The 2019-2024 Outlook for Paper and Allied Products in the United States

The 2019-2024 Outlook for Paper and Allied Products in the United States

  • June 2018 •
  • 625 pages •
  • Report ID: 5447300 •
  • Format: PDF
This study covers the latent demand outlook for paper and allied products across the states and cities of the United States. Latent demand (in millions of U.S. dollars), or potential industry earnings (P.I.E.) estimates are given across some 12,600 cities in the United States.

For each city in question, the percent share the city is of its state and of the United States as a whole is reported. These comparative benchmarks allow the reader to quickly gauge a city vis-à-vis others.

This statistical approach can prove very useful to distribution and/or sales force strategies. Using econometric models which project fundamental economic dynamics within each state and city, latent demand estimates are created for paper and allied products. This report does not discuss the specific players in the market serving the latent demand, nor specific details at the product level. The study also does not consider short-term cyclicalities that might affect realized sales. The study, therefore, is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved.

This study does not report actual sales data (which are simply unavailable, in a comparable or consistent manner in virtually all cities in the United States). This study gives, however, my estimates for the latent demand, or potential industry earnings (P.I.E.), for paper and allied products in the United States. It also shows how the P.I.E. is divided and concentrated across the cities and regional markets of the United States. For each state, I also show my estimates of how the P.I.E. grows over time. In order to make these estimates, a multi-stage methodology was employed that is often taught in courses on strategic planning at graduate schools of business.

Another reason why sales do not equate to latent demand is exchange rates. In this report, all figures assume the long-run efficiency of currency markets.

Figures, therefore, equate values based on purchasing power parities across geographies. Short-run distortions in the value of the dollar, therefore, do not figure into the estimates. Purchasing power parity estimates were collected from official sources, and extrapolated using standard econometric models. The report uses the dollar as the currency of comparison, but not as a measure of transaction volume. The units used in this report are: US $ mln.

1.3 THE METHODOLOGY
In order to estimate the latent demand for paper and allied products across the states and cities of the United States, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created.

In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions.

Latent demand functions relate the income of a state, city, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium is realized.

For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question.

Ignoring, for the moment, exogenous shocks and variations in utility across geographies, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem.

In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function.

He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume.

This type of consumption function is shown as "B" in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data). This type of consumption function is show as "B" in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant. For a general overview of this subject area, see Principles of Macroeconomics by N. Gregory Mankiw, South-Western College Publishing; ISBN: 0030340594; 2nd edition (February 2002).

Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles.

In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households with no income eventually have no consumption (wealth is depleted).

While the debate surrounding beliefs about how income and consumption are related is interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for paper and allied products across the states and cities of the United States.

The smallest cities have few inhabitants. I assume that all of these cities fall along a "long-run" aggregate consumption function. This long-run function applies despite some of these states having wealth; current income dominates the latent demand for paper and allied products. So, latent demand in the long-run has a zero intercept. However, I allow different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences).

Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for paper and allied products. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories and geographic locations, not just paper and allied products in the United States.

1.3.1 STEP 1. PRODUCT DEFINITION AND DATA COLLECTION
Any study of latent demand requires that some standard be established to define "efficiently served". Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key indicators are more likely to reflect efficiency than others.

These indicators are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, I have found the assumption that the highest aggregate income and highest income-per-capita markets reflect the best standards for "efficiency".

High aggregate income alone is not sufficient (i.e. some cities have high aggregate income, but low income per capita and cannot be assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income).

Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, and the World Bank). Depending on original data sources used, the definition of paper and allied products is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential products and/or services that might be incorporated within paper and allied products fall under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the "whole". Rather, it starts with the "whole", and estimates the whole for all states and cities in the United States (without needing to know the specific parts that went into the whole in the first place).

Given this caveat, this study covers paper and allied products as defined by the North American Industrial Classification system or NAICS (pronounced "nakes").

The NAICS code for paper and allied products is 322. It is for this definition that aggregate latent demand estimates are derived.

Paper and allied products is specifically defined as follows:
322 Industries in the Paper Manufacturing subsector make pulp, paper, or converted paper products. The manufacturing of these products is grouped together because they constitute a series of vertically connected processes. More than one is often carried out in a single establishment. There are essentially three activities. The manufacturing of pulp involves separating the cellulose fibers from other impurities in wood or used paper. The manufacturing of paper involves matting these fibers into a sheet. Converted paper products are made from paper and other materials by various cutting and shaping techniques and includes coating and laminating activities.
The Paper Manufacturing subsector is subdivided into two industry groups, the first for the manufacturing of pulp and paper and the second for the manufacturing of converted paper products. Paper making is treated as the core activity of the subsector.

Therefore, any establishment that makes paper (including paperboard), either alone or in combination with pulp manufacturing or paper converting, is classified as a paper or paperboard mill. Establishments that make pulp without making paper are classified as pulp mills.

Pulp mills, paper mills and paperboard mills comprise the first industry group.
Establishments that make products from purchased paper and other materials make up the second industry group, Converted Paper Product Manufacturing. This general activity is then subdivided based, for the most part, on process distinctions.

Paperboard container manufacturing uses corrugating, cutting, and shaping machinery to form paperboard into containers. Paper bag and coated and treated paper manufacturing establishments cut and coat paper and foil.

Stationery product manufacturing establishments make a variety of paper products used for writing, filing, and similar applications. Other converted paper product manufacturing includes, in particular, the conversion of sanitary paper stock into such things as tissue paper and disposable diapers.
An important process used in the Paper Bag and Coated and Treated Paper Manufacturing industry is lamination, often combined with coating. Lamination and coating makes a composite material with improved properties of strength, impermeability, and so on.

The laminated materials may be paper, metal foil, or plastics film. While paper is often one of the components, it is not always.

Lamination of plastics film to plastics film is classified in the NAICS Subsector 326, Plastics and Rubber Products Manufacturing, because establishments that do this often first make the film. The same situation holds with respect to bags.

The manufacturing of bags from plastics only, whether or not laminated, is classified in Subsector 326, Plastics and Rubber Products Manufacturing, but all other bag manufacturing is classified in this subsector.
Excluded from this subsector are photosensitive papers. These papers are chemically treated and are classified in Industry 32599, All Other Chemical Product and Preparation Manufacturing.