Category Update

Just as the paper industry was enjoying a glimmer of hope, 2022 has gotten off to a rocky start with labour shortages and an energy crunch compounded by mill strikes and a war. OPI looks at the ramifications – by Michelle Sturman

Despite the struggling global supply chain, labour shortages and economic difficulties as the world tries to bounce back from COVID, global demand for uncoated freesheet (UFS) grew last year.

According to the Cutsize Monthly Monitor, January 2022 report from paper sector consultants EMGE, cutsize paper demand across Europe in 2021 rose by just over 2%, shipments increased about 8%, while capacity dropped 7%, drastically improving operating rates versus 2020. Worldwide demand for cutsize paper, meanwhile, grew 2.3%.

EMGE says industry feedback in January 2022 revealed the cutsize market index in Europe fell because of weaker apparent demand – due to buyers facing difficulties obtaining paper – and worsening short-term business prospects. This was regardless of delivery lead times and prices attaining their highest levels since EMGE’s survey started in 2011.

In addition, buyer inventory levels dropped to their lowest in more than a decade. Opinions canvassed in January revealed that although market conditions remained positive, the index slipped slightly compared to the previous month. Domtar Customer Marketing Manager John Parke believes the US market for office paper had a slight recovery versus 2020. “The sector has been declining annually by about 4%. So, to see growth in 2021 represents recovered demand lost during the beginning of the pandemic.” He adds that there is the potential for additional demand recovery when more corporate offices reopen.

TOPSY-TURVY

For the full year of 2021, Mondi reported year-on-year revenue growth of 11% for its Uncoated Fine Paper segment. Sylvamo – formerly International Paper’s Printing Papers division – reported sales that were almost 17% higher.

Portugal-based Navigator benefitted from a surge in demand for its uncoated woodfree (UWF) paper, with sales increasing 23%, while those for the Communications Paper division at Finnish manufacturer UPM grew by 8%.

However, although taking advantage of higher pricing, sales at Packaging Corporation of America’s Boise division fell as it was unable to offset rising energy costs.

Finland-based Stora Enso reported a decline in revenues for 2021, although paper remains a diminishing concern as the company continues its transformation into a renewables packaging firm. The net result is the closure of several mills in Sweden and Finland and the conversion of another to kraftliner production. It has also put four of its five remaining paper mills up for sale.

But Stora Enso is by no means the only manufacturer to shut down mills or convert machines. This scenario is being repeated by

There is the potential for additional demand recovery when more corporate offices reopen

Sanctions on Russia are putting further pressure on wholesale energy prices vendors globally and has already eliminated almost two million tonnes of paper from the supply chain in recent times.

Sustained gas and electricity price rises, as well as those related to logistics, resulted in subsequent paper price hikes from vendors during 2021, and the situation has now worsened due to the invasion of Ukraine by Russia. Navigator, for example, has implemented several increases this year so far. The latest, in the form of an energy surcharge on all UWF products, equated to $120 per tonne in the US and $115 in EMEA.

Says Liz Wilks, European Director for Sustainability and Stakeholder Relations at Asia Pulp & Paper (APP): “The requirement for paper has been improving steadily with the return to the office, the reopening of schools, and a resumption of business travel.

“However, supply is constrained due to disruptions in Europe and Asia as well as tight shipping conditions mainly because of limited container availability, higher freight costs and port congestions. These elements and the sharp rise in energy and input costs are contributing factors to price increases.”

INDUSTRY IN CRISIS

Indeed, the energy crunch has led the Confederation of European Paper Industries (Cepi) to write a letter to the European Commission to “express [its] grave concern about the devastating and long-lasting impact of unprecedently high energy prices on [the] industry’s ability to continue operations in Europe and to stay competitive in a global market.”

In an accompanying statement, Cepi said: “Our sector is particularly hit by the spike in energy prices. At the time of writing [23 March], many paper mills across Europe were forced to stop production or to introduce temporary downtimes […] We are now calling for our sectors to be recognised as essential suppliers in several critical European value chains and to be eligible for state aid and preferential gas deliveries.”

Macro environment factors also continue to affect the pulp market. Trade credit insurance firm Euler Hermes reports that, as of the end of September 2021, pulp prices in Europe have risen by 53%, while in Asia, they rose by 47% year on year. Initial projections for 2022 were for a slight price easing, but increasing energy costs plus the war in Ukraine place this in serious jeopardy.

With the recent sanctions on Russia and its status as a major pulp producing country, market intelligence consultancy Brian McClay & Associates believes that in the short term, this will hurt already fragile supply chains and increase demand for non-Russian softwood pulp. Moreover, there’s a material risk of capacity curtailments within the country which would exacerbate the current tight global pulp stock.

Furthermore, several paper manufacturers have been invested in Russia for a number of years and are now having to deal with the sanctions. Mondi, for example, says its Syktyvkar mill is still operational – and is legally required by the Russian authorities to provide part of the local area’s energy supply – but was starting to see constraints which may impact mill operations.

Sylvamo also has a significant interest in Russia and announced on 7 March that it was suspending operations there. UPM and Stora Enso have ceased imports and exports to the country and shut down mills and plants.

Adding fuel to the fire – or not as the case may be – PEFC has said all timber originating from Russia and Belarus is now considered conflict timber, while FSC has suspended all trading certificates and blocked wood sourced from both countries. For an in-depth analysis of the impact on our industry due to the war in Ukraine, see also News Analysis, page 6.

Further aggravating the situation is an ongoing strike at UPM’s mills, imposing more pressure on paper capacity. The Paperworkers’ Union strike began on 1 January 2022 and, at the time of going to press, had been extended until 30 April.

According to one well-informed industry insider – speaking to OPI on the condition of anonymity – the current crisis means it is likely we will continue to see machine conversions, mill closures and even manufacturers closing their doors permanently this year.

MARKET CONSTRAINTS

This perfect storm is exerting unprecedented strain on paper volumes in Europe. Stephan Sweerts-Sporck, Head of Investor Relations and Corporate Communications of industry newcomer Mayr-Melnhof, says although the market has picked up, the drop-out of supplies from Russia plus low imports from Asia has constrained European supplies.

He adds: “There is lower production capacity and availability, with further substantial price hikes due to rising energy and raw material costs.”

The aforementioned industry insider revealed that global inventory levels are already in a dismal state, with all producers on some form of internal moratorium or allocation across the board with their customers. If this situation persists, there will likely be other cutbacks on trade, making paper even more scarce and difficult to source.

As it stands, leaders of two European office supplies companies – both of whom wish to remain anonymous – told OPI that sourcing paper has become a grave issue.

One confirms: “The fact of the matter is, the shift by producers from paper to packaging, and now the UPM strike and the war in Ukraine mean European paper volumes are in very short supply. We’re struggling to source paper, even from companies we’ve worked with for a long time. If the situation doesn’t revert back to normal soon, we may have to look outside Europe and import paper from the US, South America or Asia.”

The second anonymous contributor agrees that his firm is facing the same troubles as the rest of the business supplies channel – rapidly increasing prices and tight supply – sometimes down to 30% of normal demand. “Due to high freight rates, sourcing paper from overseas was previously not an option, but this might be reaching a turning point now as continental mill prices keep on increasing and shipping costs are coming down, albeit only slightly.”

Sébastien Tréguier, Head of Marketing and Communication at France-based reseller Bureau Vallée, fears paper is gradually becoming a luxury item. “For Bureau Vallée, while paper consumption is trending the same as last year, availability is increasingly being reduced. Some product ranges will disappear because of this,” he says.

Industry woes are not restricted to Europe. In the US, says Domtar’s Parke, the supply of UFS is now lower than pre-pandemic. To help with reduced inventory levels of office paper, Domtar has reopened a machine that will add extra paper production in 2022. Furthermore, its Lettermark collection of office papers has grown to include an array of pastel colours.

Handling paper for US wholesaler S.P. Richards (SPR), Merchandise Manager Jeff Harmon hopes the supply chain issues and soaring prices do not escalate the demand decline. “SPR has strong and well-established relationships with nearly every paper mill in the world. None are immune to the myriad of challenges facing the sector, which are ultimately wreaking havoc on the supply and demand dynamics of the market.

“I have personally been involved in the merchandising of copy paper for over 20 years, and have led SPR’s efforts for the last 12. I have never seen anything like this,” he says.

A SUSTAINABLE FUTURE

Putting the current chaos aside, there are a few trends worth mentioning, namely hybrid working and sustainability. Paper continues to play a vital role in our lives at work, as APP’s Wilks notes: “Important or long documents are still printed, notebooks are used in meetings, and digitisation has made it possible to print on increasingly niche, purposed and personalised paper.

“In addition to this, it has been shown that writing by hand encourages creativity and boosts retention of information.”

Mondi Uncoated Fine Paper Marketing and Sales Director Devan Naidoo, meanwhile, says with hybrid working agreements in place since the pandemic, there has been a higher demand for smaller packs of printing paper that is optimised for inkjet printers often used in home offices.

Industry players confirm the issue of sustainability as increasingly important to consumers and they are acting accordingly. Wilks strongly believes the younger generation will make a major difference in the way brands embrace environmental action. Generally, they are more invested in the impact of being greener, and these are the people who will lead the companies of the not-so-distant future.

There’s a serious business case for environmental and social governance. “People think it’s going to cost money, with no business benefits,” she notes. “However, to be sustainable, you also have to be economically viable. It’s a collaborative effort along the supply chain.”

Although magnified by the pandemic, Naidoo says sustainability has been visible for years. Mondi’s commitment was recently recognised in late 2021 when the company received the Cradle to Cradle certification at Bronze level for its uncoated fine papers produced in its European mills.

Meanwhile, Bureau Vallée – renowned for its focus on sustainability – is excited about the development of its Jet’up Green paper. “It is a 100% recycled paper made in France and it has animated the category. Clients have quickly become fans and we are going to keep developing this range with ecological and economical products,” says Tréguier.

Mondi’s Syktyvkar mill in Russia

European paper volumes are in very short supply