Supply chain disruption and the paper industry in India
The Indian paper market faces a difficult situation due to extreme undersupply and high input costs. The surge in production cost, logistics, chemicals, and raw materials, have forced paper mills to increase prices to all-time highs. PR Ray reports
02 May 2022 | By Aultrin Vijay
The years 2020 and 2021 have seen disruptions with respect to the world supply chain, consequent upon pandemic upheaval. This disruption had adversely affected the goods sector and had enhanced the service sector like never before. While this is a welcome trend for the service sector, one should do well to remember that at the core of majority of service sector activities lie the exchange of goods, and hence any supply chain disruption will ultimately be a major concern for both the goods as well as the service sector. Therefore, a look into the supply chain situation for 2022 should be of major interest for the entire business community, while knowing how rough the ride could be to do any crystal-ball-gazing into the world shipping trend for 2022, given the pandemic situation plus the war in Ukraine.
This matter is, however, extremely important for the paper industry in India, since the greater part of its total production volume relies on raw materials procured from the overseas supply chain through international shipping routes, more so because the paper industry in India has never bothered to build up a dedicated supply chain, being too enamoured in reaching corporate goals through ‘buying cheap’.
The havoc on the supply chain started with the shortage of shipping containers at the beginning of the pandemic. The cargo containers being at the heart of all supply chains, their shortages at the supply point wrecked havoc on the international supply chain. But, surprisingly enough, this shortage was not due to a smaller number of containers, vis-a-vis the available cargo for shipment. According to Harvard Business School Professor Willy Shih, this was rather due to the growing container imbalance, a messy build-up of containers in places where they are not supposed to be. With the beginning of pandemic related shutdown, containers started to pile up at major importing centres, while their availability suffered at the exporting hubs.
On reviewing various aspects of the international business trend and shipping, in all likelihood, this Covid-19 related supply chain disruptions will continue through the greater part of 2022. Even Maersk shipping, one of world's largest shipping lines, predicts the same trend in international cargo shipment, as in 2021, to continue for the bulk of the months of 2022. According to Goldman Sachs, backlogs in availability of shipping space and high shipping cost will continue to persist for 2022.
This will happen primarily due to China’s zero Covid policy and the resultant trade volatility and due to the logistic bottlenecks, which still continue.
International paper highlights
- The Finnish Paperworkers' Union Paperiliitto has extended the strike at UPM's mills by another three weeks. The strike will continue until 2 April 2022 unless a new collective agreement is reached before then, the Union wrote. The Paperworkers’ Union’s strike at UPM Pulp, UPM Biofuels, UPM Communication Papers, UPM Specialty Papers and UPM Raflatac units in Finland began on 1 January 2022.
- Sappi has reported strong results for its first quarter with sales of USD 1.697bn up 46% year-on-year, and a profit of USD 123m – compared to a loss of USD 17m in Q1 2020. Markets for packaging and speciality papers continued to be robust across all regions with sales volumes up 26% on a year ago. Sappi said buoyant demand for graphic papers, meanwhile, boosted sales volumes by 20% compared to last year and provided support for price increases.
- Mitsubishi HiTec Paper said that it would be implement a global price increase of 10% across all its speciality papers, effective 1 March. A Mitsubishi press note said, "The reason for this is the continued increase in the cost of gas, chemical raw materials and logistics services". The products affected are Thermoscript, Jetscript, Giroform, Supercote and Barricote.
The overall world shipping situation remains tense. In Europe, the shipping space demand and supply continue to remain somewhat nerve-wrecking, as demand remains above potential. Inland depots in Europe are passing through critical situations. Europe – North America shipping space demand remains very high and likely to last the greater part of 2022. US East and West Coast vessels are overbooked. Demand for shipping space – ex-Asia Pacific to AMNO and Euro – will remain strong.
Coupled with this, if the fallout from the current Ukraine crisis was to disturb the Mediterranean shipping lane, the supply chain disruptions ,for Indian paper mills as well as other industries, with sources of supplies from the West, could be phenomenal and catastrophic.
In a nutshell, 2022 – at least a greater part of the year – will continue to see supply chain disruptions, with chances of the situation turning further critical if the pandemic, which can only be tackled with sufficient advance planning, continues unabated along with the war. For its own survival, the paper industry in India would do well to appreciate these realities. Otherwise, these disruptions could adversely affect the paper as well as the print and the paper packaging industries in India, consequent upon further price rises in the end product.
Although, as of now, the future still looks grim for the international business sector; few green shoots in the distance, provide some ray of hope for the better. Mainland China’s economy is resuming a long-term declaration, with 2021 GDP projected above 8% and with the government’s deleveraging campaign working towards deflating real estate and construction activity. The worst of China’s power crisis is over. Asia Pacific economies are rebounding from a 2021 setback as factories are reopening, possibly helping supply chain constraints to ease. Overall demand and the urgency to restock are peaking, with the demand moving into a self-regulated normalisation mode, reducing further the pressure on the supply chain.
With the ramping up of the world production of containers and 6.4% increase in global orders for new containers over the existing fleet, and USD 17 billion additional expenditure on global shipping, one could hopefully look at the supply chain crisis to resolve itself by the end of 2022, unless the world is faced with another unpredictable crisis, as it is now happening, with the outbreak of hostilities in Ukraine.
As of now, since it is a mere guess to predict when this supply chain disruption would be over, the business sector, including the paper industry in India, should do well to chalk out a strategy for inventory management, which it can then utilise for its benefit, in case the supply chain faces further disruptions during 2022 and beyond. Such contingencies could include:
- Change in inventory management policy from ‘just in time’ to ‘just in case’. Capgemini predicts that 40% of business organisations will do this shifting.
- Resorting more towards responsive supply chains, with flexibility to expand and contract capacities, to meet demand within a given time frame.
- Increase local buying, subject to natural/geographical/
technological constraints in such sourcing.
- Building partnership with the supply chain.
The paper industry in India is putting the onus of its current price increases largely on this disruption in the supply chain and the resultant cost increases for its inputs. While this rationality is undeniable, question arises, has the paper industry in India felt it necessary to look deeper into this disruption and has laid out a well thought out strategy to counter the problem, in case such uncertainty continues and/or strikes once again? Or is it that this industry thinks it much easier to pass on the burden of the cost increase arising out of supply chain disruptions, to its users and be done with it.
In order to tackle this difficult situation, like all other industries, the paper industry in India will need to do some out-of-the-box thinking for various aspects of its operations, including raw material sourcing, technological obsolescence and the required updating, reducing systemic wastage and more.
Like in all these above aspects, this industry needs to evolve newer methods for looking into its inventory management with more and more digital control of the supply chain through automated inventory management, which can thereafter be extended to other vital areas of operations. Thus, helping reduce the extra burden of cost, arising out of any future disruptions in the system.
Sustainability being the watchword for the world economy, the paper industry in India can hardly afford to ignore this factor for its own survival and betterment. One way of doing so for this industry would be to get into a circular economy, starting right from the point of sourcing of its own raw material, using the same for production, supplying the product to the market, and taking the waste back into its system for producing fresh products. In fact, the opportunity for utilising the circular economy is one of the best for the paper industry in India than many others. So why not go for it in this time of crises and be an example for all other industries?
Another important aspect for the paper industry in India would be the area of product development.
Needless to state the obvious, that the paper industry in India is a unique one with its own operational functions and technology, and therefore its own unique set of problems and limitations for product development. For the paper industry to indulge in any product development within a short space of time is technologically, financially and strategically farfetched. Even then, within a given parameter, for the sake of its own future growth, the paper industry in India needs to look at every opportunity for diversifying into developing newer products.
And one such segment, which this industry definitely needs to look at actively, is the area of substitution of environmentally unfriendly packaging products with eco-friendly paper packaging. If this can be implemented successfully, this segment can open a long-term opportunity for the paper industry in the country for enormous growth. While few of the major units in the country’s paper industry are mindful of this process, the majority of them prefer not to venture out of the safety zone. But, if this industry has to face a crisis like the present one, developing newer ways of use of paper could provide the lifeline for growth for the future.
Finally, when supply chain disruptions are adding to the cost, promoting internal efficiency through reduction of systemic wastage and better utilisation of fibre and energy would go a long way to balance out the cost escalation, ultimately accruing benefit for the end users.
The paper industry in India would do well to bear in mind that unless it can keep up to its image as a responsible strategic industry for the country, which can rise in the time of crisis and support the users, it can never expect the country to hear its pleas in its hour of need.
PR Ray is an industry veteran who has been a part of the paper industry since 1970.