2021 Supply Chain Chaos – Pulp, Packaging, and Freight…Oh My!

2021 has left the pressure sensitive label industry in complete and utter chaos.

Shipping costs and freight rates are soaring. Soaring freight rates, cargo container shortages, and port congestion have driven up shipping costs. Lead times have extended so far out, they are unknown.

A rising need for pulp and paper has far exceeded supply and demand, escalating raw material costs. Packaging supplies like sealing tape, stretch film, and ribbon are seeing price hikes to the moon.

We know these disruptions mean big problems for the label industry, but what do they really mean for everyday people?

Well, someone has to pay when the cost of goods increases. Up until now, manufacturers and suppliers have been absorbing these additional prices. But they can’t anymore. Now those rising prices are making their way to you and your wallet.

Drawbacks with freight means that need-to-buy items you’re looking for will either be low in stock or completely unavailable. The wait time for shipping for items you want will range anywhere from weeks to months. And there’s no end in sight.

Each leg of the supply chain has taken a massive blow, and the hits just keep coming. 

[click_to_tweet tweet=”“The cure for surpluses is surpluses and the cure for shortages is shortages.”” quote=”“The cure for surpluses is surpluses and the cure for shortages is shortages.”” theme=”style2″]

Freight Rate Increases

Over the past year, ocean cargo prices have skyrocketed up to 4 times the amount they previously were. These prices have affected 40-foot containers, a common size used for shipping products. Costs to ship to and from China have exploded within only a year’s time.

For example, the median cost of shipping a 40-foot container from China to the Eastern US coast more than doubled from $2,559 in February 2020 to $5,822 in February 2021. 

In another example, the median cost of shipping a 40-foot container from China to the Western US coast increased exponentially from $1,300 in February 2020 to $4,992 in February 2021. 

According to Freightos Baltic Index (FBX), spot rates for 40-foot containers from China to the Eastern US coast peaked in mid-January 2021 at $7,776

According to Freightos Baltic Index (FBX), spot rates for 40-foot containers from China to the Western US coast peaked in mid-January 2021 at $6,163

Across the globe, millions of goods are constantly being imported and exported via ocean cargo. With freight rates climbing to such extremes, prices on imports and exports will inevitably be affected, putting a further strain on the economy as inflation surges higher for everyday consumer goods and supplies.    

Unfortunately, these median cost increases aren’t the only problem plaguing the transportation of ocean cargo. The amount of bad luck the shipping industry has accrued is spreading, from shortages of shipping containers all the way to complications with labor.

Shipping Cost Drivers

The shipping industry thrives on periods of stability and predictable business. But nothing was more unpredictable than the 2020 pandemic and the intense turmoil it caused. From 2019 to 2020, global trade only declined around 1%. However, from April 2020 to May 2020 it fell 15% before quickly rebounding. 

The ocean cargo business is already very volatile, with maritime operators usually seeking long term, stable contracts over spot business. This usually helps to manage volatility, but 2020 caused a mix of new customer demands. 

Customers with large, new demands for freight tend to fill it using spot business over long term contracts. Spot business flourished with the rise of supply and demand caused by the pandemic. For example, demand for disinfectants has increased 6,800% and demand for items like exercise equipment has doubled over the past year.

The main sources for shipping cost increases stem from complications with container shortages and labor constraints.

Container Shortages

Currently, there is a global shortage of shipping containers available. 

Due to labor shortages caused by COVID-19, containers have been stranded in ports and rail yards. The stranded containers have caused a shortage and new customers are unable to receive containers to fill with their products.

Containers delivered to ports in South America and Africa are not being picked up, because these are considered to be less profitable routes. It is more profitable for vessels to work China-USA routes and China-Europe routes. 

A container ship along a port transports supplies and goods.

COVID Cases Reducing Workers

COVID-19 has reduced the number of dockworkers and truckers working due to many of them testing positive.

At the start of February 2021, over 1,000 dockworkers in California tested positive for COVID-19, up from 694 workers in January 2021. These shortages in workers are further exacerbated by an unprecedented volume of imports in western US ports like Los Angeles and Long Beach.

Wait times for anchorage at these ports often exceed a week, which only continues to increase costs.

Labor Constraints

Shortages of truck drivers, rail workers, and longshoremen are further driving up freight rates. Because of these labor shortages, vessels are unable to be unloaded within a timely manner. A lack of longshoremen has even caused many ocean carrier operators to cancel voyages. This snowball effect further slows the rate at which shipping containers are recycled back into service, making the already deep shortage of empty containers that much worse.

Another danger to increasing costs is port closures. The Port of Montreal’s longshoremen union is currently in a continuous labor negotiation. On March 21, 2021 they voted against new offered terms, leaving the potential for a strike over the dispute. This uncertainty is driving deliveries elsewhere. A closure of this port will drive ocean cargo to other ports that are already overwhelmed, adding to more ocean transit delays.

So what can we expect moving forward with ocean cargo?

Forward Progress Grinds to a Halt

Currently, transit costs are only slightly lower from their peak rates in February. With the world’s economy beginning to see signs of reopening for the summer of 2021, many are hopeful that COVID-19 cases will be in remission. If this happens, there will be a corresponding increase in economic activity.

The demand for ocean cargo will support elevated transit costs and opening economies will again lead to changes in consumer preferences, adding to volatility through additional spot business.

However, all of this positive future outlook came to a screeching halt with one, woeful mishap: a complete blockage in one of the world’s most popular shipping routes.

Blockage in the Suez Canal

On March 25, 2021, a 1,300 foot container ship called the Ever Given became stuck in the Suez Canal in Egypt, completely blocking transit and further halting shipping. Around 12% of all global trade travels through this canal, which provides a route connecting Europe to Asia. Hundreds of cargo ships and tankers were stuck waiting in the Red Sea near the opening of the Suez Canal for 5 days until the ship became unstuck on March 29, costing hundreds of millions of dollars. 

Even with the ship moved and the flow of traffic resuming, the ramifications of this event left many deadlines missed as some ships rerouted, taking longer voyages and adding weeks to their scheduled journeys, along with added fuel and operating costs.

But it’s not just the shipping industry experiencing turmoil. Carriers across the US have also seen massive delays and disruptions, some even due to events beyond human control.

It is estimated that the blockage ended up costing $400 million per hour.

LTL & Small Parcel

Beginning in December 2020, shipping rates began to increase. Fuel surcharges attempted to cover rising diesel costs, with additional new surcharges being added or contemplated to cover labor and operational costs. 

Extreme weather has also played a role in increases. The south and southeastern US were affected by severe cold weather and winter storms in early 2021, causing disruptions to a wide array of businesses, factories, and warehouses. Several states saw restrictions by LTL carriers, and many shipments were delayed or abandoned. 

Local courier services would usually rescue these shipments, but due to the high demand in local couriers, they are refusing non-contract customers. Carriers are also being more selective with their customers while  restricting the shipments they are willing to pick up until they can stabilize their work flow.

Ultimately, freight costs will cause increases to our raw materials irrespective of their underlying prices. No decline in demand is expected to be seen anytime soon.

While extreme weather events have led to some unpredictable restrictions with freight, the truth is shipments were already compromised from a massive shortage of available truck drivers. 

Driver Shortage

The current supply chain is still experiencing a huge shortage in truck drivers. These shortages began with changes to the Department of Transportation (DOT) rules regarding the maximum hours of service (HOS) a truck driver can accomplish during a week. These rules are enforced through mandatory Electronic Logging Devices (ELD).

Drivers are only permitted to work a specific number of hours followed by time off duty before they can resume driving. These new HOS and ELD rules are designed to prevent accidents caused by over fatigued truck drivers. Because of these regulations, drivers are not able to put in as many hours or drive as many miles. As drivers are often paid by the mile, they are no longer able to earn as much money.

As it stands, there are around 80,000 fewer truck drivers in 2021 than in 2020. Current drivers are aging out, and new drivers are not being hired or trained at a quick enough rate. As it stands, there are around 80,000 fewer truck drivers in 2021 than in 2020. Drivers are aging out, and new drivers are not being hired or trained at a quick enough rate. Around 57% of drivers are over the age of 45, with 23% over the age of 55.

Where Did the Truck Drivers Go?

In 2019, of the 14 million job postings for drivers, only 1.9 million hires were made. There has been a 40% decrease in commercial driver’s license (CDL) training due to capacity restrictions from COVID-19 and outright closures of CDL training schools.

There is also a lack of appeal with the occupation. Truck driving entails long hours, constant traveling, and unhealthy lifestyles with a minimal ability to eat well or exercise. According to the BLS, trucking is the 6th most dangerous occupation.

Fewer drivers means fewer goods moving goods across the country, not only stretching out lead times but unfulfilling demands for necessary products.

However, all of these transportation challenges are just one part of the supply chain disruption equation. To find out what else has been driving the chaos, we’ll have to look at the supply and demand tug-of-war affecting raw materials and their prices. 

Pulp Prices on the Rise

Industry wide price pressure from increasing pulp prices began in Q4 of 2020, which has continued into 2021, causing prices for pulp in China to nearly double. The Chinese market has increased pulp and paper consumption, with high demand in China being driven by the growth for tissue and packaging/board. 

There has also been a sharp increase in the use of tissue and ivory board globally. Tissue demands are being driven by COVID-19 and ivory board demand has increased as consumption of single serve meals  has transitioned from plastic containers to board for sustainability.

Pulp & Paper Mills

Many mills in North America and some in South America were delayed maintenance in 2020. Because demands for products escalated so extremely, mills delayed typical shutdowns for preventative maintenance. Regulations put into place because of COVID-19 limited access for specialized maintenance teams, mechanics, and suppliers. These mills are now taking extended downtime to remedy deferred maintenance, further exacerbating the restraints of the pulp supply chain.

During 2020, several marginal pulp mills shut down due to poor profitability. A mill explosion at Androscoggin Mill removed more than 240,000 tons of pulp from the market, shifting the mill to purchase market pulp. Viscose fiber, which is used in clothing making, increased in price dramatically, 88% for Softwood and 53% for Hardwood. With China and many far east countries coming out of lockdown, the demand for clothing has been driven up.

Pulp Market Fluctuations

Producer utilization rates are currently high, leaving little to no access capacity. There are lower than normal inventories reported throughout the market, with no major capacity expected to come online in 2021.

Historically in the pulp market, supply and demand has been very closely aligned, usually +/-2%. Tight supply and demand equilibrium and massive operating leverage throughout the industry have caused supply and demand shocks to generate huge pricing volatility. Industry experts anticipate volatile pulp prices to remain through the rest of the first half of 2021 and pricing to remain above that of 2020 through the rest of the year.

These prices are affecting the production of many different items in the label industry, from finished products like direct thermal and thermal transfer paper, to key ingredients like laminates and acrylics.

Below are 3 graphs showing the rise of pulp prices for materials in Canada, the US, and others.

Direct Thermal Paper

On October 28, 2020, the US Departments of Commerce initiated an antidumping investigation into direct thermal paper from Germany, Japan, South Korea, and Spain. It’s goal is to determine if imports of thermal paper from these four countries are being dumped in the US market at less than fair value. As it stands the alleged dumpling margins are:

  • Germany: 9.2% – 58.90%
  • Japan: 129.86% – 140.25%
  • Korea: 56.6% – 58.24%
  • Spain: 32.68% – 41.45%

The pending antidumping investigation is tightening supply with offshore manufacturers are limiting imports into the US to mitigate any potential dumping fines. Domestic US production for thermal paper is not sufficient to meet domestic demand. It is estimated that domestic production only covers 50% of domestic demand. Rising pulp prices are further driving up direct thermal base paper costs, forcing manufacturers to pass along these prices. Shortages are forming in the chemicals used to create direct thermal coatings as well.

The combination of rising pulp, direct thermal chemicals, and potential duties will likely result in a second round of price increases. Announcements of price increases have already been announced from the following companies:

  • Appvion (formerly Appleton Papers)
  • Hansol Papers
  • Mitsubishi Papers
  • Kanzako
  • Domtar
  • Jujo

“Despite our continuous improvement initiatives and cost reduction efforts, the costs associated with manufacturing, raw materials, delivered cost of raw materials, transporting Appvion Direct Thermal products continue to increase. “

-Appvion 

Thermal Transfer & Release Liners

Unlike direct thermal paper and chemicals, thermal transfer papers and release liners are not in shortage. However, a pressure on prices as the result of increased pulp prices and logistics costs are being seen. One cause for this is a factory disaster in one of the leading mills.

In April 2020, Pixelle, one of the largest suppliers of release liners in the US, suffered an explosion in its pulp digester. The explosion caused a considerable amount of damage to the mill, completely leveling the pulp production facility. Although paper machines were undamaged, the mill is no longer able to produce its own pulp.

Label Laminates

Rising pulp and paper pricing is driving up raw material costs as well. As the cost to move raw materials and finished laminates increases, an increased logistics cost will be passed onto label converters. There are also shortages on substrate materials for making laminates. These include components used to make label face material and liners, such as:

Acrylics

As previously mentioned, severe winter weather in the southern US caused many businesses to experience turmoil with shipments. Production of several key chemicals was also severely affected. For example, as a result of the winter storms in Texas, production of several acrylic chemicals, like acrylic acids, are in extreme shortage.

Acrylic acids are used as a precursor chemical for making acrylic adhesives as well as acrylic esters and acrylic resins. The shortage is creating a precarious situation for consumers of acrylic coatings and acrylic adhesives as these are necessary ingredients. Other causes for the acrylic acid shortage include:

  • No update from LG-Korea on production until March
  • Force majeure of Sasol in South Africa
  • Fire at China’s Zhejiang Satellite Petrochemical
  • LyondellBasell and INEOS have declared force majeure
  • IQ declares force majeure on butanols and butyl acetate

All of these major announcements, disasters, and events affecting components in the label production process are crippling distributors and suppliers. Many are emailing customers to lament inevitable price increases and apologize for the uncontrollable circumstances.

Below are emails sent by Intertape Polymer Group (ipg), QSPAC, and Primetac to customers relaying the current industry challenges and the price increases on their products as a result:

Ribbons

Along with other materials, ribbon prices are starting to increase. This can be attributed to many factors, including rising freight costs and the shortages on chemicals from southern and southeastern US factories. Chemicals like polyethylene terephthalate (PET), which is used for base film, and monoethylene glycol (MEG), a polyethylene terephthalate (PET) precursor chemical, are experiencing shortages as a result of winter storms.

MEGlobal in Freeport, Texas declaring force majeure has also been attributed to the rising costs of PET resins and subsequently driving up thermal transfer ribbon costs.

Rolls of ribbon for labels to be used on a thermal transfer ribbon

Shutdowns 

  • Indorama Ventures in Clear Lake, Texas: 435,000 mt/year EO, 358,000 mt/year MEG
  • LyondellBasell in Bayport, Texas: 265,000 mt/year MEG

Restarting as of March 22, 2021

  • Nan Ya Plastics in Point Comfort, Texas: 2 MEG units with a cumulative 1.17 million mt/year capacity
  • Dow Chemical in Seadrift, Texas: 300,000 mt/year MEG
  • Indorama Ventures in Clear Lake Texas: 300,000 mt/year MEG
  • Sasol in Lake Charles, Louisiana: 380,000 mt/year EO/MEG

Ribbons are required for thermal transfer technology. Even though shortages are not plaguing the production of thermal transfer labels, prices are already sky high, and now even more so than ever before.

Carton Sealing Tape

The huge shortages of acrylic adhesives and polypropylene resins have now caused acrylic tapes to sell for nearly as much as hotmelt tapes.

Not only have prices increased, but lead times have as well.

In 2020, typical lead times for new orders were running out 4-6 weeks. Currently, lead times are as long as 18 weeks out with no sign of them shortening any time soon. 

“We are faced with a shortage of several raw material components of our tapes and stretch films, which have driven up dramatically our cost of finished goods. We have absorbed increases in 6 of the past 7 months.”

-Primetac

Stretch Film

Prices on polyethylene resins have reached a near-decade high. This is due to massive disruptions to ethylene and propylene monomers that are used to create polyethylene resins. Along with the shortages of raw monomers to make resin, polyethylene resin manufacturers have been forced to close due to damages caused by recent storms.

Stretch film prices are currently through the roof. Linear low-density polyethylene (LLDPE), which is used to make stretch film, has increased from $0.35 per lb. in May 2020 to $1.00 in March 2021, accounting for a 285% increase. And offshore production has been unable to help due to massive freight backups.

Unfortunately for users, there are no product substitutes for stretch film.

Conclusion

Overall, the disruptions currently taking place in the supply chain have thoroughly turned the pressure sensitive label industry on its head.

Prices are soaring across the board, affecting everything from freight rates to pulp, paper, and packaging supplies. In turn, this is causing businesses to adjust their pricing in order to meet demands, which ultimately affects the cost being given to end-users.

Shortages in truck drivers, disruptions in paper mills across the country, and extreme weather conditions have only further exacerbated the situation. 

Predictions for a more promising future marketplace are hopeful, but as of now there is no telling when that could be. At present, converters and distributors should keep their end users informed on the evolving situation and adapt as best as they can in order to accommodate the difficult circumstances.

[click_to_tweet tweet=”Shortages bring higher prices with with higher prices will come new entrants. Surpluses will bring lower prices and with lower prices will come bankruptcies and closures. Bankruptcies and closures will bring shortages and the cycle of markets continues.” quote=”Shortages bring higher prices with with higher prices will come new entrants. Surpluses will bring lower prices and with lower prices will come bankruptcies and closures. Bankruptcies and closures will bring shortages and the cycle of markets continues. ” theme=”style2″]

References
  • https://fbx.freightos.com/
  • https://www.risiinfo.com/
  • https://www.ccjdigital.com/
  • https://www.trade.gov/press-release/us-department-commerce-initiates-antidumping-duty-investigations-thermal-paper
  • https://www.printweek.in/features/demand-across-industries,-domestic-supply-requirements,-higher-costs-leading-to-price-rise-rajesh-srivastava-54311
  • https://www.spglobal.com/platts/en/market-insights/latest-news/petrochemicals/031921-factbox-post-freeze-us-petrochemical-restarts-progressing