Here’s Why a Leuco Dye Shortage Has Plagued Thermal Paper Supply

Update: on November 1, 2018, we published an update to this article looking at the impact of the leuco dye shortage going into 2019. 

In recent months, the thermal paper industry has been hit hard by a sudden and unexpected drop-off in the supply of a crucial raw material used in its production: leuco dye.

While the recent unforeseen scarcity of leuco dye has strongly affected thermal paper producers and consumers globally, its origins are overseas and are the result of a foreign government’s crackdown on pollution.

The Chinese Government Shut Down 40% of Its Factories in a Crackdown on Emissions

In late 2017, China’s government began taking a more proactive approach in regulating environmental laws. One main facet of this approach was to reduce emissions and regain the reins on the country’s infamous air pollution problem.

To meet this goal, the country announced a plan to reduce its concentration of hazardous fine particulate matter from 47 micrograms per cubic meter to 35 micrograms by the year 2035.

The result was a crackdown of unprecedented scale: nearly 80,000 factories have been hit with fines and criminal offenses – including jail time for factory owners in some cases – as a result of their emissions.

In fact, as a result of the inspections, an estimated 40% of the country’s factories have been shut down at some stage since September of 2017 to accommodate inspection by environmental bureau officials – some on a temporary basis, and others permanently.

Chinese Factory Shutdowns Created a Massive Global Shortage of Raw Materials

The crackdown in China has had a ripple effect across the world throughout a number of sectors, particularly in commoditized products. For a number of industries that rely heavily on internationally sourced materials, this ripple has become a tidal wave that has cut supply substantially and driven production costs up monumentally.

Chemical Factory Shutdowns Cut Global Production of Leuco Dye by 80%

Chinese manufacturer Connect Chemicals – which dominated the world’s leuco dye production – was no exception from the government’s crackdown on emissions.

In September, 2017, Connect Chemicals was shut down alongside a number of other leuco dye producers – halting an estimated 80% of the entire world’s production – causing the price of the dye to skyrocket by 500%.

The Thermal Paper Industry Was Hit Hard Due to its Heavy Reliance on Leuco Dye

Leuco dye is a primary and crucial component in the production of thermal paper products. Used commonly in a plethora of applications – from barcoding to ATM and retail receipts to parking violations and citations, casino and gaming facility printing and even shipping labels and airline tickets – thermal paper has applications in a huge range of sectors.

With such wide-ranging applications creating a massive demand for thermal paper, production of leuco dye – along with other raw materials required for producing thermal paper – became a race to the bottom. Manufacturers sought the lowest possible price to accommodate scale and, as a result, almost all of the world’s leuco dye production ended up in China, where producers were able to undercut the competition and effectively drive them out of business.

As is the risk with any oligopoly, this shift in production created a massive dependency on a small handful of producers that, despite their scale, are still at the mercy of many external factors – including government regulation. This, in turn, put entire industries in a precarious position.

The shutdown of the Connect Chemicals factory and the subsequent shortage of leuco dye put a tight squeeze on the world’s thermal paper supply chain and resulted in late and missed orders, increased costs and even caused bankruptcies of companies who rely on the dye for production.  It has also ultimately resulted in higher prices for Canadian thermal paper customers.

While the thermal paper industry hasn’t been the only one to feel the effects of the government crackdown, it has been hit particularly hard because of the sheer volume of leuco dye produced in China and the number of factories that were shut down in such a short timeframe.

There’s No Definitive Timeline for Stabilization of the Thermal Paper Industry

The shutdown of Connect Chemicals and the resulting impacts on production costs and supply chain were largely unforeseeable, and the future remains just as unpredictable.

While the Chinese government’s crackdown on regulating environmental laws will ultimately increase the country’s gross domestic product in the long run and ensure a substantial step towards cleaner air and clearer skies for the country, the immediate impacts of these new initiatives will continue to be felt in industries that supply and utilize thermal paper.

Despite reports that Connect Chemicals has recommenced production, it’s unclear as to the capacity at which the manufacturer is operating.

While some reports indicate production could be as high as 75%, thermal paper coaters have yet to see industry-wide relief on this issue, leading experts to believe that the market will remain in shortage for at least another six to nine months.

What You Can Do to Protect Yourself and Your Business

Northern Specialty Supplies has been implementing solutions to minimize the effects felt by its customers including broadening its acquisition of inventories to include multiple manufacturers to prevent shortages as well as accounting for longer lead times – particularly with custom printed paper.

Until global production and supply of leuco dye stabilizes, Northern Specialty Supplies advises paper consumers to take proactive steps to ensure operations remain as seamless as possible by allowing substantially longer timelines for manufacturing.