Unraveling Paper Price Increases
If, like me, you received price increase letters last week from a couple of coated paper manufacturers, you’re probably really frustrated. Frustrated at the prospect of paying yet-higher costs. For me, the first thought was the time drain that’s coming my way while I put together a case to convince the mills of the absurdity.
Is this price increase demand-driven? Of course not! Then why are they doing it?
They claim “rising input and transportation costs,” but I think their reasoning was much simpler. I think they saw what just happened in the uncoated market and calculated they had nothing to lose in trying to push an increase through.
Maybe they miscalculated.
The marketplace is working out the recent uncoated increase right now. While some customers are not receiving any increase, many are accepting something in the range of $1.50/cwt and others are taking the entire $3/cwt.
In my effort to understand the current price fluctuations, I spoke with a number of friends and colleagues—printers, merchant distributors and mills.
Suppliers who instigated the uncoated increase claimed the same drivers as did the coated manufacturers—“rising input and transportation costs.” I wanted to better understand the “input” cost argument, so I asked for an explanation from a local merchant. He had no credible explanation.
First, he cited gas prices. He then insisted costs that he could not identify were going up, and informed me that the $3/cwt increase was being implemented across the board.
This is a merchant with whom I spend eight figures annually! He didn’t seem to be working strongly on my behalf, nor was he sufficiently diligent to understand what was happening in the market and why.
Another mill rep was much more straightforward; he simply explained that the two dominant uncoated mills are pushing hard, and that his smaller mill would really like to make more money by riding the coattails of the bigger mills’ increase.
Honesty! Can I find some of that from the coated mills concerning their latest increase?
I did some homework on gas prices to understand the mills’ claims. Over the past year, diesel prices have risen from $3.93/gallon to $4.04/gallon here in the Midwest, according to the U.S. Energy Information Administration. I also found that the average fully loaded semi gets between six and eight miles per gallon.
Let’s analyze a paper truckload from these mills and calculate the impact of fuel prices on the cost per hundred weight. These manufacturers each have mills in Michigan and Maine. On average, the Michigan mills are 295 miles from SPC, and the mills in Maine are 1,068 miles from SPC. Working off the inefficient end of the gas mileage spectrum (six mpg), this adds $5.40 to the Michigan shipment and $21.41 to the Maine shipments. Given 40,000 lbs. of paper per truckload, that’s $.0135/cwt from Michigan and $.0535/cwt from Maine.
Yep, we’re talking between a penny and a nickel for the fuel cost component.
As for the spectacularly murky and undefined “rising input costs,” I’m still waiting for a definition of this from the uncoated mills. Two mills control an overwhelming majority of this market, and they’re testing their market power to push through price increases.
But who pays for those increases? Printers have much less market power, and the extremely elastic nature of print demand dictates that the lion’s share of the increase will fall directly on the shoulders of printers.
Perhaps we can get a full explanation from the coated mills if they’re willing to attempt to support this increase. My guess is that this will never happen because the numbers simply don’t add up. They know it, and so do we.
And if they won’t or can’t support the price hike, why not simply acknowledge it’s “because we want to make more money?” Honesty wouldn’t be nearly as insulting, and it would save us all a lot of time trying to wade through their murky logic when maybe the simple word “greed” would suffice.
(The views expressed in PIworld blog posts are those of the blogger and not Printing Impressions magazine.)