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.

A third-generation printer, Dustin LeFebvre delivers his vision for Specialty Print Communications as EVP, Marketing through strategy, planning and new product development. With a rich background ranging from sales and marketing to operations, quality control and procurement, Dustin takes a wide-angle approach to SPC

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Comments
  • Greg Imhoff

    Good commentary Dustin. Thank you also for your excellent print presentation during last months IdeAlliance G7 conference.

    Paper companies know print markets are shrinking so a safe assumption may be, they simply need to cover unchanging (Fixed) operating costs on lower (Variable) outputs. To balance this market business reality is the entities may simply need to adjust their "input" costs, to offset (cover) higher unit Fixed costs resulting from decreasing Variable volumes to re-balance their operational equilibrium.

    Fixed costs need to be covered so the remaining market may pay more under the auspices of "higher input costs. " A math model that may help more accurately answer may be the Cournot competition theory with formulas: http://en.wikipedia.org/wiki/Cournot_competition just my .02

  • Brent Clarke

    I think you are right Dustin that the transportation charge is a bit of a smoke screen but I think once you take into account increased transportation cost for the timber that feeds the pulp mills and other consumables used by the mills in making paper its a bit more. Whether this should be lumped under increasing input costs or part of transportation is a different question, however; as Greg pointed out decreasing volume definitely creates a higher overhead cost for any company which is likely what is the real result of the increased cwt cost. Then there is the legacy costs which would fall under Greg’s "Fixed Cost" (pensions and medical benefits of past/retired employees) that still need to be covered even as production volumes fall short, something I would think the big mills have greater exposure to than say a smaller growing mill. Not a lot different than what the automotive and steel industries have gone through in the last 10 years. If this is the case, usually this is a short sited tactic as other suppliers will begin to encroach on the already shrinking market in an attempt to grow their own market share with a better price point than the bigger mills. Except in the case of a Monopoly, there is usually someone ready to exploit that weakness.