Paper Losses

The high cost of mandatory recycling

The old saying, "That's not worth the paper it's printed on" has taken on a whole different meaning. Paper is suddenly worth a lot these days.

With the economy in high gear and no new capacity expected for the next several years, paper prices are rising dramatically. To some extent, this is a classic case of Adam Smith's invisible hand at work. But government's very visible hand also has played a role, imposing recycling mandates that have helped exacerbate the current paper shortage.

The price of newsprint is up 33 percent from February 1994, and more increases are expected to push that to 63 percent by May. Standard-grade magazine paper is rising by 10 percent a month. Northern Bleached Softwood Kraft, a paper grade used for cardboard and other products, which was selling for $400 per metric ton at the beginning of 1994, is now going for $825. So everyone who uses paper products heavily is affected.

Newsprint typically accounts for 20 percent of a newspaper's total costs, so the price hikes are hitting newspapers particularly hard. The Wall Street Journal raised its subscription price 10 percent and announced layoffs of more than 100 employees, citing newsprint price increases as one factor. The New York Times says it will raise its subscription price 13 percent because of "unprecedented" newsprint price increases. (Magazine paper accounts for about 10 percent of REASON's budget.)

In part, the price increases are due to the cyclical nature of the paper industry. When the economy is booming, paper usage goes way up, and so do the prices. When times are bad, prices plummet. Since it takes two to three years to add plant capacity, suppliers can't adjust quickly to changes in demand.

But another factor is the switch to recycled-paper production. "A lot of our new investment is going into deinking or recycling plants," says Barry Polsky of the American Forest & Paper Association, an industry trade association. So while overall capacity is expected to remain flat through 1997, recycled-newsprint capacity is projected to increase 26 percent.

And those investment decisions were not based solely on consumer demand. Twenty-eight states have approved either mandatory or "voluntary" recycled-content guidelines for newsprint, and more legislation seems likely.

The end result of this government intervention is that demand is outstripping supply, and that condition will continue for the foreseeable future. Industry sources estimate that $10 billion will be spent on new recycling and deinking equipment from now to the year 2000.