The Great US Paper Shortage of 2022 (that never was)

Sometimes a sort of cognitive dissonance exists when you compare a popular narrative with the data.

For example, there were many blog posts and references to a paper shortage in 2022, yet, the US imported $5B more paper than ever before for an astounding amount of $22B.

Your brain rationalizes why there is chasm between the two conflicting facts.

You construct a logic economic narrative. In this case, you have many options. Factories have been retooling for cardboard as opposed to paper because people aren’t using as much paper anymore. The return to the office and school helped fuel the problem. Additionally, shipping costs were astronomical. And there was a pulp mill strike in Finland for more than 100 days. And Russia invaded Ukraine, which Germany stopped buying energy from them, which in turn led to German energy prices rising. And the UK still never figured out the whole Brexit thing.

Your narrative is simple and logical – it was a perfect storm that led to a shortage, and the shortage led to higher prices.

There is only one slight problem with the narrative: there was no paper shortage in the US in 2022, even though all those things are true.

In an attempt to identify a better narrative, I’ve analyzed dozens of SEC filings, years of international trade data, national shipping data, commodity prices, futures pricing, and years of sales and pricing data on dozens of Amazon products.

Among other things, I’ve learned about the process to make paper, how the industry has been consolidating over the past few decades, and why COVID could have affected the price of white paper.

How to be a War Profiteer

During wartime, there are a few ways to make money. If you are living in a country under siege or in an active war, and items begin to become scarce, and rationing begins, you could smuggle, steal or otherwise procure foodstuff and other rationed goods and sell them on the black market.

If you don’t live in the country, you can sell arms, medicines, and other supplies to either side of the conflict. You can start a nonprofit, raise money for the war effort, and increase your personal brand at the same time. You can publicly support one side and sell banners, t-shirts and bumper stickers. You can become a pundit and write a book. You can bet on outcomes on betting sites.

Or you can identify industries that will be disrupted due to the conflict, and make your bets on the finance markets. But instead of you saying “I can sell x to this country at war”, you ask “which prices are likely to go up because of this war, because of the war machine or sanctions.” If one of the countries is one of the world’s largest producers of something, chances are that war will have an effect on that market.

If you know that a country which sells lumber is going to war before anyone else, you buy as many lumber futures as you can, because the price is more than likely going to rise with the anticipated shortage. You don’t hold them for a long time, but for long enough that other investors, who had the same idea as you, to increase their price, and then you offload them.

Even if you truly believe that the price of lumber is going to continue to skyrocket, futures are the contracts that you will actually be purchasing that commodity at the price. Meaning that unless you are in the lumber industry, you don’t want to make a massive bet and be left with contracts to buy lumber at an artificially inflated price with no way to sell them.

Historically, the relationship between the futures and stock prices and the consumer prices for products made with that commodity did not have an immediate correlation. The only exceptions were perishable commodities, energy and petrol (oil). But even as such, it could take a few days.

Because in a case where you had a small retailer who can react quickly to new developments and who would be able to constantly change prices on the fly at their own whim, it was not likely that that would have an outsized effect on the market as a whole because you always will have outliers.

A large national retailer is not going to change the price every time the futures market changes, they are going to stay steady, and have a more minor increase. At the very least, if you continue selling that item at a lower profit, as a loss leader, you will have customers come to you just for that (and buy other things).

If you are a global retailer, your mere decision to charge a certain price or sell a certain product could have global supply chain repercussions.

See McDonalds and McRibs - and futures

The "Shortage" Narrative

There are two quasi-contradictory anecdotes concerning the paper industry in 2022.

The first is that the US imported more than $22B of paper, an increase of roughly $5B increase from the previous year, which already was an increase on the previous year. Trying to ascertain the “why” led to the second anecdote is that there there was a paper shortage in the US in 2022.

As an explanation, some have cited the resurgence of the need for graphic papers with the return to work and school, while paper manufacturers have been shifting their machinery for shipping containers in response to the increase in ecommerce. We can rationalize the reasoning, and it sounds correct.

Proponents of the “Shortage” Narrative

Ironically, the increase in ecommerce has led to Amazon Logistics being the #4 carrier, and Amazon has not only pioneered the use of predictive analytics in box choosing, they are phasing out plastic packaging, and they have purchased technology that allows them to create perfectly shaped boxes for every order.

While there was actually a decrease in packages shipped in 2022, according to Pitney Bowes, there may be an increase in cardboard used. Similarly, manufactures are now replacing product packaging with paper instead of plastic.

The narrative of the shortage includes some authors on the internet citing their publishing companies as being reticent to publish due to the shortage, and even a bride delaying her wedding due to inability to order the invitations.

These anecdotes are interesting, because there was actually an increase in books published, and because there was paper, may just not be the exact style the bride wanted.

What is a shortage?

When the gasoline (petrol) cost is higher, people are less likely to drive. 64% of respondents in a 2022 survey published in Bloomberg admitted to altering driving habits and behaviors due to the price. That said, it wasn’t like 1979 when you could not physically purchase gasoline (petrol). Gas stations weren’t running out of gas (in most cases, in the US). Changing behaviors in response to change in circumstances is normal.

Having a budget means that you choose things based on the availability - or spend the extra time tracking it down.

There are two recent comparisons to consider in my mind: the first is the international chip shortage and the second is the failing of the Silicon Valley Bank.

But first, Beanie Babies.

In 2021, Vice wrote a sort of expose about the fraudulent Beanie Baby market on eBay. People had heard that there had been Beanie Babies sold for tens of thousands of dollars in the 90s, and then they see on eBay that there are Beanie Babies which supposedly sold for tens of thousands of dollars in 2021, it leads a consumer to believe that there is a nostalgia market for Beanie Babies.

Which leads consumers to purchase Beanie Babies in order to resell, and then it is just like NFTs. You will always find people who are willing to champion something because it means that they are then able to drive your understanding of the market.

An analogy would be if you would purchase toilet paper, and then bribe the Weather Channel to report about an incoming weather disaster, and increasing the price of the toilet paper. You aren't necessarily changing the inherent value of the toilet paper, you are changing the perceived value, and the perceived utility.

The price of something in a capitalistic society is whatever people are willing to pay, supply and demand. That is assuming that people have accurate facts. If people are misinformed, they would be willing to pay more. If there really were an incoming weather disaster and there were only limited available supplies, each item would rightfully command a higher price.

You could lie about either the supply or about the demand, and that would affect the price.

The chip shortage of 2021-22 was different. You wouldn’t be able to purchase the computer or car that you want, because there were really no microchips available.

The chip shortage had not only affected 167 different industries including automobiles, but it is the result of disaster - of the destruction of a factory, but the second is the sheer variety of uses that microchips occupy in the world. Between gamers and crypto mining, factories were already at their capacity. This just exacerbated the situation.

When you look at Intel’s 2023 10-K (for the FY2022), they clearly recognize “industry component shortages” as something they overcame, and developed plans to reduce this issue in the future. Similar to the paper industry, they are shifting to an internal foundry model so that they can better manage the entire production process.

With banks, the concept of the bank run is psychological more than financially needed. Many have cited SVB’s narrow clientele, high-net worth individuals. and the lack of physical branches as making it easier to hear a rumor from a friend and moving your accounts immediately. As a comparison, other banks in the same situation did not have a bank run and were able to weather the storm.

There are a few different ways to tell if there is a shortage. One happens when you are attempting to purchase something, and it is unavailable. Toilet paper and bottled water are frequent examples of shortages due to the collective fear of them running out in a time of disaster, so people over-purchase. Even if there were enough supplies to share, human psychology drives the shortage.

Another way to see there is a shortage is when you are able to purchase something, but just at a higher price. As high prices are associated with being a signal for shortages, at times the belief in the shortage is caused by the high price.

Consolidation of Paper Manufacturers

In this case of paper, specifically, one of the signals of shortage was the futures price of pulp, one of the basic ingredients of paper. This came in the wake of a strike at one of the largest pulp mills in Finland, associated with one of the world’s largest paper manufacturers.

But if you look at the 10-Ks of the largest paper and boxes manufacturers, you would be hard-pressed finding a single reference to this shortage. Nearly all available data for US public companies reveal that they had celebrated higher sales and profits, invested in purchasing more mills, hit factory capacity, raising dividends, and had even increased in stock buybacks.

Over the past few decades, there has been a consolidation of mills and factories, each having both horizontal and vertical integrations. Most independent mills have sold out, and the SEC’s SIC page of the industry acts like a graveyard. Additionally, in the US, it was celebrated that an astonishing 80% of boxes were recycled in 2022, leading to an exportable surplus. With the price of shipping, paper is a product that is most likely to be produced and sold locally.

But as one manufacturer wrote snarkily in their 10-K, there is not much connection between the prices of pulp and paper listed in the industry media, and the actual cost for the manufacturer.

As WestRock noted in their 10-K:

“Certain published indices (including those published by Pulp and Paper Week ("PPW")) contribute to the setting of selling prices for some of our products. PW is a limited survey that may not accurately reflect changes in market conditions for our products. Changes in how the indices in PW are determined or maintained, or other indices are established or maintained, could adversely impact the selling prices for these products”.

Leaning into clearly explaining what this means, it means that the price of pulp in China does not affect their price whatsoever, because it’s all done in-house or via local trade swaps. Indeed, it is a bit confusing why the price would change – besides for lumber prices?

“The primary raw materials used by our mill operations are recycled fiber at our recycled containerboard and paperboard mills and virgin fiber from hardwoods and softwoods at our virgin containerboard and paperboard mills. Certain of our virgin containerboard is manufactured with some recycled fiber content.

Our overall fiber sourcing for all of our mills is approximately 65% virgin and 35% recycled. Recycled fiber prices and virgin fiber prices can fluctuate significantly. Recycled fiber and virgin fiber costs increased significantly in fiscal 2022 compared to fiscal 2021. Containerboard and paperboard are the primary raw materials used by our converting operations. Our converting operations use many different grades of containerboard and paperboard.

We supply substantially all of our converting operations' needs for containerboard and paperboard from our own mills and through the use of trade swaps with other manufacturers. These arrangements allow us to optimize our mill system and reduce freight costs.

Because there are other suppliers that produce the necessary grades of containerboard and paperboard used in our converting operations, we believe we would be able to source significant replacement quantities from other suppliers in the event that we incur production disruptions for recycled or virgin containerboard and paperboard.”

And they also did not blame a shortage or a war, rather they admit to having “higher freight costs and some distribution delays” in 2021 and 2022, which is not the same thing as using the word “shortage”.

Xerox doesn’t even cite the high price of paper due to shortage as a reason for their higher revenue from their managed printing offerings.

The leading voices in talking about a shortage were actually the bulk-mailing senders (whether marketers or politicians), who are likely a lot more conscious about the exact price per piece, as opposed to someone who does a printing run once in a while. The USPS even made a comment, which was not actually based in reality.

Expanding the Data Narrative

The shipping and energy costs affect manufacturing costs more than pulp. As Germany was one of the countries most reliant on Russian energy, the war in Ukraine affected their energy costs more than most other countries, to the extent where at least one mill shut down due to high prices. The government even stepped in to help defray the costs of energy. But this led to an actual toilet paper shortage.

The US has actually shipped more pulp this year than in previous years.

If you look at import and export data for the past four years, you would see that there has actually been a general increase in the number of books printed abroad. Even the price of recycled pulp has risen.

Perhaps, more importantly, you’d also see that the $5bn in increased international trade in paper isn’t due to higher levels of ordering, rather higher prices. The $22bn pricetag actually refers to the CIF price, which is the price of a good landed with the tariffs already paid, instead of the actual cost paid to the manufacturer abroad.

There are many cases where fewer items are ordered, yet, the overall cost (with inflation) exceeds the earlier year. You can even see a month over month increase in price per item, by as much as 30%.

So in the vast majority of cases, the price of international commerce and shipping has more of an effect on paper than lack of material. And the manufacturers just go along with the higher price.

Pulp Fiction

There is a conflation of ideas. Until 2023 (at least) the US would accept a higher percentage of recycled material in their pulp than China would allow. Which led to the market in the US being stronger. Yet, still pulp prices are related to the price of pulp in China, Germany, and Finland.

The belief in the existence of a shortage leads to changes in pricing which result in even a greater belief and higher prices. While it is well documented that digital is edging out printed documents, already since the late 2010s. That is not to say that there are locations with very good reasons to have shortages, or that a very high end German paper may be unavailable, but in general, it seems that the misconception of the shortage and the overall misinterpretation of the futures market created a very real difference.

It is similar to how the prediction of a recession can cause a slowdown, even though nothing had actually happened yet. After whisperings of a downturn in a year, tech companies began laying off employees by the tens of thousands, even though nothing actually changed besides perception.

Using Amazon Prices as a Makeshift CPI

If you analyze the price of copy paper on Amazon throughout 2022, you find something quite fascinating.

There are three different types of sales on Amazon: The first is the official Amazon price, and that is when it is “sold by” and “shipped by” Amazon. The second is “New” but not officially sold by Amazon.

So if I buy a pallet of paper wholesale from HP, I’m able to turn around and sell it from my Amazon store. I could decide if I want to have it FBA or if I want to handle shipping myself, but I could decide to list any price I’d like.

And finally, the third major type of sale is “Used”. I believe that in the case of paper, “Used” would be if I bought a retail pack of 10 reams, and split it up into selling reams one at a time.

Amazon has its AmazonBasics white label line, in which the only real way to buy it is directly from Amazon. It would be counterproductive for Amazon to sell a white-labeled product retail and then let someone (somehow) undercut them on their own product.

The fact that multiple companies can all set their own price on specific products leads to weird calculations. For example, as of 10/31/2023, a box of 8 reams of Hammermill Printer Paper (made in the USA) “New” is $70.37. It’s sold and shipped by OfficeWorld Store.

A box of 10 reams of the same exact paper, which is sold and shipped by Amazon, is $55.15, roughly $15 cheaper than 8 reams, and also receiving more. Amazon’s price per sheet is a little more than .011, less than a penny and a half a sheet. OfficeWorld Store’s price is closer to .018. It’s less than a penny difference, but when you are buying 5000 sheets of paper, it adds up.

If you only need 5 reams of paper, Amazon offers a price per sheet of roughly .012 ($29.44). If I want to spend more money on the same thing, Staples (on Amazon) will be happy to sell me the same exact product for $38.61 (or even $41.41 through a different Staples vendor).

If I were to purchase the 5 reams of the Amazon Basics paper, it would cost me $27.50, or exactly .011 cents a piece of paper. All of the “Used” versions are probably returns from the Amazon Warehouse, and you can save about .43 for buying exactly the same product with a little external packaging damage. No one is running up Amazon prices.

While there is a slight aberration on the max pricing for 8 reams of Amazon Basics paper on a single day in February 2022, 10 reams still cost less than that. 10 reams of paper (in the US store) jumped for a single day in September 2022.

Bad Players

The rise of the internet (and especially machine learning) did help shorten the amount of time between a global event occurring and its effects on things around us. eBay was used as a prime example of a perfect marketplace, and the amount that someone would bid on something drove what the public believed that the value of that to be.

But an eBay seller was more similar to the small retailer, but with a stronger potential for publicity. People love sharing seemingly erratic or abnormal bids. Couple that with media sources like blogs being incentivized to increase page views any way possible, it became easier to create narratives trends when none actually existed.

That would be a case of "social engineering", or hacking people's perceptions. But bad players could do a lot more.

During Twitter’s early years, once API access to the firehose was allowed, people tried to use natural language processing to use indicators in tweets to drive investment strategies. If an inordinate amount of people were talking about a certain product or company, they could have automated stocks purchased. There were some humorous articles about correlations between the cinematic releases of certain actors who share a name with a famous brand and the brand’s stock price.

Therefore, an early bad player strategy would be to create bots that mention a stock that you would want to sell, and drive sales that way. Fake press releases and hacked twitter accounts led to market behavior. You weren't necessariy betting on an individual investor falling for it. You were looking to hack the algorithm.

During COVID, we witnessed the gamification of investing and, with the help of r/WallStreetBets and Robinhood, the retail trader has come of age. If a stock was discussed enough on WSB, or if a stock was featured on a RH list, it would be more than likely to rise. It was the return of the "social engineering".

Amazon’s open marketplace changed everything. Now you could sell whatever you want, at whatever price you want, and people are more likely to be going to Amazon when they need something instead of checking out a dozen different sites. Amazon sellers are constantly tracking other seller’s prices for items, changing their price to undercut the opposition by pennies.

But what happens when the opposite happens. When a group of sellers decides to collectively / individually raise their prices. Instead of trying to undersell the lowest seller, you want to charge a premium. Because when that seller sells out of product, you may be the next seller the customer may be shown. When that seller restocks, they’ll see that your higher price item is still selling, and they will undercut you, but have a price higher than they had before. And you can create an upward shift without people noticing what you are doing.

Now, you can actually shift prices live with global events. Amazon acts like a petri dish where you can see cause and effect. A shadow market of sorts, if you will.

Put in financial terms, the smaller retailer and black market participant have high Alpha, whereas the global retailer has a stable Beta.

Crafting a Better Narrative

In the middle of February 2022, Russia invaded Ukraine. Immediately, futures prices for pulp in China and Germany rose, because Russia was one of the largest producers of paper in the world, and adding this to all the other concurrent supply chain issues, smart money bet that the price of paper would rise.

So investors speculated and bought futures. Chinese pulp prices are a barometer for paper prices around the world, even though we don’t actually buy paper or pulp from China.

Entrepreneurial-minded war profiteers began to buy bulk pallets of paper, split them up, and then list it at a premium price. At any given point in time, you can find most things at different prices on Amazon, with people choosing high prices on the off-chance that a few sales will pay off. Or uneducated consumers wouldn’t know the difference.

If you are only searching on Amazon to figure out what the price range of something is, you will be subconsciously biased. Sellers are constantly monitoring prices, and identifying opportunities for arbitrage.

Again, nothing actually happened which directly affected the US.

Paper prices in affected countries like Germany, who had relied on Russia for energy, and therefore the price of manufacturing German paper became so expensive that a few mills shut down, only rose in April and May of 2022, not February.

Japan as well did not register such a huge jump in price until months later.

Propagandists and How to Spot Them

But the "shortage" narrative was already set.

When you see a newspaper article that has a question mark in the title, it’s because they are promoting a thesis and not necessarily stating facts.

There were headlines in the US questioning if there would be a paper shortage. Pundits were talking about how paper ballots for the election were costing more money, because there was a paper shortage.

A member of the paper lobby in the UK, a few weeks later, stated that the Finnish Pulp Mill strike would exacerbate the supply and cause a shortage. But for a member of a coalition of companies to use rhetoric to generate fear against the workers striking is a great soundbite, but is just pure propaganda.

As I wrote above, actual manufacturers did see rises in costs (alongside general inflation) but nothing to the level of what paper rose to during the year. There was no actual paper shortage. There were supply chain difficulties and disruptions, but by and large they did not affect the actual production of paper in the US and Canada.

It began a domino effect: Fear of an impending shortage led to retailers charging higher prices, which is a signal that there is more demand than supply, which led printers to charge more. Manufacturers, already enjoying record profit margins, saw what was happening, and raised their prices (so they would be able to join in the profits). Due to the continuing war, and other signals of supply chain disruption, and what has become semi-annual increases in the price of pulp and paper by the manufacturers (because their competitors were China), the price rose and didn’t really abate.

The Beautifully Rigged Game

Most of the results about the supposed shortage were posted on the blog pages of printers, which would give a reason to increase fees. (This is not to say that there wasn’t a shortage whatsoever of specific specialty papers which were manufactured in Germany, for example, but that is conflating multiple different issues.)

Which led to the increase of the price of all paper products, even though the US purchased less paper, it was at a 30% markup, which led to the $22B import price tag.

While something is worth whatever someone is willing to pay for it, much of the paper issues of 2022 were the results of (war) profiteering and the entrepreneurial American spirit. Even perusing the data, you find that the futures markets affect the price, and drive the narrative.

There is a wide berth between the future and commodities markets, the stock market, and the actual revenues and profits of the manufacturers.

The narrative makes sense, though. There has been a decline in the production of writing paper as companies have been retooling for cartonboard, but companies are also investing billions of dollars in acquisitions and equipment purchasing. Amazon, who is responsible for the logistics of nearly a quarter of all packages shipped, is using less cardboard every delivery. (Regardless of the fact that there were fewer shipments in 2022 than in 2021.)

We all saw the backup at the port of Los Angeles, but by February, ships were moving more quickly. That isn’t to say that the price of shipping didn’t go up exponentially, but again, we aren’t buying bulk paper from Asia (or even Europe). So when someone tells us that there is a shortage, we accept it.

Many pallets which were previously available for purchase were no longer available on Amazon, likely because you can make a lot more money breaking it up than keeping it together. Consumers shifted to purchasing what they needed at the time, not keeping a ton of paper on hand, because at the end of the day, fewer people own printers and copy machines. We are less likely to actually be aware of what something should cost that we buy sporadically, so we become cognitively anchored to the prices we see, even if they may be ridiculous.

All of this is exasperated by the fact that manufacturers are being very careful in what they produce. They do not want to produce an excess of paper, because that will drive the price down.