by Rebecca Pfeiffer, Smith-Corona
If you are a manufacturer, it is tough to beat the low cost of international raw material sourcing. Countries like China, India, Indonesia, Bolivia, Brazil, Russia, and Mexico are able to offer materials at incredibly low prices because of their low labor and production costs. This is especially true if you are selling a commoditized product, such as thermal paper.
One critical component of thermal paper is leuco dye. Leuco Dye is the key ingredient in direct thermal paper, which is the paper that is commonly printed on and used for barcoding, receipts, shipping labels, airlines tickets, and much more.
As with all other raw materials of thermal paper, leuco dye production became a race to the bottom, as all manufacturers looked for the lowest possible price. Consequently, almost all of the leuco dye production used has found its way to being manufactured in China, by only a handful of companies. These few manufacturers were simply able to offer the lowest prices and therefore drove every other major competitor out of the business.
These low prices come with a great risk, however. If any one of the manufacturers were to close unexpectedly, the market for leuco dye could suddenly become very short on supply. The recent closure of a Chinese Manufacturer, Connect Chemical, has done just that.
In early September, Connect Chemical, along with thousands of other Chinese manufacturers, were shut down by the Chinese government because of recent changes in the country’s environmental regulations. This was a part of the national effort to rectify China’s infamous pollution issue.
Connect Chemical alone was responsible for 50% of the entire world’s production leuco dye. In total, an estimated 80% of the world’s supply of leuco dye has been halted by these newly enforced environment regulations.
After this news was announced, the prices for leuco dye skyrocketed to 5 times its normal price.
Shutting down Connect Chemical has begun to put a gigantic squeeze on the thermal paper supply chain worldwide and could have a huge impact on several different industries moving forward.
Now’s the Time to Implement Domestic Sourcing
This mass shutdown in China has had a major supply chain impact, especially considering the timing of it all. The holiday season is a busy one for a lot companies. This means increased shipping and increased consumer purchasing behavior -- If you couldn’t guess...shipping labels and receipts are kind of necessary for that.
Direct thermal labels are used in barcoding, shipping, and inventory tracking. These are heat-sensitive paper labels that have leuco dye embedded in them. Once the labels pass under the heated printhead, the dye is activated, allowing the print to be seen. Many manufacturers, converters, and resellers of these direct thermal labels are struggling with this recent shortage. Most have already announced price increases.
The rapid increase of demand and lack of supply has left many companies at a loss of what to do. Many manufacturers that required leuco dye to produce their goods have either gone out of business or have been forced to drastically increase their prices on labels and receipt paper.
With this sudden closure of Connect Chemical, several of the 7 major direct thermal coaters were left scrambling to meet top coated paper demand.
Those coaters located closest to Connect Chemical were the ones most heavily impacted by the shutdown. In an attempt to stay lean, these nearby coaters were practicing just-in-time (JIT) inventory. While this was an efficient decision for the short run, it did not leave any wiggle room for any sudden drop off of supply.
Once Connect Chemical was shut down, a ripple effect was set into motion. US based thermal paper manufacturer, Appvion (formerly Appleton Papers), produced between 40-50% of all coated paper in the United States. On October 2nd, 2017, they were forced to file for Chapter 11 bankruptcy.
Appvion no longer had access to leuco dye, preventing them from manufacturing their thermal paper. Due to this, their prices have increased by 29%. If they increase their prices, label manufacturers, who use coated paper, have no choice but to increase their products as well.
South Korea-based conglomerate, Hansol Papers -- one of the world’s top 7 paper coaters -- had only a 2 week supply of leuco dye when the closure of Connect Chemical was announced.
Additionally, the global shortage has stopped several international paper coaters from taking on any new US customers.
Other direct thermal coaters, such as Mitsubishi have sent letters to their customers describing how serious the situation just might become:
“The possibility cannot be ruled out that due to this situation there may also be a production shortage or stop as of January 2018”
This was an overnight worldwide shortage of thermal paper that could not have been foreseen. So many companies could have avoided this if they had sourced domestically.
Domestic sourcing allows for better inventory control -- AKA less risk -- and shorter time to market. And as an added bonus, shipping charges are much lower.
When sourcing internationally, it is crucial to be cognizant of potential -- and unfortunately common -- supply chain interruptions in the region in order to mitigate risk. These could be geopolitical or logistical barriers, such as government regulations (ex. Leuco dye manufacturers in China) or inclement weather.
If leuco dye was produced in the US by a supported company, this dire situation would have had a much smaller impact on the worldwide supply chain operations of thermal paper.
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