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Management Side
Why the Paper Industry Isn't Attractive (to Investors)

There's been a steady decline in the paper industry that we've all had front row seats to for years now. The play "Death of a Salesman" doesn't quite compare to the "Death of Print."

To be more specific, printing and writing paper like magazines and newspapers. Unfortunately, labels get looped into this group, too.

Each year it seems we see little money being invested back into the paper industry, and the effects are evident with paper mills:

  • Changing hands often (can you remember who owns what?)
  • Frequently closing (more devastating than surprising)
  • Removing thousands of tons of materials from the market (not like there's any supply issues happening)

It's as though there's a big sign running across the industry saying, "Warning! Finance at your own risk!"

But why is that?

Why exactly don't we see investments funneled back into the paper industry to keep mills that produce labels running?

It seems that this issue comes in different variations with one simple, key point: the paper industry isn't attractive enough for investors.

Not Lacking in Lack of Investments

Paper mills are notorious for being expensive to run. A significantly high barrier of entry keeps out new players and making a profit is increasingly difficult.

So how does a business run without making money? Well, it doesn't.

Without investments going into paper mills (or the industry, for that matter), we're seeing more and more mills disappear. The paper mill market size has dropped from an estimated $57.2 billion in 2013 to $38.2 billion in 2023, according to Statista.

So what is it about the paper industry that's preventing investors from....well, investing?

Private Equity Getting Involved

This is becoming a rising issue.

As of 2021, 37% of the entire North American paper and pulp capacity was owned by private equity companies, according to Forest2Market. While public companies still hold the majority, private companies have been continuing to make their purchase of public owned mills.

Mills require lots of capital for materials, equipment, operations, etc. Pair that with declines in demand, and debt often looms for many of them.

For example, Appvion needed help in 2017 to address its $440 million debt loan due to downward sales while Verso filed for bankruptcy in 2016 to cut $2.4 billion of its debt.

Some private companies acquire mills by leveraging their debt for the expressed purpose of later selling them for a profit. Which, unfortunately, means they don't re-invest in the paper industry.

Some of these companies include:

  • Bain Capital
  • Atlas
  • H.I.G Capital
  • Lindsay Goldberg

These private firms are what's considered "short term players." Their interests boil down to increasing their investments by collecting these paper mills.

H.I.G. Capital, for example, acquired Jackson Paper Manufacturing in 2021 and Pixelle Specialty Solutions in 2022, which at the time operated 4 mills across several states.

Mills purchased through private equity often change hands so much it's hard to keep track. And sadly, we eventually see them close.

Not Investing in the Mills Themselves

Not putting money into keeping paper mills going is ultimately a one way ticket to ruin. We can see this example play out with the Pixelle mill in Jay, Maine.

It was during the mill's tenure with private equity firm Lindsay Goldberg that a pulp digester exploded in April 2020. This disaster removed the mill's ability to run as fully integrated, meaning it produced its own pulp and generated its own energy at lower, controlled costs.

That key feature that made the mill unique. However, no investments were ever made to fix the pulp digester.

As a result, pulp was bought at market price, which ballooned over the next 2 years. After H.I.G. Capital took over in early 2022, the mill announced it would close only a few months later.

The Pixelle mill is now set to close in April 2023 and will remove 230,000 tons of specialty paper and release liner from the North American paper market, between 20-30% total.

The company choosing to not invest in the pulp digester hindered the Pixelle mill's ability to continue operating at lower costs, ultimately leading to its demise.

Hard Customers to Please

Would you spend money on a business that proved to have difficult customers? Doesn't sound like the most attractive option.

For specialty paper like labels, the customer base can make it harder than other industries. This is simply because labels have such a niche market.

Labels are products that require so many different factors (i.e. size, material, coating, adhesive). It's difficult to please every customer quickly and efficiently when they all require something different.

And then there's often issues with money, including:

  • Businesses getting paid on time
  • Customers wanting longer payment terms

These issues (especially the payment ones) don't make paper mills that produce labels an attractive option to put money into.

Because if it's difficult to deal with the customers and get paid, why invest in the first place?

Paper Market on the Descent

A graph showing the declining numbers of printing and writing paper production worldwide

The global paper market has been gradually declining for years, both in demand and production. This has been since the digital age took off and was accelerated by the recent pandemic.

And unfortunately, that decline will only continue, as indicated by the above chart from Statista. In the last 8 years, we've already seen global printing and writing paper production drop an estimated 30 million tons. And it's only going to continue.

While P&W paper has gone downhill, other materials processed in paper mills have seen continuous growth. Specifically, containerboard and corrugated paper for cardboard boxes.

These markets are expected to reach $67B by 2023.

We can thank packaged goods and e-commerce for the spike in demand. Sustainability initiatives pushing paper products over single-use plastic have also helped increase the use of these materials.

If any investments do go into paper mills, it's for the production of these materials.

More recently, machinery originally built to handle paper grades are being converted to produce packaging materials.

Nine Dragons Paper invested $189 million just last year to convert 2 paper machines from lightweight coated paper to handle packaging grades for containerboard boxes.

And it makes sense as to why we see these types of investments: investors are following the market demand and where the money is.

If there's less and less money in P&W paper, there's little sense in spending money in that market.

Higher Operating Costs & Weak Returns

And lastly, it takes a lot of money to run a paper mill. Which many people don't have in the current economy, making investing in mills quite the risky venture.

Paper mills require millions to operate. Machines have to constantly run at 100% efficiency just to break even. There's also the added cost of maintenance fees:

  • Cleaning machines
  • Providing proper upkeep
  • Regular inspections

And if a paper mill decides to upgrade equipment, it can tack on hundreds of millions of dollars extra and take months to years to complete. During which time these machines aren't in service.

How is all of this spending rewarded? With little return profits.

This is best exemplified with specialty paper, like labels. Specialty paper is hard to make, and requires very tight specifications. If machines have to be changed over to accommodate even the slightest adjustment, it costs time and money.

There's also a high rate of rejection. Precision with roll length and width must be perfect, leaving no room for error. If an order goes wrong for any reason, the customer rejects it. One bad roll can cause the entire order to be sent back.

This leaves few options: either scrap the material or try to find another buyer.

So knowing there's all of these hurdles to jump and the market isn't prospering, why would you decide to invest in a paper mill?

It's simple: you wouldn't. If there's little to no return on your investment, you'll 100% look elsewhere to spend your money.

Other Paper Industries Do It Better

Now after reading all of these reasons why investments are lacking, it would seem like this is how the paper industry is everywhere. But that's not the case.

Many of the above reasons seem to plague the U.S. paper industry. But other areas across the globe have an entirely different outlook on investing in their mills.

Case in point: Europe.

The U.S. paper industry often follows trends emerging from Europe's paper industry, but seems to fall short in how we care for our paper mills. Europe mills see frequent investments and are tended to in a way that speaks to their value in the industry.

This night and day contrast leaves us wondering why U.S. mills can't rise to that level. Especially as we witness the decline of our own.

This article was originally published on the Smith Corona blog. You can find it here.

Alaina D'Altorio is the Content Marketing Specialist at Smith Corona Labels. She explores topics relevant to the paper and pulp industry, including mill closures, material shortages, and supply chain issues. Smith Corona Labels is located at 3830 Kelley Ave, Cleveland, OH 44114. Alaina can be reached by email at daltorio@smithcorona.com or by phone at 216-426-5611.


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