper, Flambeau River Papers and now Georgia-Pacific. In all of those cases, these producers shut down capacity with relatively little forewarning to the market due to unsustainable economics for their particular mill,” he adds.

The news from the mills hasn’t been uniformly bad. After the Appleton Coated mill in Combined Locks, Wis., shut down and changed hands in September 2017, its new owners decided to keep a limited amount of printing paper in the mix upon restarting the machines for the production of brown packaging grades.

In the case of the IP mill in Selma, Ala., there was some relief in the company’s announcement that it would postpone the conversion of a machine there until the first quarter or half of 2020. (Proceeding with it this year, as originally planned, “would have been a mess” for the supply chain, notes Ratcliff.)

But there’s no question of the paper industry’s partial movement away from printing grades to other kinds of paper that the mills find more profitable.

A Drumroll of Decommissions

At the Georgia-Pacific plant in Port Hudson, La., machines that made communication papers will be shut down as the company continues to invest in equipment for tissues and towels.

Sappi North America has spent $200 million, including the cost of a year-long paper machine rebuild, in order to boost capacity at its Somerset mill in Skowhegan, Maine — but mainly for paperboard packaging grades.

Last year, Verso Corp. announced that a machine once used to make coated papers at its Androscoggin mill in Jay, Maine, would be repurposed for label and packaging substrates.

The “economic maturity” of the paper industry and some of the markets it caters to is behind the shift in product focus, Ken Gettlin, VP of Case Paper, says.

Not all producers have been able to accomplish it, and for some, the price of falling behind has been high. There’s only so much that can be done, Gettlin points out, to keep a legacy paper plant competitive with producers running newer papermaking equipment. The West Linn Paper mill in West Linn., Ore., for example, had been in operation for 128 years when its closure was announced.

On the demand side, according to Gettlin, “the demise of parts of the printing business” has led to a definite decrease in consumption of offset papers and other grades — a trend that paper companies have reacted to accordingly.

Small wonder, he observes, that “coated mills are going back to being brown mills” as the suppliers refocus on kraft, corrugated and similar packaging materials.

Midland Paper’s Ratcliff sees the same forces at work. “Declining demand for commercial and publication grades, overabundant manufacturing capacity in North America and abroad, and rising input costs all have been key factors in creating unsustainable economics for producers,” he says. “Shifting their production assets to more profitable alternatives, like packaging grades, is a relatively new phenomenon over the last few years and a strategic move to remain relevant and to keep their equipment running.”

Grab a Chair and Hang On

Both merchant executives use the same metaphor for what these realignments can mean for printers wondering where their next consignment of paper will come from.

“It’s a game of musical chairs, and you want to have a seat when a mill closes,” says Ratcliff. With the announcement about its Port Hudson plant, Gettlin observes, Georgia-Pacific “is taking one of the chairs out of the game.”

Mallardi worries that as the mills become more vested in packaging stocks — to say nothing of tissues, diapers and sanitary products — they’ll be less inclined to make papers for printing.

“They think that packaging will have no bounds, that everything will be in a cardboard box for all of eternity,” he says. The result is that printers, with their requirements for top-quality, specially finished papers, could find themselves “at the bottom of the heap” in terms of customer priority.

In fairness to paper manufacturers, however, printers should remember that making and selling paper is often an unforgiving business to be in. Even Mallardi concedes that the industry has had to become “more scientific” in its decisions about making the most cost-efficient use of its papermaking equipment.

As Gettlin says, “a tree gets handled four or five times before it ends up as a book or a magazine on your desk,” incurring layers of manufacturing costs that have to be recovered. Pulp prices, according to Ratcliff, are at a 10-year high, along with the cost of chemicals and other raw materials.

Because so much paper moves from mills to merchant warehouses to customers via truck freight, changes in trucking laws that limit driving hours and impose other restrictions also have to be factored in.

Ratcliff says that last year, because of them, “it was hard to find trucks to deliver paper to customers. When you found the driver, the cost was generally higher. This is one of the many input cost increases that have affected producers’ abilities to achieve sustainable returns.”

Don’t Panic — Plan Ahead

No one imagines anything like a collapse of the market for printing papers, and merchants like Midland Paper and Case Paper are eager to share that assurance with their customers.

“We are closely aligned with a very broad spectrum of producers of all grades. And while we have experienced some short-term outages and longer lead times on select products, we have generally been able to offer alternatives from other producers to our customers where necessary,” Ratcliff reveals.

Similarly, Gettlin notes that at Case, “we stock up and keep our warehouses full,” working closely with the mills to maintain continuity of supply.

Nevertheless, for the time being, printers should expect the paper market to behave no differently from any other market where demand is edging ahead of supply.

That could mean getting used to bigger intervals between order and fulfillment, as Weil says she had to do at one point last year when deliveries of paper to IWCO Direct were taking as long as eight weeks. Shops should also anticipate the effects of allocation, a practice paper suppliers fall back on when patterns of demand change (see sidebar on below).

In the meantime, there are steps that printing businesses can take to protect their access to the papers they need. Building up inventory is a natural response but, as Sarantakos points out, “that is not necessarily good business” as it may tie up too much cash.

“Being partners with your supplier is the best approach,” advises Hampton. This involves carefully monitoring consumption and accurately forecasting future needs.

“Be consistent if you can,” Weil agrees, because then, mills and merchants can more easily maintain deliveries at suitable levels and agreed-upon prices.

“Use that to your benefit,” Kirkland says.

‘Not in New Territory’

Gettlin notes that in some circumstances, printers are “happy to have the customer supply the paper,” because it spares their capital and enables them to keep the presses running.

Mallardi advises maintaining control over stock selection in case cost-saving substitutions have to be made. He says that in a paper market like the present one, if the printer can’t make reasonable modifications to the specs of the job, “don’t even bother to bid on it.”

Perhaps most important is keeping a sense of perspective about the fluctuations that have always occurred in the sourcing of printing papers.

“We are not in new territory,” Ratcliff observes. “In the past 33 years, we have seen multiple swings from a buyer’s market to seller’s market and back again. It seems counterintuitive to some, but continuing to maintain and foster your supply relationships with good merchant partners and solid mills is a must in a tight paper market.”