Authors: Richa Naidu, Martinne Geller
Chicago/London (Reuters)-As toilet paper and tissues are swept away in the escalating international trade dispute, it is not just P&G's PG.N Charmin that is being squeezed.
It is possible that price increases after tariffs will increase the pressure on consumer product companies' profits due to the soaring cost of pulp, which is the main component of paper towels, diapers and sanitary napkins.
Procter & Gamble, a supplier of Charmin toilet paper, Bounty towels and Puffs paper towels, said on Tuesday that it recently started notifying retailers of an average price increase of 5% for all three brands. The company said that it has also begun launching Pampers diapers in North America, with an average price increase of 4%.
Kimberly-Clark KMB.N increased the price of global facial tissues and other tissue products by 2% in the most recent quarter, while lowering its full-year profit forecast.
Pulp is made from wood chips or recycled paper. It is the only ingredient in many tissue products and is part of most diapers and mats. Up to 1,000 rolls of toilet paper can be made from the pulp of a single eucalyptus tree.
According to data from the Pulp and Paper Products Committee, which tracks prices based on global customs data, the price of hardwood pulp has soared by about 60% since the end of 2016. During this period, the price of softwood pulp used in diapers and sanitary napkins rose by 21%.
"They have to raise the price-if you pay 21% for softwood pulp and 60% or more for hardwood, you have to pass this price on to someone or you won't be able to continue business," said the committee Senior Analyst Arnaud Franco.
As the world's largest and fastest-growing pulp consumer, China's demand is at the core of the global shortage. Due to the economic slowdown in China, pulp prices hit a record low in 2016. The economic momentum rebounded in 2017, which stimulated an increase in demand for hardwood and softwood pulp, but due to the unexpected closure of some large pulp mills, the market was unable to meet the demand.
In addition, in order to get rid of the dominant position of the world's waste recycling, China only imported 7.1 million tons of waste paper in the first half of 2018, a year-on-year decrease of 52%. Its ban on the import of unsorted mixed recycled paper came into effect on December 31, which made the Chinese suddenly need a large amount of recycled paper pulp for packaging.
The trade war further complicates the problem. As part of a trade dispute with the United States, Canada imposed tariffs on US$575 million worth of U.S. toilet paper, toilet paper and tissue exports earlier this year.
Industry executives worry that if the United States threatens to impose a tax on another $200 billion of Chinese imports, the next one might be tariffs from China.
Jack Handelsman, senior director of international trade for the American Forestry and Paper Association, said that if China responds in the same way and imposes tariffs on similar quantities of American imports, this will cover the US$2.4 billion worth of US paper and pulp exports to China. .
"China is a very important market for our industry," Handelsman said. "This is definitely not good news."
Pulp is not only a core component of consumer products such as paper towels, but many companies also use packaging made of it. As the production and transportation costs of paper products continue to rise, consumers may have to pay more for daily necessities such as paper towels or sanitary napkins.
Nielsen data analyzed by Bernstein, an investment management company, shows that American shoppers have already spent more on many of these products this year.
Ultimately, the price that shoppers pay depends on the retailer—they balance the price among a range of products—and may not always reflect the cost passed on by the manufacturer. For example, retailers may increase the price of paper towels to avoid increasing their prices on diapers.
Therefore, although P&G stated in June that it has avoided increasing the price of its products despite the higher cost of pulp, American consumers who shop in retail stores this year still pay more for Charmin toilet paper. Bernstein's analysis of the data shows that in the month ending in mid-July, the average US retail price of Charmin rose by 6.4%. (Illustration: tmsnrt.rs/2K1YqsC)
Similarly, the retail price of Bounty tissues began to rise about six months ago, although the retail price of Puffs tissues has mostly fallen or remained flat since the beginning of the year. Procter & Gamble declined to comment on Nielsen's data.
"Pulp is everywhere. When the pulp moves, the well-known golf ball passes through the garden hose, creating ripples in the cost structure of the entire industry," said David Garfield, AlixPartners consumer goods consultant.
In Essity, Sweden, pulp accounts for 25% of its consumption of paper towels. The softness of the paper towels is almost entirely dependent on virgin pulp rather than recycled pulp. The company said its pulp costs increased by 35% year-on-year and swallowed nearly half of its consumer tissue division's potential operating profit margin in the second quarter.
"A year ago, some participants thought that the pulp price increase might be temporary," Essity CEO Magnus Groth told Reuters. "No one believes it now."
Reporting by Richa Naidu in Chicago and Martinne Geller in London; additional reporting by Muyu Xu in Beijing; editing by Vanessa O'Connell and Paul Thomasch
Our standard: Thomson Reuters Trust Principles.
All quotes are delayed by at least 15 minutes. Please see the complete list of exchanges and delays here.