The paperless office is still more fantasy than reality these days, but that doesn't mean that all is well for the paper industry. As highlighted by InternationalPaper's (NYSE:IP) warning yesterday, these are still challenging times for the group.

The company warned that earnings would come in well below current estimates. Instead of the mean analyst estimate of $0.38, International Paper's management is looking for earnings in the area of $0.25 to $0.30 per share.

According to First Call, one analyst had an estimate of $0.56 for the quarter. I don't envy that analyst, who had to call clients and try to explain that discrepancy.

While the first quarter of the year looked encouraging, demand for industrial packaging materials and printing paper fell off -- so much so that a lack of orders forced more downtime at the company. Given that papermaking is at its best as a continuous process, that's a problem.

Also troublesome for International Paper and the industry as a whole, higher costs are doing their damage. Papermaking requires not only wood pulp, but also large amounts of energy and chemicals. As everybody knows by now, energy prices are high; so are prices for chemicals and wood. Couple these rising costs with stagnant demand and increasing Asian imports, and you see the problem.

International Paper likely won't be the only one to suffer -- at least among those highly exposed to packaging. Greif (NYSE:GEF) already reported a tough quarter, and I'm sure analysts and fund managers will be watching the likes of Smurfitt-Stone Container (NASDAQ:SSCC) and Rock-Tenn (NYSE:RKT) quite closely now.

All is not well across the pond, either. A strike in Finland has essentially shut down the nation's paper industry -- bad news for the likes of UPM-Kymmene (NYSE:UPM) and Stora Enso (NYSE:SEO).

Though it's not all doom and gloom across the entire range of the paper industry, investors need to be extremely selective with their picks. On the whole, this is an industry with a bright future in its past. With difficult cost structures, growing overseas competition, and little pricing power, investors must make sure they're not buying into paper tigers.

Paper, paper, everywhere -- and you still can't get enough of it? Head on over to our International Paper discusion board for lively Foolish banter on the subject.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).