Category Update: Paper cuts

Declining paper demand and cheap imports pose an existential threat to US and European paper manufacturers, but some players in this sector are still managing to profit.

The outlook for the paper industry appears bleak and analysis by industry experts RISI of the key figures confirms an industry in continuing decline. In the US, demand for uncoated free sheet paper fell by 3.6% in 2016, continuing a longer-term trend that began at the turn of the century. 

There is some optimism that this fall may be mitigated over the next two years as the effects of low prices and economic growth play their part. Nonetheless, demand is projected to decline a further 3.1% this year and 2.2% in 2018. Naturally, the impact of these figures is highly significant for paper manufacturers and those involved in that particular supply chain.

As one industry commentator who prefers to remain anonymous says: “Unless you’ve got a strong balance sheet and can leverage the economies of scale, it will be difficult to survive the future.”

Ineffective tariffs

In February 2016, the US Department of Commerce (DOC) levied anti-dumping and countervailing duties on importing producers of cut sheet paper. The duties range from a low of 7% up to a staggering 325% and, for the most part, cut the flow of copy paper from Australia, China and Indonesia. However, over the past year US producers have not seen the benefits they were expecting as the flood gates have opened for non-tariff producers that have already increased their market share, with additional capacity from Thailand, Taiwan, Argentina and Columbia coming on stream. 

In fact, despite the imposition of tariffs, cut-size imports into the US were up around 33% in 2016. As Jim Kluth, Paper Category Manager at wholesaler Essendant, reports: “Imports from non-tariff producers such as Germany, Finland and Thailand will likely increase sharply in the future. No major capacity shutdowns have been announced by North American paper producers and Asian capacity expansion is continuing with new machines coming on line in 2017 and 2018. This will negatively impact global demand and supply balances, driving costs down even further.”

Europe suffers

The industry’s woes are not confined to North America, with sales also down in single-digit percentages across Western European countries and set to continue in the years to come, mirroring the projections from across the Atlantic. 

The decline in paper demand is now relentless and increasingly driven as part of a company’s overall environmental strategy, with many celebrating how much less paper they’ve used year on year within their annual reports.

As Darren Clargo, Market Analyst at European paper industry consultants EMGE, admits: “2016 was a very bad year for the paper category. There were major challenges caused by general oversupply and chronically-low prices. In addition, the industry continues to suffer from a poor environmental image in the eyes of consumers in general. Despite huge efforts to educate wider society about the incredibly clean credentials of the sector, there’s still a perverse – and simply incorrect – link made between office paper production and rainforest depletion.”

However, some companies are still making a success from the paper business. European wholesaler ADVEO, for instance, has seen double-digit growth in the cut-sheet paper category over recent years by taking overall market share. As its Purchasing and Category Director Dennis Albers reports: “This is down to a combination of a strong brand offering coupled with attractive pricing and a large amount of marketing effort. It’s also about managing the product mix – our overall broad product portfolio means that dealers often prefer us over paper merchants. SME OP dealers have proved quite resilient in selling paper, helped by successfully adding value-added products to their range.”

In Austria, multichannel operator PBS Holding is also seeing a decline in paper sales, although mainly across Central Europe. As its CEO Richard Scharmann explains: “Consolidation is having an effect, with some manufacturers managing to post record earnings while others are in a desperate situation. We still expect some growth in this sector from Eastern European countries and that’s where our strategic focus lies. By aiming to retain our existing customers and play an active role in distribution, it will help us manage our exposure in a market that’s declining overall, while we concentrate on pushing alternative non-paper portfolios.”

As the sector contracts, resellers and distributors are looking to flex their product lines in order to try and find new angles and niche markets that could prove profitable. Essendant in the US, for example, has seen success by introducing paper ranges with a lower weight. Traditionally, the copy paper market has been dominated by 20 lb (75 gsm) ranges, but new 18 and 16 lb versions that require less wood to produce are finding favour. As Kluth discloses: “Although they cost a similar amount to regular paper, it’s a way in which customers can demonstrate their commitment to sustainability. The other benefit is that a 5,000-sheet carton weighs about 20% less, making for lower shipping costs and a smaller carbon footprint.”

UK office supplies group SPOT has noticed the rise of of value-added products that offer fewer sheets per pack or fewer reams per box to support online customer growth and the SOHO market. It’s also seeing a higher sales decline in branded paper, with a major shift to own brand and entry-level, white-box paper at lower price points. The decline in the value of the British pound has actually seen significant UK price increases as paper mills seek to maintain profit levels. Prices of wood-free paper have increased more than those of recycled paper, which has meant that the demand and volume for recycled brands has grown.  

“Price stability driven by reduction in capacity, instability in currency and fewer paper producers is the major challenge,” says SPOT Group’s Purchasing Manager Gail Moody. “The competitive nature of C grade, lower-specification paper means that customer loyalty is weak. The loss of PaperlinX in the UK has left fewer numbers of large paper merchants that, with both direct and indirect channels of distribution, are able to leverage customer price increases to fuel their own profit expectations.”

Uncertain future

The category has spent a lot of time responding to external factors and consolidating requirements, rather that developing new innovative ideas, according to Simon McLoughlin, Category Head Traditional at UK wholesaler VOW. 

However, he adds: “Paper as a category is still performing strongly for us with sales in 2016 up by double digits. In the premium copier paper sub-category core brands such as Xerox and HP are outperforming the market, with Premier Paper’s Evolution brand also driving significant sales growth in the recycled arena. 

Additionally, one of the newest entrants to the market, the Double A brand, is building a loyal following with consumers who are enjoying the mix of quality and value it offers.”

McLoughlin also refers to pricing as being a huge issue: “Since last June, we’ve all faced significant uncertainty and market volatility as a result of the EU referendum. These concerns are impossible to ignore given the impact this commodity product group has on the channel and its future remains unclear.” 

Environmental focus pays off for Office Club

UK dealer group Office Club has recently found commercial success with an environmentally-friendly brand of paper, known as ‘Cool Earth’. OPI spoke to CEO and keen environmental campaigner Toby Robins about the philosophy behind the way this paper is produced and marketed.

OPI: Tell me about Cool Earth paper? What sets it apart from other ‘green’ paper products?

Toby Robins: The messaging on the wrapper – ‘This paper saves trees’ – says it all, and unashamedly sets out to grab the attention of the consumer. But it’s not ‘greenwashing’. Cool Earth paper has been created to withstand the intense scrutiny of sustainability professionals and consideration has been given to the social, economic and environmental requirements of stakeholders along the entire value chain.  

Often a so-called green product will focus on a single environmental feature – such as being made from recycled material or FSC/PEFC pulp. But it then fails to take account of the mill being coal-powered, for example, the raw materials being shipped halfway round the world, or the health and safety record at the manufacturing plant. When Cool Earth was developed it adopted a totally comprehensive and holistic approach to systematically take factors such as these into account.  

OPI: How does Cool Earth make a difference?

TR: We entered into a partnership with the Cool Earth charity and have developed an ethos that goes way beyond simply planting trees. It’s not just protecting the rainforest but also the biodiversity within it and the ecosystem services it provides. We are supporting indigenous communities to prevent deforestation and environmental degradation in the long term. In this way they benefit from improved healthcare, education and economic development, but not at the cost of the forest. 

Cool Earth paper is not just an end in itself, but a tool to raise awareness and support the transition to a sustainable economy.

OPI: How has Cool Earth performed for you from a commercial perspective? 

TR: It has been a delightful surprise. The previous Office Club paper brand was showing an 8% decline, but Cool Earth has turned it into a 30% growth. It’s particularly pleasing because it’s an added-value product and therefore reiterates that there are alternatives to the price-focused ‘race to the bottom’ business models that have become so prevalent in our industry. 

In conjunction with Antalis we will continue to maintain the profile of the product and awareness of its benefits among our reseller community, supported by point-of sale-merchandising for our retailers and other marketing materials for our commercial and online members. These materials will be kept fresh and updated with new information – such as the Cool Earth’s shortlisting for the Marketing Initiative of the Year in the European Office Products Awards.

OPI: What are your views on the environmental record of the paper industry to date? 

TR: On the whole, the environmental record of the paper industry has not justified the poor reputation it has gathered. Of course there are elements within the global industry that have not demonstrated responsible environmental management and which continue to do so by failing to control and manage the corruption within their supply chains. 

However, regulators have sought to address this through, for example, the Lacey Act in the US and the EU Timber Regulation in Europe. Manufacturers and merchants have sought to distance themselves from bad practice through supporting voluntary chain of custody standards.  

At the point of production, professional environmental management systems have not only seen massive reductions in carbon intensity, but also ever-tighter management of water and waste. By sourcing locally in Europe or the US, you will almost certainly be supporting manufacturers with levels of environmental awareness and management like few other industries while also reducing the carbon footprint of transportation. I believe the industry is several steps ahead of its reputation. 

2050 Roadmap update

The European paper industry has launched a reviewed version of its 2050 Roadmap detailing the route and investment needed to cut its carbon emissions by 80% while creating 50% more added value.

The Roadmap forecasts the need for an additional €44 billion ($47 billion) investment – a 40% increase on current levels – to transform the paper industry in Europe and lead the low-carbon bioeconomy by 2050.

The Confederation of European Paper Industries (CEPI) pioneered the first low-carbon industry roadmap six years ago and its Director General, Sylvain Lhôte, told OPI: “Since our first roadmap in 2011 the paper industry has invested €15 billion in Europe [but] more must be done to accelerate industry transformation in Europe over the next decade. It is now essential to lift off the low-carbon bioeconomy and pace of transformation.”

Download the full roadmap