From Oversold to Optimism:
A Look at the Stabilizing Paper Market
Unforeseen Changes to a Once Stable Domestic Paper Market
The past three years have brought unforeseen changes to a once stable and reliable domestic paper market. We’ve seen a radical shift in prices and production fueled by the pandemic, supply chain disruptions, labor shortages, energy prices, inflation, and transportation challenges. Now we’re asking: will it return to normal or are we dealing with a new normal? Spoiler alert: optimism is returning. Keep reading to learn why.
The forest products industry is one of the largest manufacturing industries in the U.S. according to the American Forest & Paper Association. Paper remains integral to our daily lives, even in our digital age. However, global paper production has been slowly declining for decades.
Decline of Global Paper Production and Market Shift
Paper machine shutdowns, mill closures and product conversions were all a result of a decline in demand for printing papers and growing demand for other paper products, such as packaging. A quarter of the uncoated freesheet capacity has been shut down or reassigned to other products in the U.S. market. Uncoated freesheets are often used in printing production — think advertising mail, billing and bank statements. Many institutions offer, and even incentivize, paperless options.
Approximately half the volume of coated freesheet capacity has also disappeared in the last five years. Magazines and high-end product catalogs are examples of coated freesheet products. These days nearly all offer digital distribution as an alternative to print.
As market needs changed, paper manufacturers evaluated and often accelerated their plans to address reduced demand for certain products. Production capacity was repurposed into other paper products with higher demand (e.g., packaging and consumer products). Originally, the strategy was for a gradual shift, but the onset of the pandemic fast-tracked those plans. According to a report from Winterberry Group, direct mail volume fell by 18.1% in 2020. As a result, paper manufacturers found themselves with excess inventory as printing production stalled. The slowdown did not last long.
Printing Paper Demand Returns with a Vengeance
In 2021, printing paper demand returned quickly with new orders outpacing 2020 activity by almost 25%. When the surge came, manufacturers were often forced to fill orders from their production runs, which limited their ability to replenish their own inventory. Inventories remained at record-low levels as demand continued to climb. Printers found themselves operating in an unprecedented paper market with very tight allocations and long order lead times. With the domestic supply tapped, many printers turned to foreign markets for relief but were limited by shipping-related disruptions and container shortages.
Due to the long lead times for orders, many paper buyers started to stockpile, fearing they might run out of inventory needed to support their customers. Fear of running short of paper further fueled buying, thereby exacerbating shortages and price increases. As 2022 wound down, mailing activity began to slow rapidly. Many mailers had exhausted their 2022 budgets by the end of Q3 because of the continued rise in paper and postage costs.
You don’t need to be a finance expert to know that from 2020 to 2022, the price of everything went up. Just think about your grocery bills. The Consumer Price Index identified the year-over-year increase in the cost of a dozen eggs at almost 40%! The paper industry was no exception to this inflation. Input costs such as energy, starch, fuel, transportation, labor, pulp, and chemicals continued to rise, resulting in double-digit price increases across every grade of paper. Overall, standard printing paper increased an average of 21% in 2021 and another 20% in 2022.
The cost of direct mail programs continued to increase throughout 2022. This resulted in a return on marketing investment (ROMI) decline due to a combination of increased costs and the impact of inflation on consumers. The continued cycle of general inflation negatively impacted discretionary consumer spending and giving. The very vehicle that was generating so much money earlier in the year was not nearly as profitable toward the year’s end. As a result, Q4 2022 direct mail activity slowed significantly. The inventory printers and mailers had been stockpiling sat idle, resulting in higher-than-normal paper inventory levels across the industry.
Optimism Returns as Inventory Levels Stabilize
Optimism is returning as we begin to navigate out of an oversold market. The pandemic accelerated an overdue market correction. Inventory levels for producers and buyers alike are stabilizing. Paper manufacturers are forecasting strong production capacity for 2023, despite a soft first quarter. Paper mills and merchants recognize this softness will be temporary as printers and lettershops work through their stockpiled inventory. As surpluses are consumed, paper demand is expected to be stronger for the balance of 2023.
While most do not anticipate a significant decline in paper pricing in 2023, they also don’t anticipate the market volatility of 2022. Moore has strong supply chain partners and we are well-positioned to continue to support our customers during these changing times. We’re recognized experts in the paper industry with best-in-class paper suppliers. We have strong partner programs, allocations and flexibility in place to navigate difficult market conditions. These relationships ensure we continue meeting our clients’ program needs today and in the future.
Coming soon: Strategies to Reduce Costs and Maximize Paper Strategy Efficiency
About the Author
Dave Johannes
Dave is an operations executive with 40+ years of experience in the printing & mailing industry. Throughout his career, Dave has been fortunate to work with leading companies that have provided him the opportunity to take on new challenges. Along the way, Dave has developed expertise in color digital workflow, printing and technology, leading to opportunities to serve in multisite leadership roles.