European paper and board industry braces for fallout following Russian invasion of Ukraine

Mill operations suspended in Ukraine and energy supply risks loom over Europe

The Ukrainian paper and board industry has come to a standstill following the invasion of the country by Russian forces, according to the head of the Ukrainian association of paper and board producers Ukrpapir.

“[Vladimir] Putin has entered Ukraine from almost all sides and is waging a bloody war, including against the civilian population, women and children, stated Ukrpapir director Eduard Litvak to Fastmarkets’ publication PPI Europe.

Almost all paper and board producers suspended production on February 24. The reason is clear – the war.

Ukraine produces approximately 1.2 million tonnes of paper and board annually, according to Fastmarkets RISI’s economic analysis team. The country’s biggest producers include the Kyiv Cardboard and Paper Mill (KCPM), which accounts for approximately 30% of Ukraine’s total paper and board output, and the Rubezhansky Cardboard and Packaging Mill, a DS Smith joint venture.

War suspends Ukraine mill operations

A KCPM representative confirmed that the plant had suspended operations. “We have stopped production and the guards are protecting the mill. All paper and board production in Ukraine has stopped – it is real war,” a KCPM representative said. They continued:

All of our funds are going to protect the country.

At the company level, a flurry of announcements have been made by firms with operations in Russia and Ukraine or doing business in the countries.

Stora Enso announced Wednesday that it would stop all production and sales in Russia until further notice due to the ongoing invasion of Ukraine. It will also halt all exports and imports to and from the country. “The war in Ukraine is unacceptable and we are fully behind all sanctions. We will now focus all our attention on supporting our customers and the wellbeing of our employees,” the firm’s CEO Annica Bresky said in a statement.

Stora Enso has three corrugated packaging plants and two sawmills in Russia and employs some 1,100 people there. The company’s sales in Russia account for approximately 3% of total group revenues and the impact on its sales and EBIT is not material, according to the firm.

Mondi, which has operations in Russia that total some 12% of its production revenue, said in a statement that their facilities in Russia were operational, but that its sole bag plant in Ukraine, west of Lviv, had suspended production. Some 100 workers are employed there.

Germany’s Leipa issued a statement saying that logistical bottlenecks appeared to have worsened since February 25 and that while it would stand by its customers, there would be “postponements, delays and cost increases in the coming weeks.”

Chemical producer Kemira, which obtains around 3% of its total revenue from Russia, said on Tuesday that it would discontinue deliveries to both Russia and Belarus as of March 1 and until further notice citing the “ongoing situation in the region.”

Ukrainian packaging mill employees devastatingly impacted

The Prinzhorn Group’s Dunapack Packaging, which operates two sites in Ukraine, in Oleshky and Hodorov, released a scathing statement detailing the death of its employee Pawel Borisov, a 21-year-old box-making line operator at the firm who was caught in crossfire and killed. Two other employees had their homes destroyed by bombs. “The rest of our colleagues are scattered all over, from cellars to bomb shelters to days-long queues on the borders trying to cross over to the EU,” Dunapack said.

The firm said it was “forever grateful” to its colleagues in Poland, Hungary, Romania and Bulgaria who were taking care of their Ukrainian colleagues when they managed to cross the border. “Several shells have hit our corrugated packaging plant. It is enraging and incomprehensible to see your former office destroyed. This war is meaningless. It needs to stop now,” the firm said.

Late yesterday, the International Paper spinoff Sylvamo said it was considering curtailing or temporarily shutting down pulp and paper production at its Svetogorsk mill in Russia at the end of this week due to “inadequate supplies of critical raw materials.” The mill is currently operating while the firm takes steps to mitigate supply chain issues. The mill, which is located in western Russia on the border with Finland, can produce some 720,000 tonnes per year of pulp, paper and board.

Varying global and local trade fallout

While the situation is still very much in flux, there can be no doubt that there will be varying levels of fallout both at a narrow, regional level and more broadly.

In terms of paper and board production and trade, the impact on global markets should be limited, even for Europe, according to Fastmarkets RISI’s director Europe packaging paper and graphic paper Alejandro Mata.

Ukraine, with its 1.2 million tonnes of paper and board capacity, of which some 750,000 tonnes is containerboard, accounts for less than 2% of Europe’s total paper and board capacity, according to Mata, with most of that going to the domestic market.

Read more on Alejandro Mata’s views here.

Trade-wise, Russia exports significant quantities of newsprint and kraftliner as well as some uncoated woodfree (UWF) paper. Mata noted that Ukraine and Russia have already been imposing trade restrictions on each other since Russia’s annexation of Crimea in 2014, impacting various paper grades, wood fiber and paper for recycling, so any new effects will be limited.

However, Russia imports some 800,000-900,000 tonnes of paper and board – mostly boxboard and coated graphic papers – from the EU, and this could be at risk, according to Mata, who pointed out that Russia’s import demand share is over 30% for boxboard and around 25% for graphic papers.

If trade restrictions cut off paper and board coming to Europe, there is a possibility of some short-term paper shortages in certain segments on the European market, kraftliner in particular, according to Mata. “Russia usually sends some 180,000-200,000 tonnes of kraftliner to Europe each year. However, with capacity ramping up in Europe (Stora Enso Oulu), better availability from North America while the market eases there and the ramp-up at Klabin’s Puma II project in Brazil, we should expect a certain degree of flexibility to compensate for the potential loss of Russian kraftliner,” Mata said.

”Russia does export to many other regions, with a big chunk going to China and other countries in Asia, so finding an outlet for displaced volumes should not be too difficult, especially as global kraftliner markets remain tight,” he added.

When it comes to pulp, Russia accounts for some 4% of global exports, with China, where some 60% of its exports went in 2021, being the main destination, Mata noted. He said that no disruptions to supply to China are currently expected. With Russia accounting for some 22% of the global trade in softwood lumber and pulpwood logs, however, wood supply could become an issue.

Logistics in flux and major shippers cut ties with Russia

The logistical situation remains very fluid as well. This week, two of the world’s biggest shipping firms, Mediterranean Shipping Company (MSC) and Maersk, announced they were severing ties with Russia. MSC said that as of March 1 it would halt all cargo bookings to and from Russia, aside from essentials including food, medical equipment and humanitarian goods. Maersk said that effective immediately, cargo bookings by ocean, air and rail to and from Russia would be suspended temporarily with a similar humanitarian exception.

Developments on the roads are also likely to squeeze the logistics chain. According to the European Cargo Association of International Freight Forwarders ELVIS, the leading association of truck haulage companies, there are “immense problems looming for the logistics industry in both Germany and Europe. “The Russian war of aggression against Ukraine could exacerbate the driver shortage to an extent that many supply chains will not be able to withstand,” the association said.

Eastern European transport fleets handle large parts of the truck traffic in Germany. While the share of Ukrainian drivers in this system is not precisely quantifiable, the proportion of mileage handled by Polish trucks in Germany amounts to some 17.5%, according to ELVIS, which means at least half of all transport in Germany is carried out by foreign companies. Many of the drivers employed in Poland come from Ukraine, and the majority of them are no longer able or willing to carry out their work, either because they are part of the general mobilization ordered by the Ukrainian government or are returning home to help with the war effort.

“We’re talking about an estimated 100,000 Ukrainian drivers who are currently in Poland alone and who may soon no longer be available to transport companies. That would be tantamount to a bloodletting that could hardly be compensated for,” said Klaus Meyer, chairman of logistics and mobility at the German Association of Small and Medium-sized Businesses BVMW.

Energy looms over the European economy

“Without a doubt, the largest impact for the European economy and the EU’s pulp and paper industry relates to energy and inflation,” Fastmarkets RISI’s Mata said.

EU energy ministers held an emergency meeting earlier this week to address supply risks. The EU gave the green light to link the European Entso-E power system to Ukraine’s grid after the country disconnected its grid from the Russian system last week and has asked for emergency synchronization with a European system. “This is a strategic initiative for increasing Ukraine’s energy independence,” EU Energy Commissioner Kadri Simson said during a press conference. EU officials said the link should be completed within weeks.

Simson also acknowledged that the situation could have “deep repercussions, one way or another, on [the EU’s] own energy system.” She did not rule out “retaliatory steps” against Europe’s energy supplies by Russia in response to western sanctions. The ministers stressed, however, that the EU could “get through this winter safely.”

“At the moment, gas flows from east to west continue, liquid natural gas deliveries to the EU have increased significantly and the weather forecast is favorable. The use of gas from storage has slowed down and we still have around 30% of storage capacity filled. Ministers have confirmed that their national and regional preparedness plans are ready and updated,” Simson added. Potential for additional or alternative gas supplies are also under discussion.

“Europe currently imports 35-40% of its natural gas from Russia, so the war in Ukraine has effectively put a large portion of the EU’s gas supply at risk,” said Mata. This is especially true for countries heavily dependent on Russian gas, such as the Nordics, Poland, the Czech Republic, Italy and Germany, he added, noting that since the Russian invasion, natural gas prices in Europe had increased rapidly, reaching nearly Euro 120/MWh – one of the highest levels seen in the past year.

Read an economic viewpoint from Alejandro Mata on how the Russian invasion of Ukraine will impact the European pulp and paper industry here.

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