The paper and pulp industry is highly energy-intensive and has a significant carbon footprint, with biomass black fuel liquor and fossil fuel coal as the primary energy sources. In the industry, material transportation, alkali recovery, papermaking, pulping, and other production processes consume the most substantial share of energy. The sector is also is a massive waste generator. Paper mills expel dissolved matter, such as lignin, wastewater discharge, and the range of materials, such as chlorates and alcohol, present in the wastewater pollute rivers and other water bodies in the vicinity.
Over time, the demand for paper in industrial and commercial uses has grown manifold. The growth of the paper and pulp industry has directly contributed to the rising pollution levels. The cost of mitigating the industry's damage ultimately burdens the taxpayer, which has compelled governments to check the pollution caused by paper mills. The cost of changing operations and adopting new methods in an era of increasing competition and non-availability of easy credit is considerably high, and players in the industry will have to take strategies to circumvent it.
Raw material availability is another challenge that players in the industry face. The raw materials required for manufacturing paper and packaging material —energy, water, and wood chips that contain cellulose and chemicals —are also used in an array of industrial applications, such as automobile, petrochemicals, and paints and coatings, which results in unavailability and disruptions in the supply chain. Besides, the concentration of raw material suppliers in one region might cause cartelization and result in price fluctuations. Paper packaging manufacturers also face stiff competitionfrom plastic packaging, which is emerging as a sustainable alternative. Players are also under immense pressure to innovate constantly. In addition to this, players are always trying to bring product innovation while keeping a tab on the pricing.
After the 2008 recession, lenders and credit institutes have become increasingly cautious about lending. Before the economic crisis, key players were on an acquisition and merger spree. For instance, West Fraser Timber's acquisition of the International Paper's lumber business in the U.S. and, in another case, International Paper’s purchase of Weyerhaeuser's containerboard unit. For these acquisitions, substantial capital was borrowed, which is not possible today. Thus, players involved in paper and packaging are likely to focus on only one or two segments of the industry or divert their capital towards achieving high market share in select sectors.
For instance, players in the paper industry will cater to graphic papers, packaging papers, softwood pulp, or hardwood pulp instead of trying to service all the segmentswhere new players from emerging economies can enter the market. Also, players should opt for a strategy that can retain raw material suppliers for the long term. Catering to a select market need, contract manufacturing, and signing long-term supplier agreements are some of the strategies companies are likely to follow to counter market volatility, decrease credit approvals, and increase operating margin.
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In another instance, our recommendations helped a company we worked with in India to lower inventory costs. We also identified the potential end-users of India's Paper Market. We provided a competitive landscape, which gave the client a fair idea of the strategies adopted by the players and the geographical proximity of the manufacturers to the market.
The novel coronavirus outbreak has brought economies to a standstill, with developing and developed countries implementing lockdowns that have brought businesses to a halt. Even before the pandemic, there were signs of a global recession, albeit one with a magnitude much lower than that of 2008.
The U.S.-China trade war, for instance, was significantly disturbing international trade. The increase in import tariffs by the U.S. on Chinese goods meant an increasing number of consumers in the U.S. would be forced to procure products produced at a domestic level or manufactured indigenously. On the other hand, the increasing stockpile of goods led Chinese producers to reduce the prices on their goods, slash their profit margins, and dump their goods in emerging economies, such as Canada, India, Mexico, and Brazil.
While the trade war between the U.S. and China was still on, the U.K. was firm on leaving the European Union, and the deal was finalized in early 2020. This meant that one of the EU's prominent trading partners and the world was leaving the union, creating a trading gap. These trends areindicative of how world economies were moving away from globalization to protectionism. Moreover, the panic-induced within consumers during the COVID-19 outbreak increased the demand for products, such as tissue paper, toilet paper, and packaged foods. This has led to an exponential increase in the demand for paper and packaging materialand a desperate search for alternative raw materials to meet the supply needs.
Mass Migration of Workers
Over the past several decades, many key companies have shifted or expanded their manufacturing bases and headquarters to emerging economies. While these economies were not technologically advanced, their inexpensive laborand land attracted investments from multinationals. The rapid pace of development in these economies, including Brazil, India, Thailand, and Malaysia, attracted migrant workers from different states as well as countries.
The lockdownsimplemented by state and national authorities have forced these migrant workers to return to their homeland, making it difficult for manufactures to run their plants. Laborers migrate to their native cities and towns on a large scale, leaving economic hubs bereft of skilled manpower. Even after the end of the lockdown, there is no surety that these workers will return or whether the employers are likely to hire them back, considering the declining demand for all products except essentials.
Disruption of Raw Material Supply Chain
Raw materials across industries are sourced from various locations. In many cases, they are transported several times before they reach the end-use industry where they are consumed. Before the pandemic, China accounted for the majority of raw material supply, and the current scenario has seen importers of Chinese raw materials look for other suppliers.China’s industrial production has fallen by around 13.5% due to the novel coronavirus outbreak, as per the World Economic Forum. The country is among the leading exporters of toilet paper, paper containers, sanitary articles made of paper, and other paper products. Thus, the detrimental impact of the outbreak on the Chinese economy will hamper the global paper and packaging industry.
Source: Observatory of Economic Complexity (OEC)
The high dependency on finished goods made of paper is also likely to give way to the shortage of paper products. A survey conducted by the Institute for Supply Management (ISM) from February 22–March 5 revealed that production in China was at an all-time low. Manufacturers in the country reported that they were operating at only 50% capacity, with 56% of the staff. In an interview in February, the Chief Operating Officer of Procter and Gamble (P&G), Jon Moeller, said, “We access around 387 suppliers in China that ship to use globally more than 9,000 different materials, impacting approximately 17,600 different finished product items. Each of these suppliers faces their challenges in resuming operations." Economies and industries now find themselves amidthe vulnerability of supply chain disruption and the risks of globalization.
Consumer Behaviour and the Expected Change in Trends
Health officials around the globe have stressed the importance of disinfecting and hygiene measures to contain the spread of COVID-19, which has resulted in the stockpiling and panic buying of tissue and toilet paper, disinfectant towels, and hand sanitizers, among other products. This is evidenced by the sales of hand sanitizers, which in some countries registered a month-on-month growth rate of as high as 600% and the empty shelves of contained toilet papers in stores.
China is among the leading importers of pulp, chip, and wood. Reduction in China’s manufacturing capacities will compel exporters relying on China, to look for domestic importers. This is likely to lead to an increase in supply and a decrease in the demand soon if the crisis is solved. However, if the pandemic lasts longer, then there will be a supply deficit, which can result in a price increase.
Source: RM Analysis
Whether the pandemic continues for an extended period or is successfully dealt with, consumers will have formed a habit of using disinfectants, which will keep the demand for tissue paper, toilet paper, and disinfectant towels steady. Companies that provide greater variety for these products and higher customer satisfaction in terms of after-sales services and packaging will gain an advantage.
On the other hand, the demand for perishable items has decreased, while that for canned foods, medicines, and other items is rising. This trend will affect the packaging demands from an array of end-users.
Transportation and industrial development will be closely linked to the global gross development product (GDP) and industrial activity levels. Therefore, the demand for industrial packagings, such as automotive spare parts and heavy machinery, will be low. Global automobile sales were already decreasing, owing to geopolitical factors and the looming recession. However, the demand for packaging will surge from industrial end-users, such as those involved in pharmaceutical packaging and food products.
Source: Organisation Internationale des Constructeurs d'Automobiles (OICA)
The demand for healthcare packagings, such as rigid plastics, closures, pumps, and blister foils, is expected to remain high. Also, consumers will increasingly demand allergy medication, vitamins, dietary supplements, and other healthcare products, which are essential to survive in a lockdown. These products will continue to see peak demands even after the infection has been contained.
Before the pandemic, manufacturers had done away with excessive packaging to reduce the weight of the product. Still, this trend is expected to be reversed with the shifting of consumer focus toward product safety. Such developments are likely to increase the demand for paper and cardboard packaging to reduce the overall weight of the product.
Plastic packaging is anticipated to observe a higher growth rate than paper and cardboard packaging due to its higher safety and durability. With the prices of crude oil going down due to the pandemic’s effect on the demand to some extent, the prices of raw materials such as plastic resins for the packaging industry are also likely to slump. This will lead to an overall decrease in the manufacturing of the final product.
The demand for packaged food and home delivery services too will increase. People around the globe will practice social distancing for a considerable amount of time, even after the pandemic has been contained. However, consumers will also demand effective packaging solutions to keep their food safe. Despite the high demand for packaging, consumers and end-users will still press for packaging solutions at a lower price. This will depend on the severity of the crisis, the duration for how long it will last, the weakening of corporate balance sheets, and the lowering of disposable income in various households.
Despite the rise in plastic packaging, there will still be regulations to limit the use of plastics in various capacities. Economic stimuli packages, the opening of trade routes, and a global consensus on temporarily lifting trade sanctions on various economies will stabilize the global economy, bring packaging demand to the previous normal, set a new normal, and open up potential opportunities for various other companies.