Between a rock and a hard place

By Barney Cox, Monday 19 June 2017

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At the end of May UK paper merchants implemented a rise in the price of uncoated paper of between 5% and 7%, a move that followed across-the-board rises in paper at the beginning of the year by a similar amount.

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There are also inklings that a further rise of a similar magnitude is possible in the third quarter. If that is the case then the price of some grades will have potentially increased by over 20% in the space of less than a year.

A significant chunk of those rises is due to the continued weakness of the pound following the EU Referendum last June, something that the recent snap election has done nothing to mitigate: one of the few things that looks strong and stable in the UK at the moment is the euro. At the time of writing the exchange rate was 1.14, down 14% from last June prior to the referendum, and the pound is expected to slip further.

However, it is not just the pound’s weakness that is behind the rises, which are more widespread and fundamental, it just puts UK printers at a further disadvantage.

“The producers have cited rising costs of raw materials and logistics as being the drivers for this increase, as their returns have fallen to unsustainable levels,” says Premier Paper Group marketing director David Jones. “These factors, together with the very high levels of worldwide demand for paper that is currently being experienced, make paper price increases inevitable. Producers, particularly those based in the Far East, will sell their paper to their own domestic markets first where demand and prices are good and they do not have the added transport costs of shipping paper across the world.”

It has been previously argued by printers that despite the mills and merchants making a big noise about increasing their prices, when push comes to shove, they relent, or after an initial increase prices rapidly fall back to previous levels. Unfortunately, this time it looks different. The BPIF’s Directions survey for Q1 2017 found that 81% of respondents had seen paper prices increase, and there is an expectation of further rises in Q2. The average rise reported by printers was 6.4%, so at the higher end of the merchants’ figures. Other costs

And paper prices are not the only ones going up, ink and coatings prices are rising too. Some ink manufacturers have already announced international price rises. Flint Group announced rises of between 4% and 7% effective from 3 April, followed by rises of up to 10% announced by Hubergroup effective 10 April for water-based coatings and UV varnishes. Again, it is not just a UK issue: VDL, the German paint coating and printing ink industry body, issued a statement at the end of May warning that some pigments had increased by 26%, while solvents had increased by 15%.

“Oil price increases have been a major factor with Brent Crude Spot Prices up nearly 60% in Q1 this year compared with a year ago,” says BCF chief executive Tom Bowtell. “The hit to sterling following the referendum has also been a factor, while specific supply problems for some materials have contributed further to price increases.”

BPIF research and information manager Kyle Jardine says that materials and outwork typically represent 45% of a print company’s costs, albeit he caveats that “it’s difficult to have meaningful data as sectors, companies and jobs can vary so widely”. However, it is clear that with materials making up such a large proportion of costs, that significant rises are hard to absorb. Assuming a 5% profit margin, material price rises in double figures risk wiping out profits if they can’t be passed on or mitigated.

“Paper price rises are a justifiable reason to raise prices,” argues Jardine. “But it depends on your relationship with the client.”

They may be reasonable but whether they are realistic is another matter. While the BPIF Directions survey found 91% of companies were able to pass all or some of their cost rises onto customers, only 39% passed all on. 

Significantly, the impact on print volumes from passing on price increases was inconclusive. While 5% said increased prices reduced volumes and 46% felt sure they didn’t, 49% weren’t sure of the impact. 

Anecdotally the feeling from both printers and buyers was that it is impossible to impose price rises without reducing volume.

“So far this year material price rises have not impacted us directly. It is not something our suppliers have looked to pass on to date,” says Sky head of print buying Mark Cruise. “We are due to talk to our suppliers in July about what our plans look like for the next year, so we may know more then about their challenges. 

“If price rises come through then unfortunately we’d probably just spend less on print. All our spend across all routes to market is very much challenged so we have to justify ourselves. For example, when postal costs go up again then we will just have to do less in direct mail as happened last year.”

If you can’t pass the price rises on what are the options for mitigating them?

It will depend on the client, but Cruise’s experience at Sky suggests that bigger clients may have gone as far as is possible in terms of re-engineering their products: “We’ve already reduced paper weights where we can, looked at product formats, assessed data targeting and continually pushed on innovation so there is not a lot that we can do to reduce our print costs without cutting volume. I wouldn’t recommend to my marketing team going any lighter on stock unless the starting point is too heavy as it wouldn’t be a proper fit for our product and brand.”

Cruise adds that to get more value out of lower print volumes “we will of course look at further variable digital personalised print to try to get more of a return or improved responses”. 

However, while that may be an option for sophisticated companies who have data, there is a big question about whether it is a practical option for the majority of printers. 

Looking to the future, both paper and ink suppliers are predicting further price rises in Q3, as the underlying challenges continue. With the UK’s political situation far from certain as the Brexit negotiations begin, the picture for print input prices, particularly in the UK, remains challenging. Clients may be reluctant to accept higher prices without reducing volumes accordingly to leave overall costs unchanged. 

Without a good negotiating position on prices with either suppliers or customers, printers are stuck between a rock and a hard place. The time for talking is over, action is needed to take control of costs wherever possible within your business through efficiency gains. 

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