How uncertainty in postal services is affecting the paper industry

The U.S. postal service may well be a thing of the past in a few days, going by the spate of losses it has seen in the past years - the first quarter of 2012, the service had a $3.2 billion loss. The latest report brings total losses so far in its fiscal year, which ended Sept. 30, to $11.6 billion, compared with $5.7 billion over the same period a year earlier.

Obviously, a large portion of the fate of the paper industry is dependent on the outcome of the situation the postal services will be in, in a few months from now.

Directly hit by this storm is Domtar Corp. (UFS), the largest North American maker of paper for printers and copiers. The company has shutdown supply of paper machines to four mills since 2007. Without intervention by the government, the postal industry could run into major losses again next year, and this time the damage will be open for all to see.

“Congress needs to act responsibly and move on this legislation,” said the Postmaster General, Patrick R. Donahoe. “We can only go so far.”

Despite projections that show very low levels of cash, and no remaining borrowing capacity, Mr. Donahoe said the Postal Service would continue to ensure that employees and vendors will be paid on time to avoid a disruption of mail deliveries.

In the age of recession, where the market determines your company’s future, the present market scenario isn’t being very kind to most industries, the paper industry included. First-class mail volume has fallen 19 percent since 2001, and it is projected to fall another 37 percent by 2020. From 2006 to 2009 total mail volume dropped from 213 billion to 177 billion items, a 17 percent decrease. By 2020 the USPS estimates further volume declines of about 15 percent, to 150 billion pieces, which would be the lowest level since 1986.

Now, increasing postal rates may seem like a short-term savior to boost revenue but higher rates would also damage millions of businesses dependent on mailing and currently stuck with a monopoly provider of those services. Declining demand and an inability to cut costs are not unique to the USPS, as government postal services in other countries have experienced similar problems.

However, numerous countries have responded by shifting away from a government-run postal monopoly toward market liberalization, including privatizing the government postal agency and opening postal markets to entrepreneurs.

Where this leaves the paper industry remains to be seen.