Fedrigoni was one of the first papermakers to show its hand, announcing price increases of 5% to 8% from 21 November. But it was far from alone, with a steady stream of other manufacturers making similar announcements in the following days and weeks, and by mid-December virtually all had signalled their intent to raise their UK rates, with most increases in the 5%-10% range, but in some cases higher. 

In a number of letters from paper mills seen by PrintWeek, the common drivers for the increases were “fluctuation in the major currencies” and “continually unacceptable lower returns”.

But is Brexit simply to blame and how can the industry do its best to overcome the seemingly inevitable price increases?

“Any paper pricing increase is normally led by mills, not merchants,” explains Denmaur Independent Papers managing director Mike Gee.

“So we as merchants are basically between the devil and the deep blue sea, with manufacturers pressing for price increases and customers who don’t want to pay for an increase and in some cases are almost seeking decreases.”

Denmaur, which sources its paper mainly from Scandinavia, western Europe, Brazil and Asia, works with its customers when inevitable price rises happen, using a solution-based approach to seek a way in which the customer can fine tune grades or formats to reduce the impact.

This strategy is also favoured by Chapelton Paper & Board.

“Part of our job is about making sure the customer is buying the right paper in the first place, we like to have a dialogue with the customer about improving their position financially, although it’s not always possible,” says Chapelton managing director Neil Skelton.

Chapelton has this year become a distributor for the likes of International Paper, Smurfit Kappa and Plastiroll, and Skelton says price rises didn’t surprise him in the slightest. In fact, he predicts further increases in mid-2017.

Speaking before the Christmas break, Gee said Denmaur wasn’t yet set on the scale of its price increase to customers, but he was certain that they would stick, most likely around the 10% mark. He explains however that just because prices go up, it doesn’t necessarily mean they can’t come down again. 

“Some grades went up in 2012/13 but then drifted back down. What we’ve had over the past five years is a situation where prices have gone up marginally but then tended to drift down over time because of supply and demand or markets weakening.”

Skelton agrees, considering that customers will be keeping a close eye on exchange rates and will have no inhibitions in pressuring merchants to lower prices once they improve. 

Merchants vs mills

And, according to one senior executive of a European paper manufacturer, this is part of the problem faced by mills when it comes to making increases stick.

The source says: “There is a very simple case to be made: if the mills do not make a profit they won’t be here, and what concerns me is the attempt by the merchants to ‘mitigate price increases’.

“The problem with the merchants is that because they make reduced margins selling products, they are totally reliant on [mill] rebates and therefore the only way they can make more money is by selling more paper [to hit rebate targets] and the only way they can sell more paper is by reducing the price. The merchants are crucifying themselves.”

While many merchants used to offer next-day delivery and were paid for stocking as well as delivery, today they might offer twice daily deliveries, consignment of stock and a multitude of other services as standard, all of which eat into their margins.

The source explains that while post-Brexit vote exchange rates impacted manufacturers profits most recently, the writing had been on the wall for some time. This was due to the compound effect of exchange rates weakening in early 2016, long before the referendum result, combined with a rise in transport and energy costs and higher pulp prices, which all meant that come the end of 2016 price increases were inevitable.

In fact, the source states that many manufacturers were most likely mulling price increases before the impact of the referendum had even been felt, as despite rising input costs paper prices hadn’t changed significantly since 2014.

John Charnock’s consultancy Print Research International advises UK companies on how to handle issues such as paper price increases.

Charnock believes print companies need to learn to innovate fast and cut waste if they want to offset price increases and stay competitive. 

He says: “This is going to be a problem all around. If you’re talking higher-volume markets then you may well see a number of magazines dropping pagination or the [cover] price will rise, and I daresay some consumers might say ‘well that’s put it out of our budget’.

“Merchants are in a competitive market. Printers try not to pass the price rise on to their customers, but when you’re in a competitive market and with the currency shift brought on by Brexit you eventually have to. So this will be a chain reaction, which is going to bounce down to my magazine subscriptions.” 

However, for digital specialists, Charnock muses that the increases could present opportunities, as continuous rises lead to higher demand for higher-quality, better targeted, lower-volume products. 

In what is an unaccountably rocky time for the European economy, Charnock believes it is now down to “clever printers” to open up dialogues with their customers and communicate the basic assumption that raw material costs may continue to go up and they need to plan accordingly, rather than hang on to the hope it might be a temporary blip.

OPINION

Printers will need to discuss increases with their clients

Charles Jarrold, chief executive, BPIF

The main factors driving this are firstly, the impact of exchange rates, which we are all seeing, and secondly, apparent increases in recovered fibre costs. 

Sterling is down something like 15%, currently, compared with the average for the year to 31 March.  It’s true that this masks a more complex picture, with sterling strengthening from lows around the current level back in 2013 up to a pre-Brexit peak before collapsing again, but the current rates will be causing difficulties for papermakers.  

Reductions in volumes will also be causing problems, with overall demand for paper and board in the UK reducing by nearly 5% in the first six months of last year compared with the previous year.  

Whether the papermakers will be able to make the increases stick at the level they have indicated is debatable, but what is clear is that their margins will have come under further pressure in the UK.

Printers must put up prices

Printers will not be able to absorb paper increases, as margins are already very tight - cost and profitability concerns are top of the list of current issues identified by our members, so printers will need to communicate to their customers what’s happening, giving as much notice as possible. 

There may be some scope for changing grades or grammage to reduce the impact of increases, but many organisations have already gone through that process. Unfortunately, it’s also possible that increases will cause buyers to re-evaluate budgets, further adding to pressure on volumes.

We know that the effect of exchange rate movements has elevated concern about input costs in the sector, and it is of course possible that the depreciation of sterling will reverse, but given the current level of uncertainty around Brexit, whether and when this might happen is obviously questionable.

READER REACTION

How will merchants  deal with the situation? 

Dave Jones, group marketing director, Premier Paper Group

“Price rises in any market are rarely welcome but if, after a period of constructive negotiations with paper mills, it then becomes clear that prices will rise, we try and give our customers as much notice as possible. It is important that we remain competitive in the market so all increases are in line with market prices and reflect the increases received from suppliers. And many customers understand that price increases in a commodity market cannot be absorbed and need to be passed down the supply chain.” 

John Purcell, managing director, John Purcell Paper

“We’re specialists so the fact that prices go up a bit doesn’t concern people as much as it might do, but because of external events we suddenly have fairly significant price rises coming through. When you have these, even in our world it becomes a bit tougher. You start the process by telling people in general terms to be ready and that virtually all our suppliers’ price rises have come through and they are significant. We have started the process of informing our customers that we will be passing these on from 1 March.” 

Richard Proctor, managing director, Proctor Paper & Board

“What has happened is that although some prices have already gone up, during the last quarter of 2016 they didn’t reflect the full valuation of the pound because merchants were selling existing stocks or manufacturers decided to wait and see. In terms of successful communication, we get a price increase from our suppliers and if we can’t absorb it then we speak to them about it. We tend to email directly people who are purchasing the products and then our sales people follow it up afterwards.”