Carton crisis
Packaging firms hit by soaring paper costs; experts call for solution to shortage of raw materials
As domestic paper prices surge amid a shortage of raw materials, companies across the industrial chain have been feeling the impact, with carton makers suffering the biggest bite. Experts have warned that the unstable relationship between China and the US may also pose more challenges to the industry in the future.
The upcoming peak season of packaging demand has not lightened the mood of China’s carton makers, since their profits might be squeezed even more as a result of rising paper prices.
Yong Xing, the 40-something owner of carton company Yuankang Packaging Co based in Yangzhou, East China’s Jiangsu Province, was downbeat during a recent telephone interview with the Global Times.
On Thursday, Yong received a notice from his paperboard supplier, noting how the increase in prices of raw materials has put pressure on the supplier, prompting it to raise the price of its paperboards by 16 percent.
This is the fourth time Yong has received a price increase notice from the same supplier since May 3. So far, he has seen the price of paperboards go up by as much as 28 percent.
“The price increased as soon as we signed the contract with our customers. But we must stick to the contract price, which means operating at zero profits or even losses. We can only ‘bite the bullet’,” he sighed.
According to Yong, soaring prices are a result of increasing costs in raw materials, whose supply has been hit by China’s tighter controls on imported waste paper, an important source for the manufacturing of paper products.
In January, China’s ministry of environmental protection announced stricter thresholds on imported waste, a measure that took effect on March 1.
According to data released by customs, China’s waste imports decreased by 54.2 percent in March from a year earlier.
Mixed outcomes
The shortage of raw materials has caused paper prices to skyrocket. Data from paper industry website paper. com showed that from May 7 to 11, the average price of corrugated paper, the main source of cartons, was 4,711 yuan ($738.6) per ton, a year-on-year increase of 55.11 percent, and a weekon-week increase of 8.62 percent.
Amid the wave of price hikes, other companies besides Yong’s have been biting the bullet.
Shen Sheng, an industry analyst based in Shenzhen, South China’s Guangdong Province, said downstream carton companies are the ones that may be hit the most, as it takes a while to pass higher costs onto customers.
Shen told the Global Times over the weekend that across the industry chain, paper manufacturers and paperboard makers are considered the upstream and midstream players, while carton companies the downstream players.
“Unlike upstream companies, most carton makers are small in scale due to their low cost nature, thus in order to ‘grab more customers’, price competition must be fierce. Raising prices means losing customers, so some may even bear losses to maintain a competitive price,” Shen said.
Zhang He, who runs Shenzhenbased carton firm Gutewei Carton Co, said he plans to increase the price of cartons accordingly, but has had to negotiate the increase range with his customers, rather than just sending out a “price increase notice”, like he had received before.
Negotiations with some big customers might last for as long as a month, Zhang said.
“But I’m quite worried that prices will continue soaring ‘in a crazy manner’ during peak season, which occurs in the second half of the year. How can we survive then?” Zhang complained.
Compared to Yong and Zhang, however, Xu Jingping, the sales manager of a midstream cardboard company in Yangzhou, East China’s Jiangsu Province, sounded much more optimistic, saying the firm is “operating as usual” so far, and has even seen a rise in profit.
“The price of corrugated paper, accounting for about 75 percent of the cost of paper boxes, has reached 5,400 yuan per ton, an increase of 1,000 yuan per ton in just 10 days,” Xu said.
However, Xu reiterated the company is still operating smoothly, and has enough paper supplies from upstream companies, though it has been forced to raise product prices in reaction to higher prices of raw materials.
“Price fluctuations are normal in our industry, we have gotten used to that by now,” said Xu.
A sales manager of a major papermaking company, who prefers to remain anonymous, said that his company has made big profit amid the rise in paper prices.
He also believes that tighter regulations will ensure long-term, healthy development for the industry.
“Most quotas of imported waste paper have been shared by large-scale papermaking companies like ours. The quotas are tighter now, but we also own paper pulp manufacturing factories based in Southeast Asia, so we are not that worried about the shortage of raw materials,” the manager said.
“Last year, a batch of small- and medium-sized papermaking enterprises fell through as a result of strict environment regulations, a warning to all of those factories who have been dodging the rules,” the sales manager said.
Resources will be allocated to regulated companies in the future, a good sign for the industry, he added.
Rising uncertainties
The impact of the paper price hikes has also been felt by terminal traders who sell paper products.
For example, a salesperson at a printing shop in Beijing said the price of A4 paper has increased twice since the beginning of April.
A customer service spokesperson of Chinese tissue giant Vinda said the price of packaging for 12 rolls of tissue has increased by 1 yuan since April 8.
Zhao Wei, chairman of the China Paper Association, is concerned about the supply of raw materials, adding that trade frictions between the US and China could pose more challenges to the supply of waste imports.
On May 2, the Chinese inspection authority in North America (CCICNA) announced that it will suspend waste paper deliveries from the US to China for one month.
“Against this backdrop, what I’m most worried about is whether we can ensure enough raw materials for paper production. We cannot live without paper: people have to use tissues, newspaper offices have to print news and goods have to be packaged,” Zhao said, stressing the problem must be addressed at the government level.
Nevertheless, some industry players have also expressed worries over the fact that terminal customers have started to find alternative routes in face of the paper price hikes.
For example, delivery company SF Express has already been using recycled plastic bags for certain products to reduce costs, according to Yong.
“The possibility of declining demand for paper products in the future makes me really panic, and many of us may even be laid off by that time,” Yong said.