The progress of paper mills

Let’s be honest: stationery doesn’t really inspire the most exciting conversations. But given that the United States is the world’s second-largest producer of paper and pulp, manufacturing more than 70 million tons of materials annually, it’s definitely worth knowing what’s going on in the industry.

Needless to say, the pandemic caused a stir:

  • Lockdowns that stop production
  • Rapid expansion of e-commerce and direct-to-consumer (D2C) shipping
  • Increase in orders for packaging and labels
  • Inactive factories are denied preventative maintenance
  • Volume unable to meet growing demand

Combine all of this with the fact that the paper industry was already volatile. Production shifts have increased, fewer mills are operating, and tons of paper have been taken off the market. All of this has placed paper mills at a major turning point.

So which grinders fit into this equation? The top five factories in the United States include:

  1. twin rivers
  2. Pixel
  3. Back
  4. Kruger
  5. Sapi

How do they maintain? The answer: not well. Here’s what we know and what’s to come.

The pandemic was not the start of the turmoil for paper mills. Many were already struggling and had been for some time.

There are several reasons why we see paper mills declining in the industry. Below are some examples.

Entry barriers
One of the main reasons why paper mills have problems within the industry is that they have high barriers to entry. And we mean meaningful. New players looking to enter the industry will find substantial costs in many areas, such as:

  • start
  • paper making equipment
  • Plant size and location
  • Preventive maintenance
  • Raw materials
  • Regulations

As one of the most regulated industries in the United States, paper mills must meet regulations, including environmental and labor regulations, at every step of the manufacturing process. Moreover, during this period, operations must be executed with no less than 100% efficiency, otherwise money is lost. Point blank, millions of dollars go into running a paper mill (it’s a billion dollar industry, after all).

Yet despite all of this, the competition is still high. And now many factories are changing course to produce other materials to make up for lost profits.

Low profits
Although the US paper industry is valued at nearly $35 billion in 2021, it is increasingly difficult to make a profit. The past few decades have not been good for the bottom line, with declining paper grades, rising raw material costs and a major shift to digital communications that has led to a drop in demand. As a result, many factories found themselves in financial trouble. Some have declared bankruptcy.

To avoid going under, mills are shifting production from paper grades to more cost-effective materials. For example, Domtar moved one of its paper mills from producing printing and writing (P&W) papers to recycled packaging in August 2020. This is due in part to demand for manufacturing items like the growth in containerboard, allowing mills to maximize their profits.

So where are these products used? Look at Boxed Water Is Better. They use paper to produce an alternative to plastic, a 100% recycled bottle. This direction is where many popular brands and companies are turning.

At this point, factories are playing the game of “following the money”.

Rising prices and fluctuating demand
Sudden and alternating changes in the market, especially in recent pandemic years, have caused quite a headache with prices and demand. The rise of e-commerce and digital advertising over the past decade has led to a steady decline in print output for items like magazines and newspapers.

Yet, despite a drop in demand, prices for items like pulp and paper have continued to rise. A dramatic increase was particularly observed during the pandemic. Pulp prices started to increase in the fourth quarter of 2020 and peaked in 2021. For example, the price of Northern Bleached Softwood Kraft (NBSK) increased by 20% from $550/tonne to nearly $750/ton between December 2020 and February 2021, i.e. less than 2 months!

And now, the further increase in demand for paper products (to the point of supply chain shortages) has combined with rising prices to create a volatile environment for the paper and pulp industry.

Difficult times (unforeseen circumstances)
If coping with a declining and difficult market wasn’t difficult enough, a series of unfortunate events have struck some of North America’s largest mills, further weakening the paper industry:

  • Pixel – An explosion at the Androscoggin mill in April 2020 took more than 240,000 tonnes of pulp from the market. Following the rupture of a pulp digester, the factory belonging to Pixelle was forced not only to shut down pulp production, but also to idle one of its 3 paper machines. In April 2022, Pixelle announced the potential sale of the business, including all 11 paper mills, for $48 billion. The 11 mills collectively produce more than one million tons of paper per year.

  • Back – A huge drop in demand due to Covid led Verso to halt production at 2 of its paper mills in June and July 2020. The action to idle these mills was seen as action to “compensate for the unprecedented decline of the market”.

  • Sapi – A factory in Michigan was permanently closed in 2021, eliminating 170,000 annual tons of paper produced by their PM5 machine. More recently, the Sappi-owned factory in Skowhegan, Maine negotiated contracts with unionized workers for better benefits and higher wages. Strike threats are looming. As we have seen with strikes in the paper industry, failure to reach an agreement can jeopardize the entire supply chain. Fortunately, an agreement was reached with a ratified 3-year contract, narrowly avoiding a strike.

All of this has led to what is happening now and is affecting the paper industry. And the events are quite monumental.

Energy crisis due to Russian invasion
While there was already a global energy crisis (natural gas prices in the United States increased by more than 150% between 2020 and 2021), the invasion of Ukraine by Russia in February 2022 did not only makes the problem worse. Russia supplies 41% of natural gas to the European Union (EU), according to 2019 statistics. Current sanctions have halted deliveries, leaving the UK and EU in a difficult position. They may have to turn to alternative energy sources, like OPEC, where the United States buys oil. This will increase demand and therefore prices.

So how does this affect paper mills? Paper production uses considerable amounts of energy, which means these mills are hit hard by rising energy costs. Six Venetian factories in Italy have closed due to soaring costs, which have risen from €300 before the pandemic to currently €750 a tonne, a huge spike in just two years. Uncertainty about the outcome of the war left the industry in a state of instability.

UPM Finland strike
The UPM strike in Finland started on January 1, 2022 and ended on April 22, 2022 after 112 days. By March 2022, it had become the longest strike in the history of Finnish papermakers. This put the label supply chain at risk of a massive shortage. UPM shipments to the United States fell from 494 in February to just 93 in March, according to ImportYeti.

Supply chain constraints
The global supply chain has been struggling to stabilize for 2 years. Although predictions have been made about when things will eventually balance out, new and persistent constraints continue to impede this process.

Some of them include:

  • Bottlenecks in ports
  • New COVID variants
  • Raw material shortages
  • Record delays

There is no definitive timetable for the end of these problems.

While all of these events are troublesome and cause disruptive problems within the paper industry, why does the condition of paper mills matter? Well, the US paper industry is an essential part of the industrial supply chain. And we are witnessing a major change never seen before in the market.

More and more factories are converting their lines to accommodate the growing trend of sustainable packaging replacing plastic. This is the next big step for the paper industry.

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