The print industry has gone berserk
Why you need to care about operating rates and how we can help you get what you want, when you want it.
The ongoing pandemic coupled with a sharp economic recovery, soaring freight costs and labor shortage has created a lot of challenges in the paper supply chain. As a result, you’ve likely noticed low product availability and higher costs. We’ll explain what it all means so that you can take a stronger position when it comes to getting what you need, when you need it.
So, let’s talk about operating rates.
Operating rates measure the percentage of how much production capacity at manufacturing facilities is currently being utilized. Or if you want to get really specific, they’re a calculation of shipments divided by mill capacity. For example, when we think about North American operating rates, we think about it as North American shipments divided by North American capacity.
Optimal operating rates for paper manufacturing is in the 85-95% range. In that range, mills strike a perfect balance between supply and demand. They can manage their inventory and prices effectively, their machines are running continuously, and product prices are pretty stable. We call that smooth sailing.
When operating rates are low, there’s open capacity on the machines. Of course, paper assets are designed to be continuously manufactured for profit, so low operating rates aren’t good for anyone over long periods of time. In fact, in these conditions, mills are forced to fight for business with competitive pricing in order to offset their open capacity. Inventory begins stacking up, and in some cases, manufacturers have to hit the pause button on operations and take downtime.
On the flip side, when operating rates are high, the scale has tipped in the other direction and mills are shipping more product than they’re able to produce. Operating rates above 95% lead to inventory being drawn down. In these cases, manufacturers also have to increase prices.
If operating rates are too high for too long, a supply constraint or allocation is instituted, which tends to benefit the more profitable segments of their portfolio. Because of the ongoing pandemic, the reduction in capacity, and the challenging supply chain, the purchasing of domestically produced paper products has surged, causing the industry to exceed a 95% operating rate.
Which products are affected most?
- Coated freesheet. Operating rates have been high at over 100% for many months and are continuing to trend above 100%. Because of this, inventory is at a record low, and likely will remain so for the foreseeable future.
- Cut-size products. Experiencing uncomfortably high operating rates, well above 100%. Today, inventory is tight and trending down. Adding to the difficulty, cut-size and coated freesheet products are frequently imported, and because of pandemic shipping complications and fractures in the supply chain, they’re being routinely squeezed out of containers.
- Uncoated freesheet. Mills are squeezing the bottom end of their portfolios. The good news is that we do predict this is a short-term phenomenon. After the back-to-school season starts and workers return to the office, the stability of the uncoated freesheet will likely normalize. Offset rolls will be the last area to recover in uncoated freesheet. It has a relatively low profit margin and some manufacturers are limiting availability hoping for some of the coated overflow to spill into the higher margin uncoated grades. If you buy offset rolls from a low-cost provider now, you will likely have to start paying more for them soon. The future of offset rolls will improve quicker than coated freesheet or cut-size, but will likely stay somewhat tight for the rest of the year.
- SBS. Because of a malware incident that plagued a key manufacturer, an ecommerce boom, labor shortages, and oddly enough, weather in Texas that majorly impacted key chemicals used in coated board production, manufacturers have had to surgically navigate their operations to find solutions to help move products out the door. We project that as the economy reopens the incremental demand will level off, potentially in late 2021.
What actions do manufacturers take when the balance is tilted their way?
Manufacturers will do what they can to improve profitability, manage their product mixes, and improve efficiency. Until things normalize, it will be common for buyers to experience higher prices or incur service upcharges that have been waived in the past.
Manufacturers will frequently allocate lower margin grades to force demand to higher value grades. They’ll also tightly manage volume exposure to lower margin customers. To improve their operating efficiencies, lead times will be increased and brands and product offerings will be consolidated. Additionally, orders will be expected to be much more firm when they are placed and late changes will not be allowed, especially increases in quantity.
What’s the good news?
Here’s the silver lining. Long before the pandemic, Veritiv made a significant investment in key private brands so that we could protect both inventory and customers. Our integrated supply chain means we’re better prepared to handle the turbulence. We control our product mixes, our shipments, and our delivery times. What does that mean to you? Product reliability and consistency so you can keep business uninterrupted.