After a boom in demand in 2021 and record prices and margins in 2022, the European sack kraft paper market started to cool down in 2023 as players throughout the supply chain focused on destocking plentiful inventories. The high level of inventories in the market resulted in a drop in sack kraft paper demand and a reduction in production and prices, especially for unbleached grades. What can we expect to see ahead?
Fastmarkets’ associate economist and expert in the sack kraft paper market, Camila Jaramillo, presents her research and analysis on the drivers in the sack kraft paper market and the opportunities and challenges ahead in this short-term outlook.
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Read on for the key takeaways from the webinar.
- Russian paper import ban resulted in a boom in EU paper demand in the first half of 2022
- Single-use plastic substitution will continue to grow as a key demand driver
- Net exports of European sack kraft paper are expected to grow with more Russian trade outside the region
- Capacity swings in paper production can impact sack kraft paper supply
- High inflation rates and wood prices become the top cost contributors after the energy crisis
- Sack kraft paper prices are dropping from record highs in 2022
Russian paper import ban resulted in a boom in EU paper demand in the first half of 2022
One of the sanctions imposed by the European Commission over the war was the ban on paper imports from Russia. This caused a demand boom in the EU, mainly in the first half of 2022, with people fearing paper scarcity and purchasing large quantities to ensure availability.
The demand for sack kraft paper in Europe varied significantly in different regions. Overall, demand grew by 6.2% in 2021 but contracted by 1.5% in 2022. Western, Central, and Southeastern Europe showed an increase in demand, while Eastern Europe experienced a significant drop in demand due to the impact of the Russia-Ukraine war.
The impact of the ban varied for different grades of paper. For the sack kraft paper market, it had a considerable impact on market results. Russia is home to some of the largest companies in the market and the introduction of the import ban could result in around 77,000 fewer tonnes of sack kraft paper in the EU market per year, considering the import annual figures from 2021. This situation led to an increased demand in Western Europe for sack kraft paper.
The impact of the ban is also big on the machine-finished and machine-glazed kraft paper markets since 98,000 tonnes of imports came from Russia in 2021.
Single-use plastic substitution will continue to grow as a key demand driver
The European Commission has already been working on reducing the use of lightweight plastic bags in the EU over the past few years through regulations like the Plastic Bags Directive. While the progress in implementing these plastic bag bans has varied for each country, this has driven the demand for sack kraft paper in Europe and had an impact on the industry.
On the other hand, e-commerce and food delivery is also expected to contribute to demand, with the shift in consumer habits being made permeant even in the post-pandemic world.
We anticipate single-use plastic substitution to have a bigger impact on the sack kraft paper market in the future compared to e-commerce, especially for Central Europe since they currently have the highest use of lightweight plastic bags out of Europe.
Traditional demand drivers, such as construction activity, have been contracting in the last year due to high interest rates and inflation. This is expected to improve later on in 2023.
Net exports of European sack kraft paper are expected to grow with more Russian trade outside the region
In 2021, there was a 5% decrease in net exports of European sack kraft paper due to high domestic demand and a 7% decrease in imports due to the supply chain crisis. The ban on Russian imports in 2022 caused net exports to drop by 5%.
In 2023, we expect net exports to grow again with Russian companies becoming more active in trading outside of Europe. They have been successful in finding new destinations, especially in China, Turkey, and South Africa. Russian companies will be important competitors for EU companies exporting to regions outside Europe, particularly for unbleached sack kraft.
Capacity swings in paper production can impact sack kraft paper supply
Some paper producers can swing capacity between sack kraft paper and kraftliner, as well as between sack kraft paper and machine-finished paper, depending on the market conditions. Therefore, drivers impacting the other side of the market can affect sack kraft paper capacity.
For example, we saw a reduction in capacity in 2021 due to a swing towards kraftliner, which experienced a boom in demand for e-commerce packaging. Some of this capacity returned in 2022, but during the second half of the year, we observed a swing in capacity from sack kraft to machine-finished kraft paper. The machine-finished paper segment of the market faced significant challenges due to the energy crisis, leading to the closure of some units and temporary downtime. Consequently, some of the sack kraft capacity was utilized to produce machine-finished paper.
In Q4 2022 we saw a reduction in production to keep prices high when demand contracted. This carried on into 2023 and this slow growth in production will continue for the rest of the year. We are expecting limited new capacity additions for sack kraft paper in the next few years. These will mainly be in Eastern Europe, and as in Western we expect mostly investments in the machine-finished kraft side of the market.
High inflation rates and wood prices become the top cost contributors after the energy crisis
In 2022, the unexpected war between Russia and Ukraine resulted in an energy crisis for Europe. Because of Europe’s high dependency on Russian gas, all industries in Europe were impacted by this energy price hike.
The sack kraft paper industry, which is mostly integrated and produces its own energy, was less affected compared to the machine-finished and machine-glazed kraft paper sectors, where there are many non-integrated companies. These non-integrated companies were more exposed to energy price increases, leading to capacity closures and downtime. The sack kraft industry only purchased 22.8% of their energy fuels overall, with gas representing 3.6% of the total energy used.
Read our insights article on why packaging prices surged in Europe in 2022.
While energy prices have since dropped, not all companies have immediately experienced these reductions due to long-term contracts. Overall production costs are also still affected by high inflation, which contributes to high-interest rates and impacts labor, capital costs and others. In addition, wood prices were particularly high in the first quarter of the year.
Sack kraft paper prices are dropping from record highs in 2022
Last year, we witnessed the highest prices ever recorded in the sack kraft paper industry, with prices increasing by 84% from Q1 2021 to Q3 2022. This was driven by high costs, strong demand and reductions in paper supply.
Prices started to stabilize by the fourth quarter of 2022 and in the first quarter of 2023, prices have started to drop at a slightly slower rate than the drop in demand. We saw reductions of 1.5% for continental EU and 0.7% in the UK.
Fewer transactions due to industry destocking mean the prices may not fully reflect the market’s current conditions. As more transactions occur, prices will likely adjust to the market situation.
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Watch the full replay of the webinar to explore the deeper insights and see the data shown in the presentation. The replay also includes growth expectations for the European sack kraft paper industry, an analysis of the US sack kraft paper industry and the full Q&A session that followed the presentation.
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