International paper costs continue to rise, complicating the manufacturing processes of companies in many industries.
Businesses that rely primarily upon low cost paper products may need to be particularly aggressive about sourcing and negotiations in the days to come, as profit margins are becoming leaner. This year, both the Canadian markets and the Chinese markets have seen increased paper costs, though for different reasons.
Significant paper tariffs have been introduced to Canada as part of retaliatory trade negotiations. These tariffs make it more expensive to bring paper like newsprint into the United States, which in turn make it even more difficult for the struggling news industry. Paper newspapers have already found it difficult to compete with their online brethren, both in terms of audience volume and profitability.
As newsprint becomes more expensive it will become even less desirable, likely leading to the closures of smaller newspapers throughout the country. Investors should keep in mind that any organization relying upon this grade of paper may find itself particularly vulnerable once these trade tariffs begin. Organizations that also rely upon newsprint media are a shrinking industry.
In addition to Canada’s tariffs, there’s another issue impacting paper costs: China is increasing its rates on all types of paper good. Paper production creates an extraordinary amount of pollution and waste, which China is now trying to reduce in its borders. China has consequently started to refuse lower grade recycled paper product from other countries, which used to be recycled into very low grade but affordable paper.
Changes to China’s manufacturing processes will lead to a healthier and more stable China, but for other countries, it will lead to more expensive paper products across the board. China has often been the leading resource for companies looking for paper goods, ranging from fast food boxes to school textbooks. And with tariffs on countries such as Canada, it may also be difficult to import from other counties.
On the other hand, it is possible that this could bolster domestic paper production. Paper production is often seen as an undesirable industry specifically due to the amounts of waste it can produce and the amount of energy that it requires. Domestic paper production, however, would at least make it more affordable to produce paper goods without needing to negotiate with other countries.
The United States is not the only country that is having issues meeting its paper demands. Japan has also seen the cost of paper rising due to the changes in China. Paper is used throughout virtually any industry, and rising costs of paper can impact industries very much like rising energy costs or rising gasoline costs. When a commodity such as paper becomes more expensive, it reduces the growth of the economy.
The shipping industry is particularly reliant upon paper products, with more products today being shipped across country or across the world than ever before. As paper becomes more expensive, everything becomes more expensive. At a certain point, it becomes more affordable for each country to manufacture and recycle their own paper products, rather than attempting to bring them in from an external source.
As with many of the goods currently experiencing tariffs, there may ultimately be a strategy in play to bring domestic production home. Many tariffs at least temporarily hurt the United States more than the other countries; in the case of Canada, it is more likely to be able to find a buyer for its paper than the United States is to find a supplier of cheap paper. At the same time, these tariffs are also being used as a psychological benefit.
The United States is one of the largest purchasers of paper product in the world, with a consumption of 97.3 million tons of paper in 2002. There are 450 paper mills within the country, with these paper mills accounting for $68 billion in economic strength. If paper does become prohibitively difficult to purchase abroad, it’s not impossible that these mills will grow and become more profitable. Further, manufacturing related to paper goods may also grow, as the resources will be readily available.
Presently, the largest companies in paper in the United States are International Paper, Kimberly-Clark, RockTenn, Weyerhaeuser and MeadWestvaco. These are companies that do high volumes of paper sales and that investors may want to watch.
The US is not presently a major distributor of paper compared to the amount of paper that it uses. However, that doesn’t mean that there aren’t opportunities available. Many trade tariffs are going to make domestic production and manufacturing appear more appealing, and this may lead to the bolstering of a few major industries. At the same time, industries such as newsprint media may fall by the wayside, as they may simply not be able to meet their demand in time.
Regards,
Ethan Warrick
Editor
Wealth Authority
