QUESTION ONE [45]

Read the extract below and answer the questions that follow:

Pandemic toilet-paper hoarding a wise move as tissue-paper prices surge

T

he toilet-paper industry is a microcosm of the manufacturing sector, where production costs are

skyrocketing in line with soaring energy prices

Who would have thought? It turns out hoarding toilet paper in the early days of the pandemic was a

wise financial decision. If your bathroom cupboard is still stockpiled with rolls, you don't have to feel

ashamed any more.

The toilet-paper shortage of 2020 was an early warning sign of the large supply-chain disruptions

that the global economy was about to suffer. Now wholesale tissue paper prices are surging to an

all-time high a new crisis that indicates inflationary pressures are still building up.

The toilet-paper industry is a microcosm of the much larger, energy-intensive manufacturing sector,

where production costs are continuing to skyrocket in line with soaring wholesale energy prices. It's

the same issue across European industrial commodities from glass, ceramics and synthetic fibres

to aluminium, cement, fertiliser and dozens of other daily-life goods.

Wall Street hopes that the worst of the inflationary wave is behind us. But one look into the industrial

sector via the ups and downs of the toilet-paper industry suggests that price pressures are not letting

up. Central banks will have to tighten their monetary policy in response, even as economic growth, in

Europe in particular, slows down.

An energy-intensive process

As is true for many manufacturers, the core of the problem for toilet paper is the cost of energy.

Transforming wood into pulp and then into toilet tissue is very energy-intensive more so than for

other kinds of papers. In Europe, the process is now prohibitively expensive as natural gas and

electricity wholesale prices surge to an all-time high.

Despite a recent correction from the record peaks set in late August, European benchmark gas is

trading near 250 ($248) per megawatt hour, compared to an average price of less than 20 from

2010 to 2020. European benchmark electricity prices are 15 times higher now than they were a

decade ago.

Lorenzo Poli, the head of Italian papermaker Cartiere Saci SpA, recently shared his company's

monthly energy bill on television: It had gone from a little more than 385,000 in 2021 to almost 2m

in 2022. In another sign of the stress, Hakle GbmH, a large German toilet-paper maker with a

century-long history, filed for insolvency on Monday. The company said that "massive" price

increases for energy and other commodities drove it into "a corner".

I have heard other toilet-paper industry executives complain about similar energy cost hikes 300%

to 400% year-on-year seems to be the norm, rather than the exception.

Until very recently, most European governments have focused on helping households from the

impact of rising prices, largely forgetting the manufacturing industry. From Finland to Spain, manufacturers now worry their only option to stop bleeding cash is to reduce production, which

would create shortage that pushes prices higher but allows margins to recover. Meanwhile, they

are quoting significantly higher prices to their clients, often supermarket chains, than they were at the

beginning of the summer.

From Finland to Spain, manufacturers now worry their only option to stop bleeding cash is to reduce

production, which would create shortage that pushes prices higher but allows margins to recover.

As a result, the wholesale price for European tissue paper (which toilet paper comes from) has

surged this week to an all-time high of about 2,200 per metric tonne up from less than 900

euros in January 2021. And prices are likely to rise further in October, industry executives say. Even

more worrying, the rate of the price increases has accelerated. From January to June, wholesale

tissue costs were rising at about 3% to 5% month-on-month; since July, prices have increased by

10% each month.

The price increases will soon find their way onto the supermarket shelves. So far this year,

consumer-goods companies such as Proctor & Gamble and Kimberly-Clark have hiked their prices

somewhat and reduced the length of the rolls to preserve their margins. On average, industry

executives say rolls are 6% to 8% shorter today compared with a year ago while they are 8% to 10%

more expensive.

A new round of retail price hikes is now coming, at least in Europe. And you can expect to see even

shorter toilet paper rolls in the fourth quarter. Such shrinkflation is getting worse: Instead of toilet

paper rolls just getting shorter, the paper sheets are starting to get narrower, too.

The humble toilet paper roll offers a window into the rest of the manufacturing industry. Of course,

there are great differences between the rolls and, say, ceramic tiles or a ton of fertiliser. But one

common thread among them is that wholesale prices are still climbing, and production is falling. The

shortages will inflate prices even further, despite economies slowing in response to interest-rate

hikes.

Central banks will feel compelled to act via ever higher interest rates, as it's their only lever right

now. But fighting inflation this way is a messy business. And now there will be less toilet paper for

the clean-up.

Source: https://www.google.com/amp/s/www.businesslive.co.za/amp/bloomberg/opinion/2022-09-07-pandemic

toilet-paper-hoarding-a-wise-move-as-tissue-paper-prices-surge/

Questions

1.1. Use demand and supply analysis to explain the price hike. Use the graph below to support

your answer.

D S price p quantity