Russian paper import ban could pressure supply in Latin America

Despite low market share in Latin America, market participants anticipate collateral effects of Ukraine conflict

The Latin American packaging market is set to face at least some collateral effects from the war in Ukraine, market participants have told Fastmarkets in recent days.

Data from the Federal Customs Service of Russia compiled by IHS Markit shows that in 2021 Russia exported around 71,500 tonnes of kraftliner to the region. That number represents only 1.5% of all Latin American kraftliner demand, but the volume of imports from Russia has been rising in the past two years amid a lack of local supply and surging demand.

Compared with 2020, Russian kraftliner exports to Latin America climbed by 24.1% last year, after growing by 67.6% between 2019 and 2020.

Russia also exported around 42,000 tonnes of recycled medium, 16,000 tonnes of sack kraft and 15,000 tonnes of testliner to Latin America in 2021.

Latin America is third-largest kraftliner export market for Russia

Combining export volumes shipped to all Latin American countries, in 2021 the region was the third-largest export market for Russian kraftliner, accounting for around 12% of total Russian kraftliner exports. That level puts Latin America on par with Germany, which received 72,500 tonnes of kraftliner from Russia in 2021.

Fastmarkets’ economist for Latin America Rafael Barisauskas stated that the war in Ukraine has resulted in a chain reaction that is now affecting global trade. Notably, several sanctions imposed against trade with Russia could potentially limit shipments from that country in the future.

“Russia is not a big trade partner of Latin America’s for paper, paperboards, boxes or pulp, which at a first glance [indicates that a lack of shipments from Russia] should not be something to worry about,” Barisauskas said. He continued:

But [the war] adds on to a scenario that has been short on supply in the whole region.

The economist added that this is an important problem for smaller buyers in Central America, such as Ecuador.

Ecuador received about half of Russia’s total kraftliner exports to Latin America in 2021, or 34,000 tonnes – equivalent to nearly 10% of the country’s total apparent kraftliner consumption in the year. Russia also exported 11,200 tonnes to Chile and 6,500 tonnes to Peru.

Mexico, the second-largest containerboard market in Latin America, received 7,200 tonnes of Russian kraftliner in 2021.

Energy costs in Europe will pressure Latin American producers to source within the region

“Furthermore, we expect that exports of paperboard coming from other European countries to Latin America will decline in the coming months, as escalating producing costs due to higher energy prices in Europe are forcing producers to reduce or shut down units, cutting shipments to offshore markets. In this context, we understand that Latin American buyers will have to look for volumes in the region or in the US, adding more pressure to an already tight and unbalanced market,” Barisauskas added.

Exports of paperboard coming from other European countries to Latin America will decline in the coming months...
Rafael Barisauskas, Fastmarkets’ associate economist of Latin America

A market participant in Latin America told Fastmarkets that his local containerboard supplier is already talking about new price hikes based on the situation in Europe.

“They are saying that mills over there will have problems to supply paper – also sack kraft – so buyers here should be prepared for increasing prices,” that source said.

The war could increase European boxboard buyer demand in Latin America

Latin American boxboard producers are also expecting that the war may have implications for their exports.

According to one supplier in Brazil, there is increasing demand from European buyers.

“I am getting several calls from European traders asking for paper,” the source said.

Fastmarkets reported that boxboard supply in Europe is already tight. Because of that, Latin American sources believe there will be even more opportunities for exports, with production costs in Europe expected to rise due to the effects of the war on energy prices.

The challenge, another source said, is that Brazilian producers may not have enough volumes to ship because domestic demand is holding at good levels.

Agriculture business is facing worse fallout effects

In Brazil, the largest packaging market in Latin America, the impacts of the war are more related to agribusiness exports than imports.

“Russia is an important outlet for Brazilian agriculture and animal protein products, which represent a significant share of Brazilian containerboard demand. Trade sanctions could lead to fewer exports to Russia, reducing Brazilian containerboard consumption for indirect exports,” Barisauskas said.

On the other hand, Barisauskas noted, Ukraine is an important global grain and food producer, and as the invasion continues, global food supply may be severely negatively affected.

“This opens arbitrage windows for higher Brazilian grains and animal protein exports worldwide – especially to the US and EU – therefore supporting somehow the Brazilian containerboard indirect exports,” he said.

Surging energy prices will impact inflation globally

Another factor emerging from the war is the decline in natural gas supply, with Europe – which imports about 40% of its natural gas from Russia – particularly affected by that drop. Petrol prices have been surging in the wake of Russia’s invasion of Ukraine, and that has had a direct impact on inflation across the board, Fastmarkets understands.

“Higher base inflation may trigger generalized inflation across different industry supply chains as we saw in 2020-21 with COVID-19, especially across food supply chains. Higher inflation, in general, will limit even more domestic non-essential consumption in Latin America, as poor people will reduce even more their consumer goods purchases and limit purchasing to essential goods,” Barisauskas said.

The economist also noted that global uncertainty tends to increase demand for US dollars or other currencies that are viewed as more stable than those in developing countries, resulting in depreciation for currencies including the Brazilian Real.

“Exchange rates are likely to increase compared to the dollar,” Barisauskas stated.

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