27 September 2015 Paper

Seismic shifts in the paper market

The collapse of Paperlinx was like a devastating earthquake, but now the UK paper supply business is rebuilding itself.

Six months on from the collapse of Paperlinx, the dust has begin to settle on a changed UK landscape for paper supply. Some of the seismic shifts had started before 1 April 2015, the day that administrators moved in on the UK’s largest merchanting group.

But this did not adequately prepare the industry for the shock that a group comprising Robert Horne, Howard Smith Paper Group and PaperCo, had really disappeared.

Today the capacity passing through the Paperlinx companies has been effectively absorbed by the market and after the initial weeks of disruption, (a “feeding frenzy” one supplier called it) paper supply has settled into a new reality.

This has been achieved through mills finding new routes to printers for their papers, by merchants opening new accounts and by some aspects of the Paperlinx business moving to new ownership.

Premier Paper has, for example, taken on Reel Paper, increasing its supply of narrow web reels which has the potential to grow as continuous feed inkjet printing increases.

What has not happened, at least not yet, is the predicted carnage among printers who were expected to be squeezed by the tightening credit lines causing a cashflow problem.

There are, however, reports that substantial sums remain outstanding and that agents for the administrators Atlantic Risk Management Services, appointed to collect the outstanding sums, and banks are all attempting to collect the same sums.

More importantly, it seems that printers have been receiving money in 30-60 days and have been holding it before paying out on the 90- or 120-day contracted terms. At 1 April, Paperlinx was owed £93.0 million. By 31 May, more than £30 million was still outstanding.

There is also anecdotal feedback that in the initial days at least, some printers trying to open accounts with new merchants expected to pay the same prices and on the same terms as they had with Paperlinx companies. “It was as if they didn’t understand that Paperlinx had gone bust,” says one merchant.

Circumstances have played out well: the UK economy has been strengthening and the exchange rate favours UK purchasers. This has eased pressure for price increases while mills have been keen to supply UK printers to maintain their levels of capacity.

UK printers have therefore not been under the same pressure had Paperlinx failed a year or two earlier. In between it had lost the bulk of its business with Lumipaper when StoraEnso decided to go direct for at least a proportion of its UK business.

Managing director Mario de Lieto says that the approach is working and is being understood. Large volumes with plenty of lead time, typified by the heatset web market, can be ordered directly from the mill, the UK site at Mendlesham can supply from its converting unit with several days’ notice, while merchants provide smaller volumes and pallets at short notice.

Lumipaper has been working with the Aims group in this respect, and while both sides admit to a certain amount of creative friction where the terms of service overlap, both also agree that it is working well.

“We are playing a hybrid role in the new market,” he says. “We have found a way of working that delivers synergy for both. We reach parts of the market that are out of reach for merchants, and while there are minor issues, generally we have established a good working relationship, which proves it can be done.”

The mixed route to market is more common on mainland Europe where distance from mill to market is less. The North Sea provides a barrier which StoraEnso

But it is not a merchant. Lumipaper provides only one type of paper. “We are somewhere between the mill going direct but with two weeks delivery and the merchant who can offer same day or next day delivery.”

The merchant can also provide the bundle of papers and products in a “one drop shop” service that makes delivery of smaller quantities of paper viable according to Antalis. It is now unquestionably the largest merchant in the market, yet it is not holding to the monolithic approach that had been successful in the last century.

Part of the background to the Paperlinx collapse seemed to be an inability to adjust to changing market conditions where the same customer might want litho and digital papers, packaging material and wide format suitable products from a single source.

Moreover, says Antalis group marketing director James Jarvis, the merchant has invested in a digital training facility at its Coalville warehouse and has helped customers understand how to make a start in printing banners or other wise format products, looking into colour management issues and what is needed to finish these products.

In short, it is building a consultative partnership approach. In the immediate aftermath of the Paperlinx collapse, phones at Antalis were ringing off the hook and it was all hands to the pump to help printers cope with their supply of paper being turned off at source.

That rush has abated and the extra volume has been absorbed without resort to loading on the overheads. Like others across the merchanting trade, Antalis has taken on people from Paperlinx, but only in handfuls.

“It has been hard work but very positive for us,” says Jarvis. There has been support where possible for customers to meet changed payment terms, but Antalis is sticking to its guns in not supporting phoenix operations. These are going to find it harder than ever to win credit from merchants, Jarvis points out.

What may also change is the willingness to provide same day deliveries where there are minimum order values that exceed the amount that printers want to pay. Antalis is able to include a range of other items in a drop in order to make it financially viable; others may not be able to do so, leaving them to adjust their purchasing cycles. “By being able to offer an assortment of products we can get drop sizes where we need them to be,” he explains.

Aims member company Ovenden Papers has accelerated growth plans to take advantage of the larger company’s demise.

“We have ended up with a very good sales result, way ahead of last summer, even if the last weeks have been very quiet,” says director Simon Pilkington. “Like others we were bracing ourselves for an increase in customer failures, but this doesn't seem to have happened. However, there will be a cashflow impact from those that have been quite over the summer, we will be keeping close eye on them over the next few weeks.

“Ovenden has had plans to push into new areas. The loss of Paperlinx has pushed these plans up a couple of rungs.”

Likewise the expansion of warehouse facilities that Elliott Baxter began last year seems more like remarkable foresight than a calculated risk. The independent merchant hit the ground running as its agreement with Sappi for Galerie coated papers kicked off at the start of the year.

Previously Sappi had worked through Paperlinx. EBB had increased its stockholding capacity across its locations as the Sappi paper replaced arrangements with ArjoWiggins.

In the same vein, Denmaur has been swift to reassure printers looking for the Paperlinx Revive recycled paper is the same as its Amadeus Recycled. It has added former Paperlinx staff, some before the final collapse as the stricken business ought to cut costs, and its has added Arctic Paper’s range of coated papers – another move that had started before the administrator’s knock.

However, Premier Paper has gained most. It bought the Reel Paper division, including Savory Paper, with 30 staff and a location in Castle Donnington from the administrator, is a supplier for Lumipaper.

And from the Tullis Russell demise, it has emerged with ownership of the Advocate, a premium paper for stationery and corporate communications.

The Paperlinx collapse has encouraged some mills to try selling directly via agents in the UK, and there are reports that a ground up paper merchanting business is planning to launch.

What has not happened, as yet at least, is an online proposition, a sort of virtual merchant where all business is conducted through the internet.

How well any new venture performs is open to question because the underlying issues of market shrinkage, down more than 25% since the heady days of 2007 which was a major contributor to the Paperlinx collapse, remains.

The UK’s paper merchants may be breathing a little more easily for now, but it may be a short term respite. Unless further steps are taken to adjust the business model, new problems may already be brewing.

Meanwhile , down in Australia the troubles may not be over for the Paperlinx board. It is under pressure from a number of directions, including a still disgruntled former CEO, dismissed for resisting the demands to close down the European operation.

There are questions about the property portfolio and the composition of the board. And it has still to dispose of its German operation. The earthquake has passed, but the after shocks continue.