Leading Leuco Dye Manufacturer Shutdown Causes Significant Disruption in Direct Thermal Paper Market

by Michael Clarke, with Richa Gupta | 01/05/2018

The market for thermal paper and labels experienced a production hiccup starting 2017 as Chinese authorities temporarily closed Connect Chemicals, the leading manufacturer of thermal paper solutions, to modify operations in compliance with environmental regulations and bring it up to standard. This blog details the business impacts and outlook due to the leuco dye supply shortage on the printing market.

As Connect Chemicals is the world’s primary supplier of leuco dye, a vital ingredient to producing direct thermal paper, its decision to (indefinitely) close the production plant in China starting September 2017 has caused a short supply in the marketplace. Thermal paper mills have also slowed overall production, if not stopped them entirely, resulting in a global shortage. Connect Chemical owns an estimated 30 to 40% of the global dye demand for thermal coaters (and approximately 70% of demand in Europe and Asia, according to market estimates); therefore, a manufacturing shut down has significant direct implications for end users who rely on direct thermal paper. Appvion, the largest direct thermal paper mill in the USA that also filed for bankruptcy protection in Q4 2017, announced another round of price increases on their economy-grade POS thermal paper, raising prices by 29% since July 2017.

This supply constraint has caused several major players in the barcode labeling market to increase product prices that use leuco dye. Among these major label manufacturers is global leader, Zebra Technologies. Vendors and their supplies partners, like Barcodes Inc. and SystemID, have now announced priced increases in the range of 10-15% for end users (for POS receipt paper and barcode labels) that come into effect starting February 2018.

Apart from the leuco dye supply shortage, various other macroeconomic factors have affected the pricing and supply of thermal paper. Among the leading factors causing the price increases are a strong US economy, natural disasters, and a rise in the price of raw materials. The cost of freight has increased due to a strong US economy demanding transportation to ship goods and Hurricane Harvey further straining the trucking industry. The strength of the US economy has also affected profit margins for paper mills and converters due to increased wages and the devaluation of the US dollar, down 12% in 2017, has caused higher costs for imported raw materials. In addition, the cost of raw materials integral to the creation of thermal paper has increased, including pulp paper up 20% over the last 18 months, adhesive and polyester film increased as much as 40% due to the damage of the hurricanes.

Ultimately, while the leuco dye shortage stands out as the most significant reason for these planned price increases, other factors have also come into play including price increase of raw materials, strain on the shipping industry, and other macroeconomic reasons. Even when Connect Chemicals is back up and running at its full capabilities, the thermal paper market will still face the price pressure of expensive raw materials and the effects of a strong US economy. Until the overall cost of raw material reaches its pre-hurricane levels in the US, we can expect higher prices for thermal paper in 2018. Furthermore, this price increase is likely to have an ancillary effect on businesses in retail, ecommerce, and shipping services that rely heavily on direct thermal paper for POS receipts and direct thermal or thermal transfer labels to track and deliver goods.

View the 2017 AutoID & Data Capture Research Outline to learn more.

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