To understand how well paper is doing as a commodity here, consider one of the oldest, most venerable of all American institutions: the U.S. Postal Service (USPS).
At the height of its distribution heyday – 2001 precisely – the USPS handled and delivered nearly 104 billion first-class letters. Just 12 years later, that number plunged by nearly 50% – to 66 billion. All types of paper mail, from letters and packages to fliers and catalogs, have dropped from 177 billion pieces just four years ago to 150 billion. (The separate corrugated markets take credit for the only bright spot during that period, in which the number of packages actuallyincreased by 1 billion.) The precipitous decline will continue by more than 15% over the next six years, according to the USPS.
USPS revenues have plunged from a pre-recession high of $73 billion to $67 billion today, and its labor force is nearly half the size it was in 2004.
In its recent report to the USPS, the Boston Consulting Group identified key drivers killing the single biggest “product” of the post office. They include the green movement (sustainability), ever-rising fuel costs, and rapid transition to online (Internet and mobile) communications and electronic invoicing/payments. One leading telecommunications company told the company it was on track to completely eliminate first-class paper-based communications and billings in just the next six short years, and expects its competitors to follow suit.
Tom Runiewicz, Principal, Industry Practices Group, IHS, oversees the huge company’s U.S. energy service, keeping an eagle eye on key metrics (like revenues and volumes) of more than 140 different industries.
“Out of every single one of those industries, the one performing the worst in terms of volume, such as percentage change from a year ago to this year, is the U.S. Postal Service,” Runiewicz tells My Purchasing Center. “It’s not that the USPS is bad, but the volume of materials going through the postal service has the largest shrinkage of any industry we look at in the U.S. That in and of itself says, if they’re the largest mover of communication paper, it really shows how much communication paper has declined.”
Big Paper Product Markets Shrinking
As My Purchasing Center previously reported, the paper markets enjoyed a relatively strong year in 2013. And a mild recession in 2014 some analysts predicted never came to pass. Paper is still and will continue to be a healthy industry; some of its biggest customers and products, however, are becoming obsolete.
Besides the USPS, there are many now struggling industries that have long relied on paper as their economic engine. Consider newspapers, magazines and catalogs. Many are now virtual commodities on the Web and continue to be challenged by ways to retain the same tangible value of their former paper-based selves. (Even major check-printing companies expect annual production drops of as much as 7% a year through 2020, according to the Boston Consulting Group report.)
Over the past seven years, scores of U.S. newspapers, many over a century old, no longer exist in print. Print circulation is down more than 10% and print ad revenues have plunged nearly 30% since 2009, according to the aptly titled NewspaperDeathWatch.com. Some popular paper catalogs, with all their heft and huge postage expense, continue thriving, but some observers wonder for how long. The number of catalogs mailed in the U.S. dropped about 7% from 2009 to 2010 alone. Last year, that number dropped to its lowest level since the Direct Marketing Association tracked such data, according to a recent Forbes article. By 2020, the Boston Consulting Group projects catalog volume to fall nearly 30% more
“Newsprint is dying on the demand side,” says Runiewicz at IHS. “Electronic communication is continuing to grow and advance rapidly. The energy consumption and costs for paper production is expensive, point blank. To move paper around is costly.”
Not to say the industry isn’t finding clever ways to repurpose factories to produce other things besides newsprint. Large mills that once cranked out multi-ton rolls of the product in Georgia, Alabama and Oregon, for example, have now been modified fairly cost-effectively to produce things like light linerboard and containerboard used in packaging, according to Runiewicz. “It’s not growing by leaps and bounds but it’s growing and better than the communication paper industry,” he says of the corrugated markets.
Overall, however, the paper markets are in a downslide, Runiewicz tells My Purchasing Center. “People are simply printing, copying and mailing less and less,” he adds. “And it’s declining roughly about 3-5% per year. This is significant.”
One would expect paper prices to decline as precipitously as demand, but that’s not as simple as it sounds, according to Runiewicz. “Normally we’d see notable price deflation but what’s happened is producers have been removing capacity while trying to increase their market share out of a smaller pie, but in the long-term, it’s a difficult tide to fight. Prices overall have remained fairly flat in 2014 and even some producers tried to raise prices because they’ve shut down so much capacity.”
One of the major detriments to bulk paper is the ongoing rise in fuel and transportation costs. “It’s expensive to move paper around. Paper is heavy and it takes a lot of energy and expense to move it from one place to another. It is a lot cheaper to do it electronically.”
Current Market Conditions
U.S. production of pulp, paper, and board mills, paperboard containers and paper bags and treated paper products production are all at their lowest point in more than 30 years, according to the National Paper Trade Association (NPTA) in its latest economic outlook. The NPTA offered tempered growth projections for paper production in May after new Industrial Production Index figures were announced, predicting production to drop from 3.7% to 2.7% by the end of 2014. Also tempering growth is an improving labor market (which could impact margins) and expected slowing in consumer spending the latter half of this year.
According to the U.S. American Forest & Paper Association, paper and paperboard capacity declined 1.1% in 2013. Among the bright spots for paper come from the rebounding food production markets, fueling higher demand for dry food paper-based containers, as well as a significant surge in non-processed paper exports to China, according to IBIS World, a leading market research firm.
Continually rising pulp prices, fierce global competition (Chinese imports increases at an average annual rate of 5.1% to about $1 billion in the five years up to 2014) and sagging domestic competition, meanwhile, continue haunting domestic paper markets even as consumer spending recovers from the recession, the firm notes.
Meanwhile, rising demand for coated paper (used in paper packaging, such as beverage and food boxes, as well as in applications for printed materials like labels, company reports and brochures) have led to marginal price growth since 2011, only to be muted by sagging print advertising demand, according to IBIS. In 2013, paper product manufacturing reported revenues of about $4 billion while shrinking slightly (about 1.1%).
Price Forecast
Given current trends and market conditions, there’s not a great deal to hoot about in 2015, unless you’re a buyer. In short, forecasting for paper purchases should be a relatively accurate and painless task, say some observers.
IBIS World, for example, paints an industry in a bit of a decline. “During the next five years, the paper product manufacturing industry is expected to continue its descent, the firm notes in a 2014 electronic report. “Although economic growth is expected to boost discretionary spending during the five-year period, the industry will continue to grapple with rising competition from imports and a growing amount of domestic manufacturers offshoring production.” Continued environmental pressures to minimize packaging or use recycled materials also won’t help.
Coated paper products could see slight price increases of about 1.4%, meanwhile, prompting buyers to consider locking in contract prices earlier than later, according to the firm.
The one thing that could alter such predictions is a depreciation of the U.S. dollar, which would raise the cost of imports and make American-made paper products more attractive to buyers.
- See more at: http://www.mypurchasingcenter.com/office-products/articles/imports-flat-demand-could-keep-paper-prices-down-2015/#sthash.zcxAid9U.dpuf
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