A look at why paper mills have been declining — and what’s coming next.

By Alaina D’Altorio

Let’s be honest: paper mills don’t really inspire the most exciting conversations.

But seeing as how the U.S. is the second largest global producer of paper and pulp — manufacturing more than 70 million tons of material annually — it’s definitely worth knowing what’s happening in the industry.

Needless to say the pandemic caused quite a stir:

• Lockdowns halting production
  
• Rapid expansion of ecommerce and direct-to-consumer (D2C) shipping
• Packaging and labels orders spiking
• Idle mills denied preventative maintenance
• Volume unable to meet rising demand

Combine all of this with the fact that the paper industry was already volatile. Shifts in production have been climbing, fewer mills are operating and tons of paper has been removed from the market — all of this has put paper mills at a major turning point.

So which mills factor into this equation? The top 5 mills in the U.S. include:

1. Twin Rivers
2. Pixelle
3. Verso
4. Kruger
5. Sappi

How are they holding up? Not well. Here’s what we know and what’s to come.

Paper Mills in General (Why They Were Already in Bad Shape)

The pandemic wasn’t the start of turmoil for the paper mills. Many were already in trouble and had been for a while. There are several reasons we’re seeing paper mills diminishing across the industry, and below are just a few examples.

Barriers of Entry

One of the biggest reasons paper mills have issues within the industry is because they have significant barriers of entry — and we mean significant.

New players looking to enter into the industry will find substantial costs in many areas, such as:

• Start up
• Papermaking equipment
• Plant factory size and location
• Preventative maintenance
• Raw materials
• Regulations

As one of the most heavily regulated industries in the U.S., paper mills must follow regulations, including environmental and labor, through each and every step of the manufacturing process. Also during this time, operations must be run at nothing less than 100% efficiency or else money is being lost. Point blank, millions of dollars go into running a paper mill (it is a billion dollar industry, after all). Despite all of this, competition is still high. And now, many mills are shifting course to produce other materials as a way to make up for lost profits.

Low Profits

Despite the U.S. paper mill industry being valued at almost $35 billion dollars in 2021, it’s increasingly hard to make a profit.

The last several decades have not been kind to bottom lines, with declines in paper grades, rising raw material costs and a major shift to digital communications that accounted for a drop in demand. As a result, many mills were left struggling with financial issues. Some declared bankruptcy. To prevent themselves from going under, mills are moving their production from paper grades to more profitable materials. For example, Domtar shifted one of its paper mills from producing printing and writing (P&W) paper grades to recycled packaging in August 2020. This is due in part to the demand for manufacturing items like containerboard growing, allowing mills to maximize profits.

So where are these products being used?

Look at the company Boxed Water Is Better, it uses paper to produce a plastic alternative, 100% recycled bottle. This direction is one that many popular brands and companies are shifting toward. At this point, mills are playing a game of “follow the money.”

Increasing Prices and Fluctuating Demand

Sudden and alternating market changes, especially over the last few pandemic years, have caused quite a few headaches with prices and demand. The rise in e-commerce and digital advertising over the last decade produced a steady, declining production of print for items like magazines and newspapers. Yet despite a drop in demand, prices for items like pulp and paper have only continued to rise. A dramatic increase was especially seen during the pandemic.

Pulp prices began rising in Q4 of 2020 and spiked into 2021. For example, Northern Bleached Softwood Kraft (NBSK) rose in price 20% from $550/ton to almost $750/ton between December 2020 and February 2021, less than two months!

And now the new rise in demand for paper products (to the point of supply chain shortages) have combined with the rising prices to create a volatile environment for the paper and pulp industry.

Hard Times (The Unforeseen Circumstances)

If dealing with a declining and difficult market wasn’t hard enough, a series of unfortunate events hit some of the top mills in North America, further debilitating the paper industry:

1. Pixelle – An explosion at the Androscoggin Mill in April 2020 removed more than 240,000 tons of pulp from the market. The result of a ruptured pulp digester, the Pixelle-owned mill was forced to not only close pulp production but idle one of its three paper-making machines. In April 2022, Pixelle announced the potential sale of the company, including all 11 paper mills, for $48 billion. The 11 mills collectively produce more than 1 million tons of paper annually.
2. Verso – A tremendous drop in demand due to COVID led Verso to stop production at two of its paper mills in June and July 2020. The action to idle these mills was seen as taking action to “offset unprecedented market decline.”
3. Sappi – A Michigan mill was permanently closed in 2021, removing 170,000 annual tons of paper produced by its PM5 machine. Most recently, the Sappi owned mill in Skowhegan, Maine has been dealing with contract negotiations with union workers for better benefits and higher wages. Threats of a strike have been looming. As we’ve seen happen with strikes in the paper industry, failure to come to an agreement can jeopardize the entire supply chain. Thankfully, an agreement was reached with a ratified three-year contract, narrowly averting a strike.

Current Events (What’s Making It Worse)

All of this has led to what’s currently happening that’s affecting the paper mill industry.

And the events are pretty monumental.

Energy Crisis from Russia’s Invasion

While there was already a global energy crisis occurring (U.S. natural gas prices hiked up more than 150% between 2020 and 2021), Russia’s invasion of Ukraine in February 2022 only escalated the issue.

Russia supplies 41% of natural gas for the European Union (EU), according to 2019 statistics. Current sanctions have stopped deliveries, leaving the UK and EU in a challenging position. They may have to turn to alternative energy supplies, like OPEC, which is where the U.S. buys oil. This will increase demand and thus increase prices. So how does this affect paper mills?

Paper production uses considerable amounts of energy, meaning these mills are hit hard with increasing energy costs. Six Venetian mills in Italy closed because of the surging costs, which rose from €300 pre-pandemic to currently €750 per ton, a huge spike in just two years. Uncertainty of the war’s outcome is leaving the industry in a state of instability.

The UPM Finland Strike

The UPM strike in Finland began on January 1, 2022, and ended April 22, 2022, after 112 days. By March 2022, it had become the longest strike in Finnish paperworkers history. This put the label supply chain in jeopardy of a massive shortage. Shipments from UPM to the U.S. dropped from 494 in February to only 93 in March, according to ImportYeti.

No preventative maintenance was done to upkeep the mills while they were idle, which will further halt production time and delay orders once operations pick up. If you’re looking for more details about the UPM strike, check out our article here.

Supply Chain Constraints

The global supply chain has been struggling to stabilize itself for the last two years. While predictions have been made to when things will eventually balance out, new and continued constraints keep hindering this process. Some of these include:

• Bottlenecks at ports
• New COVID variants
• Raw material shortages
• Record breaking lead times

There is no definitive timeline for when these issues will end.

The End Result (Why Does It Matter?)

While all of these happenings are troublesome and causing disruptive issues within the paper industry, why do the state of paper mills matter? Well, the U.S. paper mill industry is a critical part of the industrial supply chain. And we’re in the middle of witnessing a major, never-before-seen shift in the market. More mills are converting their lines to accommodate the booming trend of sustainable packaging replacing plastic.

This is the next big step for the paper mill industry.