How Russia’s invasion of Ukraine impacts the European pulp and paper industry

EU short-term shortage is ahead and energy cost inflation could have the biggest impact

A viewpoint from Alejandro Mata, Director of European Packaging and Graphic Paper

It has been almost a week since the start of the Russian invasion of Ukraine. For many of us, the sheer shock of what is happening makes us realize how fragile our way of living is, and how fast things can change. Without minimizing the suffering of the people in Ukraine and the severity of the crisis for Europe and the world, the purpose of this viewpoint is to shed some light on the implications of this war for the pulp and paper industry in Ukraine, Russia, Europe and the rest of the world.

Economic stress and lowered economic growth ahead

Before starting, a few words on the macroeconomic and geopolitical consequences of the conflict: The escalation of aggressions in Ukrainian territory has displaced people to neighboring countries such as Poland, Romania and Hungary. So far, more than half a million people have fled the country, with estimates showing up to 5 million people potentially entering the European Union as refugees as the war continues. This will put various neighboring countries under economic stress, especially Poland.

But the greatest repercussions from a macroeconomic point of view will result from lower economic growth, especially as we expect the growing list of sanctions against Russia to have a knock-on effect on many economies around the globe, particularly Europe. Russia will not leave this conflict unscathed, either. Early estimates show a gross domestic product drop of up to 5% for Russia, a number that will need to be revised as more sanctions are imposed.

Ukrainian paper and board industry at a standstill, with further supply chain problems to come

In Ukraine, the situation is critical. The Ukrainian paper and board (P&B) industry has come to a standstill following the invasion of the country by Russian forces, according to the head of Ukrpapir, the Ukrainian association of paper and board producers.

Ukrpapir director Eduard Litvak told Fastmarkets RISI:

Almost all [P&B] producers suspended production on February 24. The reason is clear – the war.

Furthermore, major shipping companies are staying clear of Ukrainian ports, and many of them are avoiding Russia, too. These include One Network, MSC, Hapag-Lloyd and Maersk, which together account for about half of global container shipping capacity, further strangling supply chains in the region. Undoubtedly, the war is affecting every manufacturing sector in the country. The list of companies that have stopped operations in Ukraine is increasing every day and includes companies such as Japan Tobacco Inc, Coca Cola, Nestle, Carlsberg, Ferrexpo Plc, AB InBev and ArcelorMittal, among others.

With regard to the production and trade of paper and board, the impact of the invasion on global markets will be rather small, even for Europe. Ukraine has some 1.2 million tonnes of capacity – including roughly 750,000 tonnes of containerboard – accounting for less than 2% of paper and board capacity in Europe. Most of the Ukrainian capacity serves its domestic market, but there is a small outflow.

EU could suffer a short-term shortage with restricted Russian imports

On the trade front, Russia is a significant exporter of newsprint, kraftliner and, to a lesser extent, uncoated woodfree papers. However, since the Crimea conflict, Ukraine and Russia have exchanged trade restrictions affecting various paper grades, wood fiber and recycling papers, so effects on trade between the two countries are smaller than they would have been before 2014. Russia imports some 800,000-900,000 tonnes of paper and board, mostly from the EU (mostly boxboard and coated graphics), and that might be at risk. Russia’s import share of demand is above 30% for boxboard and roughly 25% for graphic papers.

From an EU perspective, Russia exports more or less the same amount to the EU every year (mostly kraftliner, newsprint and uncoated woodfree). If we assume trade restrictions will result in the elimination of paper and board coming from Russia, the EU could suffer short-term paper shortages in some segments – particularly kraftliner. 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 over 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. Russia does export to many other regions, with a big chunk going to China and other Asia, so finding an outlet for displaced volumes should not be too difficult, especially as global kraftliner markets remain tight.

Trade restrictions would also affect European exports to Russia. However, losing Russia-bound shipments is a bit more manageable for most grades, as Russia accounts for a small share of total EU exports. Boxboard is perhaps the grade that would be the most affected by the possible trade restrictions, as Russia accounts for up to 20% of EU exports.

Stora Enso today announced that they will stop all production and sales in Russia until further notice due to the ongoing invasion in Ukraine. Stora Enso has three corrugated packaging plants and two wood products sawmills in Russia, employing around 1,100 people. The Company will also stop all export and import to and from Russia. A mitigation plan has been activated to secure availability of input materials from other sources. Stora Enso’s sales in Russia is approximately 3% of total Group revenues.

Annica Bresky, President and CEO of Stora Enso said, “The war in Ukraine is unacceptable and we are fully behind all sanctions.” He continued:

We will now focus all our attention on supporting our customers and the well-being of our employees.

Minimal disruption in pulp supply; possible issues in wood supply

On the pulp side, besides the implications for energy prices and presumably lower GDP growth, other macro events like a stronger US dollar (which is negative for demand for a US dollar traded commodity like pulp) could play a role in our market outlook. Russia’s main pulp export market is China (nearly 60% of Russian exports were shipped to China in 2021), and no disruptions to supply would really be expected there. Russia accounts for roughly 4% of global pulp exports. However, with a 22% share of global trade for softwood lumber and pulpwood logs, the impact on wood supply might become an issue.

Energy supply and cost inflation will have the biggest impact

Without a doubt, the largest impact for the European economy and the EU pulp and paper industry relates to energy and inflation. On the energy side, Europe currently imports roughly 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. This is especially true for countries that depend heavily on Russian gas now, such as the Nordics, Poland, the Czech Republic, Italy and Germany. Since the invasion started, natural gas prices in Europe have increased rapidly, reaching almost €120 per megawatt hour, one of the highest levels we have seen in the past year or so.

From an inflation point of view, besides increased transport costs coming from high natural gas and oil prices, we can expect a wave of inflation in commodities such as steel, aluminum and grains. Ukraine is the world’s second-largest grain shipper. There are already signs of the steel and iron ore industry halting production or finding it harder to ship supplies from Ukraine. Ukrainian steel accounts for up about one-tenth of Europe’s imports, so disruption to mills or shipments will tighten the continent’s already strained market and help keep prices high after they reached a record last year.

Ferrexpo, the world’s third-largest producer of iron ore pellets (used in steelmaking), has all its operations in Ukraine. Furthermore, the growing isolation of Russia from the rest of the world will further fuel higher commodity prices for the rest of the world. Russia is a major supplier of crude oil, natural gas, wheat, corn, barley, sunflower, fertilizers and metals such as aluminum.

We sincerely hope a diplomatic solution to the conflict is found soon, allowing the invasion of Ukraine to end. The longer the war continues, the greater the consequences will be for Russia, Ukraine, Europe and the rest of the world. Our thoughts and sympathy go to all the people in Ukraine affected by the war.

Case Study

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