An in-depth analysis of the complex factors that got us here, and what the printing industry’s future might look like.
If nothing else, the COVID-19 pandemic has shown us the complex interdependent relationships among the components of the print supply chain. Living through it in real time, it is easy to observe the cascading effects of disruptive change.
In many ways, the substrate shortage is the most tangible effect of this disruptive change, especially from the perspective of a print provider facing a customer, with an order book in hand.
We remember the heady days of 2019, where pallets of substrate languished, forlorn and virtually forgotten in distributor warehouses around the world, waiting patiently to be ordered and delivered, just in time, and at a reasonable cost to printers and converters. Fast forward to today, where we’ve learned the meaning of the word “allocation,” and where one of the most competitive assets a printer can have is a purchaser who knows how to “horse trade.” The most demanding brand owners and product managers have relaxed their lofty standards considerably in the face of a binary ultimatum: “If you want it produced, this is the substrate available.”
There are no mysteries as to the causes. Every input to this condition has been well publicized, but their collective impact has been underestimated, as the inputs are distributed among multiple industries and contributing job functions. Y is a function of X, and the fact that you’re having difficulty sourcing sufficient substrate to support your growth is the product of many “Xes”.
Substrate demand goes up
The “good news” for the paper industry is that demand is increasing. Overall demand for substrates is up 11% year-over-year, according to the Thomas Index Report.
Printers and packaging converters are receiving multiple inbound opportunities from desirable prospects whose only criterion seems to be the ability to produce in a timely manner. The printers and converters have stopped getting excited about this, based on the aforementioned allocation constraints from their suppliers. Most of that activity is spurred by clients who simply can’t get their projects created through their traditional channels, so are shopping around for a printer or packaging converter who can deliver.
A significant source of new demand for packaging converters and printers has been the conversion of products and marketing from institutional to consumer, and the massive increase in online ordering that was spurred by pandemic lockdowns. This has led to a steep increase in demand for paperboard and containerboard. At the same time, with so many consumers staying home and shopping online instead of going out to spend money, relatively efficient institutional packaging has been abandoned in favour of less efficient consumer packaging for the same goods. Each of those home shipments comes in an order-sized cardboard box, so more substrates are required to deliver the same amount of product to the end consumers.
Substrate supply goes down
While demand was increasing, the pandemic was eroding supply. The “just in time” delivery of substrates from suppliers to printers and converters was made possible by relatively substantial buffer inventories held by those suppliers. Some printers and converters even benefited from consignment inventories as a perk from the suppliers, who took advantage of their client’s local storage capabilities. Substrates were considered a commodity and as such had a deceptively complex but well-oiled supply chain to keep it moving.
Pallets of finished substrates did not spend much time at the mill, before being whisked away to supplier warehouses. Well forecast and planned pre-orders kept the manufacturing process efficient and cost effective. Upstream, the sawmills were operating at low to moderate efficiency, according to the International Union of Forestry Research Organizations. Yet they were able to keep the paper mills well supplied and operating in moderate to high plant level overall equipment effectiveness (OEE), with output that easily supported the supplier inventory model. All of this was based on experienced personnel operating well-maintained equipment, in a collaboratively and efficiently executed supply chain.
Then, the COVID-19 pandemic hit.
According to mill spokespeople, the first hit was the lockdown and the ensuing sheltering orders. While the government wage subsidies did their part to control the spread of the pandemic, they also caused a good percentage of lower-paid employees to stay home until their benefits ended. Mill production decreased significantly in the early days of the pandemic, then slowly started to recover.
Even if the employees returned to the mills in force, nothing moves without a truck, and not all truck drivers were immune to the lockdown and sheltering orders. It was quickly established that truck drivers were “essential workers,” something that we as a society have started to understand with regards to all of the “invisible” workers who actually get things done. Many truck drivers chose to take themselves off the road – some permanently, some just as long as government benefits lasted.
This is all part of a much bigger picture. The “Great Resignation” started long before the pandemic but was highlighted during it. According to the U.S. Bureau of Labor Statistics, over 47 million Americans voluntarily quit their jobs in 2021, an unprecedented number of exits but also a continuation of a multi-year trend. Baby boomers started hitting “mandatory” retirement age back in 2011. Significant numbers chose to keep working into their seventies but, when the pandemic hit and they were considered to be in a high-risk group, many decided to leave the workforce. Others chose to retire early. Many post-retirement workers had transitioned to jobs that would be deemed essential under pandemic legislation, so their departure was deeply felt. Retailers and service companies responded by offering bonuses and increasing wages for these essential positions, which drew some younger workers in semi-skilled jobs away from light manufacturing.
In response to the pandemic, many print and packaging supply chain partners developed remote working strategies for a good percentage of their workers, putting new stresses on their organizations. The successful ones maintained or improved productivity with remote or hybrid work options. Both successful and unsuccessful were stuck with their new strategies until the pandemic improved, when they expected to return to “business as usual.”
However, recalling workers was easier said than done. According to Pew Research, 64% of remote workers felt “uncomfortable” returning to their places of work, and 57% would choose to work remotely. According to a Harvard Business Review study, 36% of workers surveyed said they would seek alternative employment if not given a remote or hybrid working option.
While the pandemic exacerbated labour shortages, it did not cause them. They were part of a multi-year trend that will continue for at least a decade. We will need to evolve in terms of the way we produce and how we work, and most likely immigration reform will be needed to respond to these pressures effectively. Those labour shortages are having an ongoing effect on the mills that produce our substrates.
The impact of climate change
Then, the extreme weather and forest fires did their part. In the northwest, the January flood in British Columbia has pretty much wiped out gains in softwood lumber and pulp and paper production. Workers could not get to the lumber to harvest it, and they certainly couldn’t retrieve it by the flooded and damaged roads and rails. Understandably, energies were redirected to infrastructure recovery and any production was hampered by closed roads and the human toll. Many people lost everything in the floods, and it’s really hard to focus on your 9 to 5 job, when your possessions are sitting under six feet of water. Residents are, in many cases, still waiting for aid.
Likewise, drought and associated damage can affect the ability to successfully harvest standing timber and, as large swaths of forest land have been affected by drought, some large mature stands have been lost or put on reserve. Drought-damaged trees are excellent fuel for forest fires, and last year over 2.5 million acres of forest burned in California alone (including the 600,000 acre Dixie fire, which was the second largest forest fire on record). Climate change is having a serious impact on the forests we rely on. When mills have to search further and further afield for suitable resources, transportation plays an even more significant role in production.
If you can’t ship your finished production, you can’t create more of it, and that is the case for many mills. Road, rail, and marine backlogs are affecting manufacturing supply chains and domestic and international deliveries. This is true across all industries, which often compete for the same transportation workers and resources. Consequently, lumber mills and pulp and paper plants have been forced to scale back production by reducing operating hours.
In this global economy, it’s not just our local catastrophes that drive prices up and supply down. For example, early in the pandemic, global players bought up shipping containers at unprecedented rates. This led to a record shortage, and the companies who manufacture shipping containers faced the same constraints in terms of raw materials and labour. Having all of these containers in the field meant that manufactured goods could leave the plants in the shipping containers, delaying the impacts on production (and meeting FOB commitments), but there was no corresponding increase in global shipping – the ports and storage yards filled up with shipping containers, and the well-oiled global port system was put under extraordinary strain.
This of course led to much higher shipping prices that peaked in November 2021, and lead times that frustrated the most well prepared and inventoried companies. The median cost of shipping a 40-foot container from China to the Eastern U.S. coast more than doubled from $2,559 USD in February 2020 to $5,822 USD in February 2021. It was not uncommon to be quoted “rush” shipping rates where the price actually eclipsed the value of the goods being shipped – and the promised “rush” timeframe was longer than the usual “normal” delivery timeframe.
The cost of shipping a container has been dropping since March 2022, but it will take some time to normalize. It can still take over two weeks for a ship that arrives in port just to be unloaded. Shortages of truck drivers, rail workers and longshoremen are continuing to drive up freight rates and delivery timeframes.
Of course, once the goods get to their ports, they compete with all other industries for truck drivers to get them to their destinations. Many long-haul truck drivers are independent owner/operators who work for the best-paying client, so the price of transcontinental and local travel went up as availability went down. Now the price of diesel is driving costs up further, causing some drivers to leave the business, which often operates on razor-thin profit margins.
Pulp and paper market dynamics
Pulp paper normally starts with the harvest of trees, usually softwood coniferous trees, prized for their long fibres, and largely as the unusable outputs of the lumber industry. Once debarked, chipped, and chemically cooked to remove the lignin, the pulp of cellulose fibres is drained, sheeted, dried, calendered, and coated. It is then finished and packaged and sent to a distributor who sends it to the company ahead of you in the queue and who still has allocation.
Lumber mills have generally done a very good job of maximizing the outputs they gain from a tree before passing the remainders along. With the current price per board foot, you can be sure they’re doing an extraordinary job of claiming the maximum number of board feet. They’re also prioritizing getting the finished lumber to market. Recent demand for lumber has been insatiable, driven by a booming construction industry and a home renovation frenzy fuelled by a population that was stuck at home and suddenly noticed the need for improvements.
The lumber and pulp and paper mills operate side by side, often competing for the same resources from the same communities. Each is driven to maximize the revenues it can generate from the raw resources. Paperboard and containerboard are specialty substrates that command a good price, meet a market need, and are increasingly in demand. Many American and European paper mills have been retooled to produce paperboard and containerboard in order to capture new revenues. Unfortunately, new paper mills are not springing up to replace the converted mills. In fact, some older, less profitable paper mills have closed rather than retool.
Mergers and acquisitions
One trend that has a huge effect on market dynamics is mergers and acquisitions. One of the biggest in recent history is the purchase of Domtar by Paper Excellence. Paper Excellence is an enigma. It has been referred to as a small Canadian paper producer, but its spokespersons have confusingly referred to several ownership structures—some on the US east coast, some on the US west coast, and, notably, in Richmond, BC, which is frequently claimed as the head office of this Canadian enterprise. It would appear that the actual company may be headquartered in the Netherlands (Paper Excellence B.V.), and then directly tied to Asia Pulp and Paper. Hardly sinister but, it would seem, needlessly opaque. Apparently, Paper Excellence is owned by Jackson Widjaja, a son (among some 40 children in total) of Eka Tjipta Widjaja, the founder of Indonesian paper giant Sinar Mas Group.
Jackson is the CEO of Paper Excellence, Catalyst Paper, and now Domtar. Paper Excellence has been purchasing underperforming plants for the purposes of improvement, conversion, and consolidation, leading to the permanent closure of plants in Powell River, BC; Port Huron, MI; Pictou County, NS; and Mackenzie, BC. From a corporate perspective, these closures might be prudent, but each plant produced paper that is not being produced today.
The $3-billion Domtar deal caught the attention of the Competition Bureau of Canada, which required Paper Excellence to sell off the Kamloops pulp mill, a condition that raises more questions than we have time for here. With a significant portion of Canadian and North American paper production dependent now on one, pointedly opaque, foreign-based organization, one has to wonder what specific advantage there is to having one specific mill not be, currently, under their control. Paper Excellence (Domtar) has announced it sold the plant to Montreal-based Kruger Specialty Papers Holding L.P. for an undisclosed amount in May.
Paper Excellence is not the only company to close pulp mills during the pandemic. Westrock closed its Panama City, FL, paper mill in June. Paper Excellence has temporarily closed its Kingsport, TN, paper mill while it converts it into a 100% recycled containerboard mill, the second largest such plant in North America. West Fraser Timber is downsizing its pulp mill and converting from bleached to unbleached kraft for, you guessed it, containerboard and paperboard applications. In addition, many North American companies have idled or temporarily shut down operations for months at a time due to pandemic pressures that made operating untenable or unprofitable.
For example, in December 2021, Montreal-based Resolute Forest Products (RFP) shut down operations in its Calhoun, TN, mill for an indefinite period because of “significant financial losses.” The plant had a capacity of 147,000 tonnes of pulp and 149,000 tonnes of uncoated paper (and 60,000 tonnes of tissue). Consequently, perhaps, first quarter 2022 results for RFP were greatly improved. Revenues for the three months ended March 31 were $945 million (USD), up 8.2% year-over-year from $873 million (USD). But substrate supply is simply no longer available on the market. Until August 2020, Domtar’s Port Huron mill ran three lines producing 95,000 short tonnes of specialty papers, when it shut down.
This is an open capitalist market where each player is looking for market advantage. Smaller, community-based players are being absorbed by larger players with an eye on efficiency and profitability. In theory, the markets should eventually balance and production should satisfy demand, but, without coordination and with profit as the prime motivator, periods like this are inevitable.
Rising costs = Rising prices
Obviously with demand increasing and supply decreasing, something must give, and usually it is price. We’ve seen prices blow away historic records and, along with that, our preconceptions about the price elasticity of demand. The pandemic has been extremely profitable for those who could get their hands on substrate. Where customers used to balk at increases in the tenths of percentages, with the pandemic as the excuse, they have not blinked at increases in the tens of percentages. Where two-day turnaround was a “requirement,” clients have learned to be a supply chain partner (not all of them ….. I know).
Pulp and paper mills have not been sheltered from the increases in employee wages. The average Canadian wage rose by 3.4% between March 2021 and March 2022 according to Statistics Canada. In my experience, workers in the print and packaging supply chain have done much better than that. Many of my clients have given blanket increases that raised their lowest paid employees up several dollars per hour with immediate effect. This is in the face of aggressive recruitment campaigns, even billboards, attempting to lure their production workers away with the promises of lucrative signing bonuses and “above market” wages. According to Pulp and Paper Canada, the unionized workers (Unifor) at Resolute Forest Products recently ratified a four-year collective agreement that gives them 20% – 24% increases over the course of the agreement. These wages are variable cost increases that need to be passed along the supply chain and represent a lasting impact to the costs of your substrates.
At the same time, aggressive environmental goals are being supported with additional provincial and federal enforcement, which will lead to more plants being closed or shut and retooled. Apparently, the Pictou, NS, mill that was shut down was simply dumping its effluent into the sea and had a grandfathered right to do so. Creating effluent ponds and treatment was deemed an unsupportable expense, so taking the write-down seemed the more financially prudent option. Those write-downs aren’t free. They’re passed along down the supply chain.
In this case, the two opaque owners of the plant are suing the Province of Nova Scotia, a government that has already invested heavily in keeping the mill working, for hundreds of millions of dollars for moving too quickly with its environmental legislation that called for the tidal estuary to stop receiving mill effluent by January of 2020. Whether sufficient time was given or not, the mill was unprepared to make the environmental investments necessary to keep the plant operational.
Without a significant increase in the capacities and efficiencies of mills, and a corresponding increase in available workforce throughout the supply chain, it is difficult to foresee an end to this situation. Some new mills are opening, but largely for containerboard and specialty markets.
Communication and life move online
In North America, newsprint mills have been shutting down in response to reduced demand as people turn away from printed newspapers. Production capacity declined 28% from 2019 to 2020 and another 18% in 2021. This was concurrent to demand falling 26% in 2020, 6.6% in 2021, and 6.2% in just the first five months of 2022.
Perhaps this is how this disruption finally plays out. One of my clients publishes a monthly membership magazine that goes to readers of all ages. Over the last 12 months, they have published in three different formats on several different stocks, based upon the substrate that was available at the time of publication. As you can imagine, production costs have soared. Simultaneously, they have run a campaign asking readers to opt for digital-only delivery until supply chain issues have been overcome. Predictably, the “digital natives” have signed up without hesitation. They prefer the PDF version for its immediacy, portability and ease of access.
If this example represents a trend of conversion to a digital-only strategy, it would just be following in the footsteps of publishing icons like Life Magazine which switched to digital-only back in 2007. Online publishing and digital editions provide opportunities to greatly increase the relevance and timeliness of publications while improving the reader experience. However, as my client has seen with more conservative and traditional readers, adoption is evolution, and full acceptance might be some years away. The fact that it’s being embraced at all is completely due to the pandemic and the paper shortage.
A huge number of significant leaps in the way we live and interact were forced on us by the pandemic. For example, experts claim that the evolution of our migration to virtual offices and Zoom meetings was accelerated by years (possibly decades) due to necessity. Perhaps these paper shortages will have a similar effect on innovative commercial printers. Many printers and converters have taken the opportunity to invest in automation and robotics to streamline their operations. Perhaps this is also an opportunity for printers to accelerate their strategies in service, multimedia publishing, and specialty markets, reducing their reliance on “ink-on-paper” client relationships.
It’s not always easy. One printer I was speaking with recently bought a fairly expensive piece of equipment in order to print existing work more efficiently and broaden their offering, only to find that, because it used a different type of substrate than they had purchased in the past, they weren’t able to convert the work over because they did not have any allocation for that new substrate with their supplier. How can you innovate along traditional lines in a business environment like that?
Packaging converters will continue to benefit from demand-driven growth. It’s possible that the increased cost for substrate will make a better business case for recycling mills such as Paper Excellence is currently converting, and that will be how we overcome that substrate dilemma. In the meantime, some of my clients have taken the opportunity to refine their client list to ensure that their best growing clients are being well provided for.
What’s on the horizon
When I first started thinking about this article, I was overwhelmed by the breadth of the issue and the number of interesting stories shared by my clients and other industry members. It’s curious that none were eager to go on the record with the impact that resource scarcity has had on their section of the supply chain. I believe that everyone perceives it as a source of some shame and a failing on their part. It’s not. Nor is it a uniquely Canadian or North American or Western issue. Clients around the world in developed nations are faced with the same concerns driven by the same trends.
There currently is no clear horizon on substrate shortages. I don’t know what the answer is, but I’m relatively confident that we simply cannot keep doing the same things we’ve been doing and expect that things will return to normal. Normal has changed. The cheese has been moved. The question is, what are you going to do about it in your particular situation?
Disruption and opportunity are close travelling companions. Why not seize the opportunity to leverage your situation into a business transformation that will secure your company well into the future?