Express Carton Price-Hike Tug-of-War: Many Are Losing Money Doing It — Without an Increase, We Simply Can't Hold On

"Since March, downstream paper mills had drawn up a price increase plan for April. But entering April, the actual implementation of the price increases has not been very good. In early April, paper mills also issued price increase letters, but downstream did not accept the increases, so the implementation has fallen short of expectations," a futures paper analyst recently told a reporter from 21st Century Business Herald.

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Faced with the continuous wave of upstream price increases in the paper industry (including waste paper and pulp), quite a few listed companies have made a fortune, while small and medium-sized paper enterprises downstream are not faring well, with the magnitude of price increases declining level by level from top to bottom along the industry chain.

On the one hand, they passively bear rising raw material prices; on the other hand, they must strive to retain orders and consider the price acceptance of the consumer end.

"We are a third-tier paper factory and have no say in this wave of price increases. After first-tier factories raise prices, second-tier factories raise them without restraint. Sometimes the raw materials for orders we have normally taken have not even arrived before prices go up, and end customers will not pay for it, yet we cannot delay the delivery cycle, so most of the time we can only silently accept it." A person in charge of a paper packaging material company in Zhengzhou told a reporter from 21st Century Business Herald that the concentration of bargaining power among paper enterprises has left downstream manufacturers in a difficult position amid the wave of price increases.

At present, the "tug-of-war" over price increases downstream in the paper sector will continue.

1. The transmission chain of paper price increases

Data from the National Bureau of Statistics show that in March 2021, among industrial producer ex-factory prices, the prices of means of production rose 2.0%, with the growth rate expanding 0.9 percentage points from the previous month, contributing to a rise of about 1.52 percentage points in the overall level of industrial producer ex-factory prices. Among them, ex-factory prices in the papermaking and paper products industry rose 2.3% month-on-month and 2.3% year-on-year, and rose 1.0% year-on-year from January to March.

At present, although the overall increase in paper prices is not very high, large paper enterprises hold industry pricing power, and both sales and prices rose in the first quarter of this year. Judging from the companies that have released their first-quarter reports and earnings forecasts, several listed paper companies have successfully doubled their profits. Behind this is also the "time lag" between cost prices and price increases.

The aforementioned futures paper analyst pointed out that the factors behind the price increases of different paper types are not the same.

Specifically, the price increases for printing and writing paper and household paper were driven by a sharp rise in wood pulp prices, forming a wave of cost-push price increases.

"In 2020, upstream pulp prices, especially wood pulp prices, roughly began to rise in the third quarter and continued rising into the first quarter of this year. In particular, from November to early March this year, prices rose by about 60%-65%." He said that relatively speaking, before March-April last year, white cardboard was less affected by upstream price increases, and downstream price increases were more self-initiated.

Driven by the uneven upstream price increases, some large paper enterprises have enjoyed excess profits. The aforementioned futures paper analyst said that for some listed paper companies, because of their large scale and relatively large inventories of wood pulp and raw materials, what they actually enjoy is the "price difference" between the rise in paper prices and the earlier low raw material costs. In other words, there is a mismatch at the output end of finished paper, which has led to very good profits for these paper companies. But in the future, as the low-priced raw materials of some large paper mills are basically used up and they may need to purchase some high-priced wood pulp, their profitability will gradually weaken on a month-on-month basis.

Compared with large paper enterprises, more small and medium-sized paper enterprises find it much harder to survive amid the wave of upstream price increases.

Boss Liao of Maoming Jiajie Paper Products Factory said that since December last year, the upstream paper industry has been raising prices all the way, with increases of 300 yuan/tonne every one or two weeks; the current increase, compared with before, is between 1,500 yuan and 2,000 yuan per tonne, though of course different paper mills have different magnitudes of increase. "Previously we bought goods at 5,600 yuan/tonne or 5,700 yuan/tonne, but now it is 7,200 yuan/tonne or even 7,500 yuan/tonne."

A person in charge of a carton factory in Jieyang said that carton making is inherently a processing industry, with raw materials accounting for about 80% of costs. "As long as materials rise even slightly, our profits are wiped out, or we even run at a loss."

He added that the upstream of the paper industry has always held the initiative, and because the transportation cost of paper products is relatively high, material manufacturers in a given region generally band together.

The person in charge of the Zhengzhou paper packaging material company said that before October 2016 raw materials were in a very stable period; compared with then, raw material costs have risen 40%, and auxiliary materials have risen by 30% to 50% respectively, while their profit margin has been continuously squeezed. "A lot of the time we have to run at a loss, because there is a group of workers to keep employed, and equipment bought with loans."

1. The downstream "tug-of-war" over price increases

Forced by the wave of price increases, some enterprises have already considered raising prices. But at present, the pace of price increases by paper mills facing the retail industry downstream cannot keep up with the magnitude of raw material price increases overall, and paper mills' profits are being eroded.

The analyst said that the profits of paper mills, especially those making household paper and printing and writing paper, have been greatly eroded, leaving them no choice but to raise prices. However, due to differences in demand elasticity, end-market demand elasticity is relatively weak, and with no particularly obvious increase in demand in the short term, the magnitude of price increases by paper mills is clearly weaker than the rise in upstream wood pulp prices; at present, paper mills have raised prices to downstream by roughly less than 30%.

The downstream buyers of Maoming Jiajie Paper Products Factory are mainly supermarkets, with offline wholesale making up the bulk. He admitted the difficulty of raising prices: because finished product prices are fixed in people's minds, if they raise prices, customers will find it hard to accept, which has a big impact on tissue paper factories like theirs. "We are basically not making money now, just pushing products out at cost price. We hope the price of virgin pulp paper drops a bit more, otherwise there is really no way to do business."

He plans to raise prices by about 10 to 15 yuan per item starting May 1, and has already notified customers in advance. "Raw materials have been rising in price since December last year, and we are only raising prices in May. Now the cost of each item has gone up by about 10 to 15 yuan, and product packaging has also risen in price. If prices continue to rise in May, we will start raising prices - we cannot hold out any longer."

But he expects the price increase to only partly cover costs. "There is not much profit. Many factories have now stopped production and dare not take on business."

However, despite repeatedly thinning profit margins, quite a few enterprises remain cautious about raising prices.

The analyst said that starting in March, downstream paper mills had a plan to raise prices. After April, finished paper prices have been on a relatively stable trend, and in some regions household paper prices even fell slightly, that is, goods were shipped at low prices, which was caused by paper mills' pressure from capital and inventory.

Therefore, prices in the downstream paper sector are still in a "tug-of-war" at present.

The person in charge of the Zhengzhou paper packaging material company said that order volumes can hardly sustain normal production now, and overall end-market demand has not grown and has even shrunk somewhat. "There are too many wolves and too little meat; survival comes first, and raising prices would mean even fewer orders. The low entry barrier of the industry is also a major factor. If customers can accept it, we would certainly raise prices."

Meanwhile, in order to retain customers, the Jieyang carton factory has kept some prices unchanged; in addition, price competition and supply capacity also constrain whether they raise prices. "Many industries need cartons, so there is no fixed buyer. After all, some customers are long-term partners, so prices cannot easily be raised."

But if the upstream increase is particularly large, the Jieyang carton factory may communicate with customers, trying to get them to increase inventory or place more orders. "We only raise prices when there is really no profit left; each time the increase in finished product prices can only be smaller than the increase in raw materials - if materials rise 30%, we 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 that future paper price increases will be affected by overseas demand. Given the pandemic in Europe and the United States, especially in the United States, economic activity is still restrained, and year-on-year demand this year is weaker than in March last year. Whether prices continue to rise still depends on domestic demand, but after the second quarter domestic demand will enter a relatively slack season, and overall demand will weaken.

The person in charge of Maoming Jiajie Paper Products Factory believes that price increases are a medium- and long-term matter. "Previously prices would fall after Qingming, but not this year. The reason behind this is tight raw materials, and most raw materials are now imported from abroad. If raw materials continue to rise, we will consider the magnitude of price increases based on the overall environment."

A relevant person in charge of the Zhengzhou paper packaging material company holds a similar view, adjusting prices according to increases. "Our profit margin is just the processing fee. Without adjusting prices we simply cannot stay afloat, but much of the time we do the work without making money or even at a loss."

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