What are the impacts of Russia’s war in Ukraine on global pulp markets?

A review by Patrick Cavanagh as he takes a deep dive into the specific impacts of the war on wood pulp markets and revisits initial predictions

As Russia’s war in Ukraine continues further into 2022, we have taken a moment to review some of the impacts specific to the wood pulp markets and to revisit our preliminary predictions. While some of our initial concerns, such as the bleaching chemical shortage in Russia, have subsided, others remain opaque (Finnish wood-fiber shortage) and further risks to supply have emerged on the horizon (a lack of new capacity in Russia and a potential spare parts shortage).

Difficulties in substituting missing Russian fiber 

First off, we’ve examined historical trends in Russian pulpwood and woodchip exports, which are most relevant as pulp fiber, as opposed to larger logs (over 15cm in diameter) that find uses as saw logs or veneer logs, especially birch.

In 2018-21, European Union member states (excluding the UK) accounted for about 70% of Russian pulpwood and woodchip exports, with Finland alone claiming a 64% share over the same period. With the import ban preventing further trade in Europe, only China has remained a significant importer of Russian pulpwood and woodchips in recent months. On a year-to-date basis through July, Russian exports of pulpwood and woodchips are down about 60% or 1.98 million cubic meters.

Focusing on Finland, where the lack of Russian wood fiber is being felt most acutely, we see a similar pattern in pulpwood and woodchip imports in the wake of the invasion of Ukraine. Total Finnish import volumes through May were down 69% or 2.02 million cubic meters, with the lack of Russian imports (down 1.58 million cubic meters) also paired with lower year-to-date imports from Estonia, Latvia and Lithuania (down a combined 44% or 433,000 cubic meters). This poor performance in Baltic imports so far this year has discounted our earlier prediction that more wood arriving from this region would help back-fill the loss of a Russian wood.

The Finnish import statistics have also yet to reveal any influx of hardwood eucalyptus fiber arriving from Uruguay, Brazil or South Africa, despite earlier speculation that perhaps eucalyptus fiber would be imported from the southern hemisphere to help displace the lack of birch fiber.

Prohibitive transportation costs appear to have also stifled this solution, leaving Finnish pulp and paper producers with a narrowing field of substitutes for Russian wood fiber.

Finnish producers expected to trigger BHK capacity swing into BSK

In Figure 3, we home in on the trade of pulpwood and woodchips between Russia and Finland to quantify the potential impact on pulp production (integrated and/or market pulp production) as this trade has ground to halt in 2022.

Woodfiber imports have been converted to thousand air-dried metric ton equivalents to assist in this comparison, with total Russian pulpwood and woodchip imports in 2021 providing enough fiber for the equivalent of 720,000 tonnes of air-dried pulp.

On average over the past five years, Finnish softwood chip imports from Russia have fibered the equivalent of 380,000 tonnes of pulp, while softwood pulpwood have accounted for 25,000 tonnes of pulp. On the hardwood side, chips have provided fiber for the equivalent of 115,000 tonnes of pulp, while hardwood pulpwood for 120,000 tonnes.

It is again worth noting that we have excluded from this calculation the importation of larger logs (with a diameter greater than 15cm), which we do not believe were imported primarily for the purpose of pulp production. The volume of this trade was significant in 2021, especially for birch logs (4.4 million cubic meters) likely destined for plywood mills, and less so for softwood logs (460,000 cubic meters) which likely landed at sawmills.

One of the largest remaining unknowns is the extent to which veneer and sawmill residuals from imported Russian wood were utilized to fiber pulp lines. Another factor contributing to the opacity of this issue is the unknown proportion of residuals and/or imported chips that are utilized as biomass chips as opposed to pulping chips.

All said, we see sufficient evidence for an impact from the Russian wood fiber import ban in Finland equivalent to 500,000-750,000 tonnes of pulp. As a result, we expect to see more Finnish BHK capacity swinging into BSK, where technically possible, and an increased appetite for imported BHK (especially eucalyptus) developing in Europe.

Russian pulp exports down further than expected 

The trade of finished Russian market pulp has also been negatively affected by the war in Ukraine, with total Russian pulp exports down 10% or 114,000 tonnes on a year-to-date basis through June.

Leading this development has unsurprisingly been trade with European Union member states, which saw pulp imports from Russia decline 38% or 41,000 tonnes in the first six months of the year. Some countries have seen an increase in pulp imports from Russia this year, with Turkey seeing the largest increase of 315% or 26,000 tonnes over the same period.

Perhaps most surprisingly, however, has been a decline in Chinese imports (down 8% or 64,000 tonnes) and imports from other Asian countries (down 11% or 19,000 tonnes).

Parsing out the consequences of Russia’s invasion of Ukraine from other market factors, such as the weakness in Chinese pulp demand that developed in the first half of 2022 or the reported lack of bleaching chemicals in the early months of the war, remains difficult, but we can examine the statistics by grade for further insights.

While Russian BSK exports were down 7% (50,000 tonnes) and BHK exports were down 32% (53,000 tonnes) through July, UKP exports were up just 7% (16,000 tonnes), which suggests that the bleaching chemical shortage alone is not enough to explain lackluster Russian pulp exports. Therefore, the weakness in East and Southeast Asian pulp demand has further clouded how we can measure the direct impacts of the Russian invasion of Ukraine.

Regardless, the export statistics have also disproven another of our initial predictions: that Russian pulp producers would swing productions toward more BHK and UKP. This has so far only materialized slightly for UKP, but Russian producers are also contending with increased competition in the Chinese market from Canadian UKP producers this year, following two recent conversions from NBSK to UKP in British Columbia.

Lack of Russian imports brings further consequences for global pulp producers

Reduced access to the domestic Russian market has been a further consequence for foreign pulp producers in 2022.

Total Russian pulp imports were down by more than half (57,000 tonnes) on a year-to-date basis through July. BSK grades saw the largest impact, with BSK from United States down 57% (21,000 tonnes, mostly fluff pulp) and BSK from other nations down 51% (27,000 tonnes, mostly NBSK from Finland and Sweden).

BHK imports were also down about 47% or 9,000 tonnes over the same period, highlighting that lower Russian pulp exports are also likely a result of Russian pulp producers focusing on fulfilling domestic demand for pulp wherever possible.

With no fluff pulp production in Russia, this approximately 75,000-tonne-per-year market will be difficult to displace, although the Svetlogorsk mill in Belarus has recently announced that it has started to produce an absorbent grade of BSK to help fulfill domestic demand from Russia and Belarussian absorbent hygiene product producers.

Further risks to pulp supply ahead

As the war in Ukraine grinds on, further risks to pulp supply have emerged with the potential for both long- and short-term consequences.

In the longer term, sanctions preventing the leading equipment suppliers in the pulp and paper industry, Andritz and Valmet, from doing business in Russia will likely be a significant hurdle for future market pulp capacity expansion projects.

Last month, the Kraslesinvest greenfield project in Siberia reported that it would need to pivot away from its original plan to work with Western European suppliers and instead it would look to work with a Chinese engineering firm with significantly less experience. Meanwhile, with more Finnish capacity focusing on BSK production, the domestic wood supply for future market pulp expansion projects is also in question.

As a result, we believe the prospects for future BSK capacity expansion have significantly diminished in the wake of the Russian invasion of Ukraine, which will likely work to support a higher global average price premium for BSK over BHK and will motivate paper and board producers to utilize more hardwood fiber in the long run.

A more immediate and less defined risk to supply also looms on the horizon as Russian producers face an upcoming maintenance season devoid of the expertise and essential spare parts that the leading Western European equipment suppliers would normally provide. Undoubtedly, Russian producers will look to procure alternatives domestically and from their remaining allies; however, we see the risk for incidences of unexpected downtime emerging from the Russian pulp market ratcheting higher for as long as sanctions remain in place.

Interested in finding out more about pulp prices? Take a look at the key price drivers for pulp in the market from Patrick Cavanagh here. Explore and learn more about our short- and long-term forecasts and how this could help your business plan ahead.

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