7 Sept. 2022: It’s getting expensive to make bathroom rolls, which means reduced production, shortages and even higher prices ahead. It’s the same story across Europe’s entire manufacturing sector.

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 anymore.

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 aluminum, cement, fertilizer 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.

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

What a Mess!
German production prices for pulp have surged over the last year and a half as the cost of gas and electricity escalated to a record high.

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 euros ($248) per megawatt hour, compared to an average price of less than 20 euros 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 paper maker Cartiere Saci SpA, recently shared his company’s monthly energy bill on television: It had gone from a little more than 385,000 euros in 2021 to almost 2 million euros 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 a shortage that pushes prices higher but allow 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.

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 euros per metric ton — 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 Co. and Kimberly-Clark Corp. 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 fertilizer. 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.

Javier Blas, Bloomberg