The Current Difficult Situation in The US Paper Industry, And The Exploration Of The Reasons Behind It!

The current difficult situation in the US paper industry, and the exploration of the reasons behind it!

The paper industry isn't exactly a fun industry, but given that the US is the world's second-largest producer of paper and pulp, producing more than 70 million tons of material annually, it's definitely worth knowing what's going on in the industry. It goes without saying that the Covid-19 pandemic has had a huge impact on the paper industry: shutdowns, rapid expansion of e-commerce and direct-to-consumer (D2C) shipping, surge in packaging and labeling orders, refusal to perform preventive maintenance on idle paper machines, capacity unable to meet the growing demand.

Linking all of this happening to the paper industry, we see that the transfer of capacity from paper mills has been climbing, there are fewer and fewer paper mills in operation, a lot of paper capacity has been removed from the market, and all of this has made paper mills at a major turning point.

Why are most American paper mills in poor condition?

The Covid-19 pandemic was not the beginning of the root cause of the unrest at paper mills, many of which had been in trouble for some time before that. There are several reasons for the decline in paper mills across the industry.

Barriers to Entry: One of the biggest reasons paper mills encounter problems in the industry is that there are very strong barriers to entry. "New players" looking to enter the industry will find input costs high in many areas, such as: plant start-up capital, paper equipment input costs, plant size and location, preventive maintenance, raw materials, regulations. As one of the most regulated industries in the United States, paper mills must comply with regulations including environmental and labor at every step of the manufacturing process. Also during this period, operations must run at no less than 100% efficiency, otherwise there will be financial losses. However, despite this, the competition is still fierce. Now, many factories are turning to other materials to make up for lost profits.

Low Profits: Although the U.S. paper industry is valued at nearly $35 billion in 2021, it's getting harder to make a profit. Profits in the paper industry have been at a low point over the past few decades, with many factories struggling to make ends meet due to declining paper grades, rising raw material costs, and falling demand due to a major shift to digital communications. Some companies have declared bankruptcy, and some companies have transferred their loss-making products to more profitable packaging paper in order to prevent bankruptcy. For example, Domtar converted one of its paper mills from producing printing and writing (P&W) paper to recycled packaging in August 2020. This is partly due to growing demand for manufacturing items such as containerboard, enabling paper mills to maximize profits.

Price hikes and demand volatility: Sudden and alternating market changes, especially during the COVID-19 pandemic over the past few years, have caused quite a few headaches on the price and demand side. The rise of e-commerce and digital advertising over the past decade has led to a steady decline in print volumes for items such as magazines and newspapers. However, despite falling demand, prices for commodities such as pulp and paper will only continue to rise. There has been a sharp increase especially during the pandemic. Pulp prices rose from the fourth quarter of 2020 and surged into 2021. For example, the price of Northern Bleached Softwood Kraft (NBSK) has risen 20% from $550/t to nearly $750/t between December 2020 and February 2021 in less than 2 months. New growth in demand for paper products combined with rising prices has created a volatile environment for the paper and pulp industry.

Various other unforeseen circumstances

If just dealing with industry downturns and market difficulties wasn't tough enough for the paper industry, the rest of the series of unfortunate events hit some of North America's top paper mills, further weakening the country's paper industry:

Pixelle - The Androscoggin plant exploded in April 2020, reducing the market by 240,000 tons of pulp capacity. The Pixelle-owned mill was not only forced to shut down pulp production, but also idled one of its three paper machines due to a ruptured pulp digester. In April 2022, Pixelle announced a $48 billion sale of the company, including all 11 paper mills. The 11 factories together produce more than 1 million tons of paper annually.

Verso – The Covid-19 pandemic has led to a significant drop in demand, causing Verso to halt production at 2 paper mills in June and July 2020, and its actions to implement the shutdown are seen as actions to “offset an unprecedented market decline”.

Sappi - a Michigan paper mill that will permanently close in 2021, their PM5 machines are producing 170,000 tons of paper per year. More recently, Sappi's plant in Skowhegan, Maine, has been negotiating contracts with unionized workers for better benefits and higher wages. The threat of a strike is looming. As we have seen with strikes in the paper industry, failure to reach a deal could jeopardize the entire supply chain. Thankfully, an approved 3-year contract narrowly avoided a strike.

The energy crisis caused by the Russian-Ukrainian war: Although the global energy crisis has already occurred (the price of natural gas in the United States has risen by more than 150% between 2020 and 2021), the Russian-Ukrainian war has deepened the energy crisis. According to 2019 statistics, Russia supplies 41% of the EU's natural gas. For the purpose of sanctions against Russia, the United Kingdom and the European Union have given up on Russian gas and have had to turn to alternative energy supplies, such as OPEC, where the United States buys oil. So how does this affect paper mills? Papermaking uses a lot of energy, which means these mills will be hit hard by rising energy costs. Previously, the closure of six Venice factories in Italy due to soaring costs, which rose from 300 euros per ton before the pandemic to 750 euros per ton today, a sharp surge in just 2 years, is one of the results. Uncertainty over the outcome of the war has left the industry in limbo.

Supply Chain Constraints: Over the past two years, global supply chains have struggled to stabilize themselves. While predictions have been made as to when things will eventually level off, a number of new and persistent factors have been holding back the process. Some of these include: port bottlenecks, new coronavirus variants, shortages of raw materials, record delivery times, and there is no clear timeline for when these problems will end.

While all of these events are troublesome and cause devastating problems in the paper industry, why does the condition of the paper mill matter? Well, the U.S. paper industry is a critical part of the industrial supply chain. The market has undergone a major shift that has never been seen before. More and more factories are transforming their production lines to accommodate the booming trend of sustainable packaging replacing plastic, the next big step in the paper industry.