The Paper and Paper Products Industry makes everything from printing paper, to “peel to stick” labels, to cardboard boxes. A look at a grocery store can see how the industry has influence over daily life: the items on the shelves were transported in corrugated boxes from the producer to the store, the cereal is in a paperboard box made from wood pulp, the “on sale” sign is made from a coated specialty paper, the price sticker is a “peel to stick” label, and the receipt is a thin rolled material. The industry provides a diversified line of products that are essential to industries like Food & Beverage, Apparel Stores, and Trucking.
Despite the natural high demand for the industries products, the industry also face many challenges. The industry is full of large companies with a diversified line of products and smaller narrowly focused companies. For example, the industry leader International Paper Company (IP) makes paper, packaging products, and even has its own distribution service, whereas the smaller Neenah Paper (NP) makes only writing paper. In addition to the steep competition, companies are also facing rising energy and commodities prices, which are driving up production costs and cutting into profit margins. For example, operating margins for Avery Dennison (AVY) fell from 7.8% in 2006 to 5.9% in 2007. In addition, a slowing US economy is decreasing the demand on general consumer goods like toys and certain foods. This adversely affects the paper and paper products industry because when spending on these goods goes down the revenues of companies that make packaging products also goes down.
The paper subset is the staple of the paper and paper products industry. This subset consists of the production of uncoated writing and printing papers by industry giants such as International Paper Company (IP) and Domtar (UFS) as well as the production of specialty papers. Specialty paper ranges from the production of the coated paper that greeting cards are made of, by companies like Nashua (NSHA), to the production of pressure-sensitive material, by Avery Dennison (AVY) used by other corporations to make labels.
All items need to be packaged when going from point A to point B in order to protect the item. Consumer goods such as food and cosmetics need to be packaged not only when going from the producer to the distributor, but also need to be packaged by unit to be put on store shelves. Industrial goods like machines and machine parts need to be safely packaged before ending up at its final destination. Packaging can be broken down into two items: paperboard and corrugated fiberboard. Paperboard is a thin cardboard (think cereal box) that can be used as folding cartons and set-up boxes. Corrugated fiberboard (fancy name for a box) is made out of containerboard, which is just multiple layers of paperboard. The multiple layers of paperboard give the corrugated packaging its strength and allow for big and heavy items to be packaged in it.
Pulp is a dry fibrous material that is used to make paper and can be made chemically or by separating the fibers of wood. Pulp sold in thick sheets and often used at a paper mill is called “market pulp”. Another kind of pulp, “kraft pulp”, is chemically produced pulp using sulfate. Cellulose is a natural fiber from trees and plants that can be used to make a variety of products including paper and packaging products.
The timber business provides forest products, such as wood and pulp, to third party companies. By managing their own timberland, these business are able to make their products straight from the trees they grow. As of 2008, the only major timber based company was Potlatch (PCH). Prior, companies like International Paper Company (IP) and Temple-Inland (TIN) were major competitors in this business, but decided to divest away from the business in 2006-2007.
Rising cost of raw materials and commodities has forced many companies in the industry to implement several price increases on its products. Sonoco (SON) for example, rose the prices on its paper tubes and cores by 8% in January 2008.  Other companies, such as Smurfit-Stone (SSCC), have been forced to shut down facilities to cut costs; Smurfit-Stone shut down its containerboard operations at two facilities. 
The ability to obtain raw materials such as wood fiber, reclaimed fiber, paper, steel, aluminum, and caustic soda, at favorable prices is an essential part of the industry’s success. Paperboard prices saw a $50/ton price increase in the summer of 2008  and recovered paper costs have reached record highs. Higher commodities prices translate into higher production costs for companies, which forces them to either raise the prices of its products by placing the burden on the consumer, or to take the burden themselves by absorbing the higher costs and decreasing profit margins. For example, International Paper’s operating margins fell from 14.5% in 2006 to 7.6% in 2007. 
Higher energy costs are also putting companies in the same predicament as production costs continue to increase. Production plants and its machines are powered by oil and natural gas, both of which are seeing record prices. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins.
A decrease in the demand for products has forced companies like Sonoco (SON) to shut down mills due to “decline in demand for cores and subsequently in coreboard”.  The paper and paper products industry is dependent on the average consumer buying typical goods such as food and electronics but a slowing economy spells trouble for the industry. As consumers cut back on spending,  it leads to a decrease in the demand for these typical goods. The industry, especially the consumer and industrial packaging businesses, is dependent on a high demand of durable goods (goods that are replenished and replaced often) to make money. As the demand for these goods drops, so do the industry’s net sales as there are fewer items that need packaging. In addition, consumers have also cut back on shipping.
In addition, FedEx (FDX) can serve as in indicator to how well the packaging products business is doing. In a slow economy, business and people cut back on the amount of shipping they do in order to cut costs. Less shipping means a lower demand for boxes and paper envelopes that the paper and paper product industry make. In May 2008, FedEx reported that U.S. packaging volume fell by 3.4%.