European sack kraft market calms amid economic fears and high stocks

Both unbleached and bleached sack kraft paper in Europe have seen price stabilize in the third quarter of 2022

The sharp beginning of a downturn in the European economy hit the continent’s sack kraft paper market over the summer and into the autumn, with both the bleached and unbleached segments calming to a more manageable pace for the first time in well over a year.

While base prices were largely unchanged to begin the last quarter of the year, a smattering of energy surcharges were applied, ranging from Euro 50/tonne to Euro 250/tonne, according to buyers, but for a minority of volumes. The surcharges were typically on the lower end of that range, and the Euro 250/tonne level was mentioned by just one buyer.

In even fewer instances, in the United Kingdom, some buyers had a small currency surcharge applied to their orders given the volatile exchange rate of the pound. Often, the companies applying these surcharges had lower pricing than other players on the market. In one case, an energy surcharge was applied by a producer, which was then cut in half the next month as energy prices came down.

Unbleached eases into fall

“An overheated sack kraft market has absolutely cooled down,” said one major producer in assessing the situation which exhausted market players largely welcomed.

“It is going better, much better than a few months ago,” said one converter. “A few months ago, it was nearly impossible to get one truck [load of paper] more, now there is more paper availability from some mills” he added.

A number of contacts commented on how quickly the situation had changed.

We have had recessions before. What is unusual with this one is the speed [with which it arrived].

In assessing demand, a producer said that he expected to see “a lot more careful behavior” from converters as buyers are sitting on high stocks. “Converters will order when they really need it,” he added. This is beginning to be reflected in the lead times of some producers, which are said to be shrinking from 16-20 weeks a few months ago to 6-10 weeks now in many cases, and as few as 3-4 weeks according to one.

A converter confirmed this, noting, “[our paper] inventories are quite good because people were purchasing all the paper they could,” and others in the market confirmed that stocks are high throughout the supply chain.

Sensing the situation, producers mostly decided not to attempt a price increase on a softer market. “We have rolled our pricing for Q3 into Q4,” one producer said, and many of his peers confirmed that base pricing was unchanged. This came as a relief to weary buyers. “[Until this quarter], we have received price increase announcements every single month since January 2021,” one converter said. “The era of huge price increases is over,” another converter weighed in. “Producers got where they wanted to be financially,” he added.

One producer who struggled with August’s peak in energy costs said that they attempted to push through an energy surcharge but that it fell flat and was “impossible” to apply, with it succeeding in just 5-10% of cases. “Buyers will not buy new material at a higher price when stocks are so high,” he lamented.

Even with cooling demand, prices did not come under downward pressure to a significant degree, and multiple producers reported that they were still fully booked. Still, there were reports of offers of additional volumes from a handful of smaller producers, and spot prices overseas, which had reached dizzying heights during the market’s peak, were said to have reduced by a couple hundred euros/tonne.

One converter pointed out that Segezha is unloading volumes on the international markets, including in Turkey, Africa, China, Southeast Asia and the Middle East, since they can no longer export to Europe, which likely has an effect on spot markets abroad.

In years past, price and market demand used to be correlated. Now, price is more correlated to input costs.

A producer noted that the price stability in Europe may stem from the fact that “in years past, price and market demand used to be correlated. Now, price is more correlated to input costs,” and a number of other players shared this view. One converter posited that “there is a reluctance [from producers] to reduce prices because we do not know where the market goes from here.” He added that his firm plans to keep its volumes [of paper it is purchasing] steady going into next year, a move which was echoed by others when speaking about their budgeting 2023.

Though there was a broad consensus about the slowdown observed on the market, players did not seem to be worried. “We have had a rather healthy market going through Covid-19 and war,” one converter weighed in. “New applications for sack kraft have grown even more than the industrial bag segment,” he added.

This sentiment was echoed by a number of his peers who believe that even if there is a downturn in the economy which negatively affects, for example, the construction industry, new applications will help to blunt that impact on the broader market. “In the short term, buyers are a little pessimistic, but in the long term, they are optimistic,” a producer said.

Sanctions hit Russian paper

With the European Union’s latest package of sanctions announced, contacts mostly agreed that the prospect of importing Russian paper into Europe would be even harder. When the ban on Russian sack kraft paper became effective in July, there were some reports of sanctions being circumvented by shipping sanctioned paper first to Turkey or Asia and then to Europe, or by changing the customs codes by incorporating recycled pulp into the product. The new sanctions coupled with a lack of desperation due to the reduction in demand suggests that Russian paper will be off the market for the foreseeable future.

Segezha Packaging, which reportedly makes more than a billion sacks annually, with the majority of them bound for western Europe, was said by one converter to have “officially disappeared from the market.” Because of the impossibility of importing Russian paper coupled with a number of major western producers stopping sales to Segezha Packaging in response to the war in Ukraine, “something has to give [with Segezha],” a converter said. One converter posited that the company is managing to acquire paper from Brazil and China.

As a result, while demand has been slowing for sacks used for other building materials, demand for cement sacks, for which Segezha is a market leader, is still relatively good. A number of contacts posited that this is because they are facing severe production shortages.

Bleached follows brown in calming

The bleached side of the market followed the unbleached side in calming. “Our order book is 30% lower than it was two months ago,” said one converter who deals in both unbleached and bleached sack kraft. “But is it because [of the economic slowdown] or because the market has galloped for 18 months?” he added.

“Availability is not an issue anymore,” added another converter. “First, unbleached paper was lacking, then white was lacking, now you can get both within [a normal period of time],” he noted.

“Bleached paper is [used predominately] in Europe and Europe is slow,” said one producer in summing up his feeling on the market.

Still, one bleached paper producer said that his company was sold out until the end of the year. “We are still busy with no quantities left over. But customers aren’t screaming for more paper like they were,” he added.

This article was first published in our PPI Europe newsletter. Find out how you can access the latest market developments in Europe directly from your inbox by speaking to our team.

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