Features | February 09, 2023
That's Not Another Price Increase — Is It?!
By Bethany Larrañaga
Late last year, Greg Lovensheimer gave the Brand Chain community his expert insights on how to navigate a turbulent marketplace and face supply chain challenges. As we move forward in the new year, we caught up with him on predictions for 2023 and key considerations for industry professionals.
Can you share some highlights from your 2023 forecast? Has anything changed since your original forecast last year?
This year will see a slow start as end users and American consumers try to understand where interest rates are going and whether unemployment must rise dramatically (think layoffs) to get inflation under control.
Consumer spending slowed in December, and print demand has slowed as well. In addition, the hoarding of paper inventories in the back half of 2022 is coming with a great price, as higher interest rates create higher debt service payments to fund that inventory. In addition, orders for import paper didn’t arrive when expected and have only recently (since October) begun to hit the U.S. shores hard at a level that is not sustainable.
Because of this, every link in the supply chain is pulling down on inventory. From December 2022 to February 2023, we’ll see purchases at a much lower rate than the actual number of impressions being produced. This condition will last until late February and into early March, and then the paper markets should see some balance.
Paper suppliers will be slowing machines down or taking selective downtime as needed to preserve pricing power. They’re only now experiencing the cost headwinds of the inflationary environment and have little to no interest in dropping price to gain market share.
How do you see supplier issues continuing into 2023, and how can companies be prepared?
The short answer is for printers and brand owners to not expect a return to 2018-19 practices. Despite the current increased inventory levels, suppliers are committed to managing their side of the equation as best as possible.
Selective downtime and reduced machine speeds will be actively used by mills to keep inventories in check as the industry works its way through the excess accumulated inventories. The imports will remain a bit of a wild card as shipping rates in the Pacific have eased, and the U.S. remains the best and highest priced market in the world. As a result, every foreign supplier has tried to redirect volume to the U.S. over the past six to eight months. However, the levels are not sustainable, as they represented a lot of pent-up volume that could not be cost effectively shipped to the U.S.
As China re-emerges from Zero-COVID and their economy kicks in, we would expect Asian volume to find its way back into the Chinese market. In addition, the European markets have been depressed to elevated energy prices due to the war in Ukraine. Cargo rates in the Atlantic have not returned to pre-COVID levels, so pricing from these countries has eased, but volumes have begun to flow again. The expectation is that once the war is settled, Europe will reemerge and consume a lot of the excess currently destined for the North American market.
What opportunities are you seeing so far this year?
The early part of the year may be an ideal time to reevaluate your supply chain partners. If there were excessive issues last year, it may be time to seek new relationships. Timing is critical — the need to move is in Q1.
Thereafter, you should be well established with partners that can best position you for long term success. Being transparent and committed to real partners will be critical to success in the back half of the year as the markets balance out and lead times and availability tighten even more.
The market remains delicately balanced, and any outside forces could create another round of turmoil. Being aligned and transparent with solid partners and will garner you a prime position to be supported when others may again find themselves without supply.
Are there any other trends to keep a pulse on?
The long-term forces in the industry continue to point to graphic paper supply volumes being removed as packaging grades offer better long-term, cost of capital returns for producers. Tightly aligned supply chains with transparency between their links is the best way to guard against risk and position your business to succeed in the long term.
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Supply Chain Paper State of the Market