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Perfect storm - inside Australia’s paper supply chain crisis: Ovato

“Though we hoped supply chain issues would ease in 2022, factors outside our control continue to wreak havoc, resulting in a perfect storm," says Clinton Willis, executive general manager sales at ASX-listed printer Ovato. Earlier this month, the ACCC said it would not oppose Opus Group’s proposed acquisition of Ovato’s book printing business.

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clinton willis ovato
  "Light at the end of the paper
     tunnel": Clinton Willis,

       executive GM sales,
                 Ovato

“The effects of COVID-19 are still lingering,” Willis writes in a blog posted on social media. “With lockdowns in China putting the brakes on shipments from Europe and Russia’s war on Ukraine limiting gas and wood supply, every aspect of our lives is being affected. From the obvious bare supermarket shelves and rising fuel prices to the less obvious paper shortage affecting printing companies and our customers. 

“It’s a complex problem with far-reaching implications – and for printing companies and publishers, the best way forward is to ride the wave and find ways to mitigate the impact.  

The contributing factors

“The challenges the Australian and New Zealand paper supply chain is facing are numerous, with each new factor compounding the issue further. Given the bulk of the Australian paper supply comes from European mills, we rely on China as a waypoint. So, lockdowns in China due to Covid-19 have caused a large backlog of stock, with 1 in 5 container ships stuck outside congested ports. With the restrictions imposed on Russian imports due to the conflict in Russia, the resulting fuel shortages have heightened shipping delays. 

“On top of that, both Russia and Ukraine are large exporters of the products needed to make paper. Russia accounts for roughly four per cent of global pulp exports and has a 22 per cent share of global trade for softwood lumber and pulpwood logs, while Ukraine exports starch and clay, among other materials. FSC and PEFC have declared any timber or wood products from Russia or occupied Ukraine territory ‘conflict timber’, meaning it cannot be certified.

“As if that weren’t enough, workers at the UPM paper mills in Finland went on strike for 112 days, bringing the company to a standstill. Australia and New Zealand rely heavily on UPM mills for paper production, so demand skyrocketed at other European mills, but they struggled to keep up. Locally, Norske Skog in Boyer, Tasmania, is continuing to honour its publishing commitments; however, this is only a small volume. While the UPM industrial dispute was settled in April and paper production is returning to normal, it may take months before mills catch up with the backlog of orders. 

Sourcing paper comes first; price is secondary 

“While riding out the paper supply chain crisis comes down to being able to source paper, price is still a consideration. With the numerous issues affecting the supply chain, the cost of materials and shipping have skyrocketed, driving the price of paper up.”

The Real Media Collective (TRMC) reports that over the past 12 months, international shipping costs have increased from $2,000 to $10,000 USD for a 40ft container. While recently that has dropped slightly to around $6000-$7000, these increased levels are expected to remain in place for most of 2022.

“Given the cost of paper accounts for around 50 per cent of a printing company’s expenses, companies have no other option but to pass that price on to customers,” Willis says. “Printing companies need paper, and that level of extra cost is not something that can be absorbed. However, customers have a budget, and that budget doesn’t increase with the cost of paper. Instead, they just reduce the amount they print. 

“This creates a false economy — they’re spending the same amount, but there’s less volume. To recover this cost, consumers will end up having to foot the bill, with Ingram Content Group in the US warning that book prices will rise in 2022. 

“The increase in paper prices also comes with a risk for printing companies: the potential to drive customers away for good. 

Considering paper quality

“To fully understand the extent of the issue and to have a chance at mitigating the impact, we need to look at the specifics and assess each paper channel individually. Some paper grades are still readily available. 

“Newsprint and copy paper supplies are relatively stable from local manufacturers, and there is a solid Southeast Asian supply for sheet-fed paper ranges. However, catalogue and magazine ranges are in very short supply both locally and overseas. Using the paper grades that are available, especially for short-lived weekly magazines or catalogues, would reduce the supply pressure.”  

Unfortunately, for Australia and New Zealand, paper supply issues are intensified because we’re used to higher-quality paper, Willis says.  

“A fit-for-purpose approach would mean we’d be better off in terms of paper supply while improving sustainability and reducing unnecessary costs — thereby helping to mitigate some of the impact of the paper supply chain crisis. 

The industry remains optimistic

“Though printing companies are concerned that the damages caused by the supply chain issues will stick, the industry remains optimistic and focused on what can be done in 2022.”  

Kellie Northwood, CEO at TRMC, says, "As we emerge from an incredibly difficult chapter from the pandemic, there remains ongoing challenges and we are mindful of this and working with government, suppliers and members to facilitate as smooth a passage as we can."

There is a "light at the end of the paper tunnel," according to Willis. “While the conflict in Ukraine is out of everyone’s control, Shanghai is easing off Covid-19 lockdowns, which is a positive sign. And although supply chain bottlenecks could last through the year, with UPM back in action, relief could be on the horizon — just in time for Christmas.”

https://www.ovato.com.au

accc logo 22 8ACCC decision

Earlier this month, the ACCC said it would not oppose Opus Group’s proposed acquisition of Ovato’s book printing business.

“A key factor in the ACCC’s decision was the likely imminent insolvency of Ovato if the proposed transaction did not proceed,” said ACCC Commissioner Liza Carver.

The commission added: "The ACCC retained specialist insolvency advisers, carefully reviewed Ovato’s internal business records including recent financial results and forecasts and conducted a number of compulsory examinations of Ovato executives to assess the likelihood of insolvency.

“Opus’ commercial printing business, CanPrint, overlaps with Ovato’s Print Australia business in the supply of certain commercial printing services. Following the proposed transaction, the Print Australia business will continue to be operated by Ovato. The ACCC concluded that this aspect of the proposed transaction was unlikely to result in a substantial lessening of competition in the supply of commercial printing services.

“The ACCC understands that, as result of the sale of Ovato’s book printing business and injection of cash via the convertible note, Ovato will be able to continue to compete in commercial printing services.”