Paper Price Hikes Stall in April: Packaging Supply Chain Locked in a Cost Pass-Through Tug-of-War

A futures paper analyst recently told 21st Century Business Herald that downstream paper mills had laid out a price-increase plan for April starting in March, yet actual execution in April proved weak. Although mills issued price-increase notices in early April, downstream buyers did not accept them, so implementation fell short of expectations.

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As upstream costs such as waste paper and pulp keep climbing, some listed companies are enjoying strong profits, while small and medium-sized paper enterprises downstream are under pressure, with price increases narrowing level by level down the supply chain.

These downstream businesses must passively absorb higher raw material costs while trying to keep orders and gauge how much price consumers can accept.

A manager at a paper packaging materials company in Zhengzhou told 21st Century Business Herald that, as a third-tier paper factory, the company has little bargaining power in the price-hike wave. Once first-tier mills raise prices, second-tier mills follow more aggressively; sometimes raw materials for orders already taken have not arrived before prices rise, end customers will not pay the extra, and delivery deadlines cannot slip, so companies often have to accept it silently. The concentration of bargaining power among paper enterprises leaves downstream manufacturers in a tough position during price increases.

At present, the tug-of-war over price increases downstream in the paper sector looks set to continue.

1. The paper price-increase transmission chain

National Bureau of Statistics data show that in March 2021, among industrial producer ex-factory prices, means-of-production prices rose 2.0%, with the growth rate 0.9 percentage points wider than the previous month, contributing about 1.52 percentage points to the overall rise in industrial producer ex-factory prices. Within this, ex-factory prices for papermaking and paper products rose 2.3% month on month, 2.3% year on year, and 1.0% year on year from January to March.

Overall paper price increases are not especially high at present, but large paper enterprises hold industry pricing power, and both sales and prices rose in the first quarter of this year. Based on companies that have released first-quarter reports and earnings forecasts, several listed paper companies have doubled profits, helped also by the time lag between cost prices and price increases.

The futures paper analyst noted that the drivers behind price increases differ by paper grade.

Specifically, printing and writing paper and household paper have seen cost-push increases triggered by a sharp rise in wood pulp prices.

The analyst said upstream pulp prices in 2020, especially wood pulp, began rising around the third quarter and continued into the first quarter of this year; from November to early March, the increase was about 60%-65%. By contrast, white cardboard was less affected by upstream increases before March-April last year, and downstream price moves were more self-initiated.

Driven by uneven upstream increases, some large paper enterprises have earned excess profits. The analyst said some listed paper companies, with large scale and ample wood pulp and raw material inventories, are effectively benefiting from the spread between higher paper prices and earlier low-cost raw materials, creating a mismatch at the finished-paper output end and very strong profits. However, as large mills use up low-priced raw materials and may need to buy high-priced wood pulp, profitability is expected to weaken month by month.

Compared with large paper enterprises, more small and medium-sized paper businesses face much greater survival pressure amid the upstream price-hike wave.

Boss Liao of Maoming Jiajie Paper Products Factory said upstream paper prices have risen continuously since December last year, by 300 yuan/tonne every one or two weeks; the cumulative increase now ranges from 1,500 to 2,000 yuan per tonne compared with before, though different mills vary. He noted that goods previously cost 5,600 yuan/tonne or 5,700 yuan/tonne, while now prices of 7,200 yuan/tonne and 7,500 yuan/tonne have appeared.

A manager at a carton factory in Jieyang said carton making is a processing business, with raw materials accounting for about 80% of costs; even a small material increase can wipe out profits or push the operation into loss.

He added that the upstream paper sector has always held the initiative, and because paper product transport costs are high, material suppliers in the same region tend to band together.

The manager at the Zhengzhou paper packaging materials company said raw material prices were very stable before October 2016; compared with that period, raw material costs have risen 40%, auxiliary materials have increased by 30% to 50%, and profit margins keep shrinking. He admitted that many times they have to operate at a loss because they must keep a group of workers employed and equipment was bought with loans.

1. The downstream tug-of-war over price hikes

Forced by the price-hike wave, some enterprises have considered raising prices, but downstream paper mills' pace of increases toward the retail sector still cannot keep up with raw material gains overall, eroding mill profits.

The analyst said paper mills, especially those making household paper and printing and writing paper, have seen profits sharply squeezed and have no choice but to raise prices. But demand elasticity differs, end-market demand elasticity is weak, and there is no clear short-term demand growth, so mill increases are clearly weaker than upstream wood pulp gains; so far mills have raised prices to downstream by roughly less than 30%.

Maoming Jiajie Paper Products Factory mainly sells to supermarkets and offline wholesalers. Its manager admitted that raising prices is difficult: finished-product prices are already fixed in consumers' minds, and customers would struggle to accept an increase, which heavily affects tissue paper factories like theirs. He said the factory is basically not making money now and can only ship at cost, hoping virgin pulp paper prices fall a little more, otherwise business is very hard.

He plans to raise prices by about 10 to 15 yuan per item from May 1 and has already notified customers. He explained that raw materials began rising in December last year, while they are only raising prices in May; each item's cost has already increased by about 10 to 15 yuan, and product packaging is also rising. If raw materials continue rising in May, they will have to raise prices, as they cannot hold on.

But he expects the increase to cover only part of the cost, with limited profit; many factories have now halted production and dare not take orders.

However, even as profits are repeatedly thinned, quite a few enterprises remain cautious about raising prices.

The analyst said downstream paper mills have had a price-increase plan since March; after April, finished paper prices have generally been stable, and household paper in some regions has even edged down, meaning low-price shipments, driven by capital and inventory pressure at mills.

As a result, downstream paper prices remain in a tug-of-war.

The manager at the Zhengzhou paper packaging materials company said order volumes now can hardly sustain normal production, and overall end demand has not grown and has even shrunk. He described the market as too many wolves for too little meat, saying survival comes first and raising prices would only mean fewer orders; the industry's low entry barrier is also a key factor, and if customers could accept an increase, they would certainly raise prices.

To retain customers, the Jieyang carton factory has kept prices unchanged for some orders; price competition and supply capacity also constrain whether it raises prices. Its manager said many industries need cartons, so there is no fixed buyer; some customers are long-term partners, so prices cannot easily be increased.

If upstream increases are especially large, the Jieyang carton factory may communicate with customers to encourage higher inventory or more orders. He said they would adjust prices only when there is truly no profit left, and each finished-product increase must be smaller than the raw material increase; for example, if materials rise 30%, they may raise prices 20% or 25%, giving as much benefit to customers as possible.

In the period ahead, paper prices may enter a relatively stable upward phase.

The analyst said future paper price increases will be affected by overseas demand; given the pandemic in Europe and the United States, especially the U.S., economic activity remains restrained, and year-on-year demand this year is weaker than in March last year. Whether prices continue rising still depends on domestic demand, but after the second quarter domestic demand will enter a relatively slack season, and overall demand will weaken.

The manager at Maoming Jiajie Paper Products Factory believes price increases are a medium- to long-term matter. Prices previously fell after Qingming, but not this year; the reason is tight raw materials, with most raw materials now imported from abroad. If raw materials keep rising, they will consider the scale of price increases based on the broader environment.

A relevant manager at the Zhengzhou paper packaging materials company holds a similar view, adjusting prices according to cost increases. He said the company's profit margin is essentially a processing fee; without price adjustments it simply cannot stay afloat, yet many times it does the work without profit or even at a loss.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-377316.html