Moody’s: Rising Energy Prices and Falling Profit Margins Could Accelerate Paper Mills’ Transition to Packaging Grades | Item


According to Moody’s, rising energy prices – which were exacerbated by the Russian invasion of Ukraine last month – are dramatically reducing the profitability of paper companies, with reports that some paper mills are no longer competitive. The company suggests that rising energy prices could accelerate the transition from paper mills to packaging applications, a trend it says is already underway.

Soaring energy prices

Moody’s reports that energy prices have risen significantly since the middle of 2021. A colder and longer than average winter in 2020-21, coupled with catch-up maintenance work following COVID-19 shutdowns, resulted in demand exceeding supply in some cases. As various industries reacted to Europe’s unexpected economic rebound, production picked up, but energy prices remain a significant concern.

Last year, organizations including IVK Europe warned of potential production stoppages due to unsustainable profit margins, while Polymers Comply Europe (PCE) identified energy surcharges introduced by polymer suppliers as a potential challenge for plastic converters. These worries have followed various industries, including paper and pulp, into 2022, despite reports of “bounce back” from the challenges of COVID-19.

Russia’s invasion of Ukraine in February is likely to aggravate the energy price problem. As Moody’s notes, natural gas deliveries from Russia could potentially be halted following sanctions, with the UK and European Union (EU) declaring plans to phase out dependency.

Uncertainty about the course of the war in Ukraine is driving up energy prices. 41% of EU natural gas comes from Russia (based on 2019 statistics), according to Eurostat. ICIS claims that Russia supplies 50% of Europe’s naphtha and 27% of its crude oil. While the EU says it will turn to alternative energy sources, such as renewables, in a bid to address this dependency, it also plans to fill the gap with imports from Iran and other OPEC members.

Moody’s says that due to the reliance of many EU countries on fossil fuels to meet electricity demand, the end price of electricity is correlated to coal or natural gas prices. However, the company notes some regional variations, with Western and Southern Europe apparently harder hit by rising costs compared to the Nordics due to a greater reliance on Russian natural gas.

Manufacture of folded paper

Paper production requires a significant amount of energy, which makes paper companies particularly vulnerable to rising energy costs. As Moody’s reported, last week paper-based packaging company Pro-Gest SpA temporarily suspended operations at around six of its plants in Italy, while Norwegian newsprint and magazine producer Norske Skog ASA has taken similar action at its factory in Bruck in Austria – both apparently due to soaring natural gas prices.

At the same time, Lecta Ltd. announced on Tuesday that it would introduce an additional energy surcharge of €150 per tonne from 1st April 2022. This indicates action taken by the industry, although Moody’s warns that the introduction of surcharges and other price increases could have a negative effect on demand volumes, which it says are “already in structural decline”. On top of that, price increases are associated with a delay of up to six months before they trickle down to profitability, which could be too long for some paper companies to avoid liquidation.

Moody’s notes that some companies are better positioned to deal with rising energy costs. For example, upstream integrated paper companies that generate much of their own energy through combined heat and power generation processes could potentially withstand price increases, according to Moody’s.

For pulp production, upstream integrated paper companies apparently include Sappi Limited, Stora Enso and UPM-Kymmene. However, it should be noted that workers at UPM’s Finnish production plants have been on strike since 1st of January 2022, as UPM failed to resolve the ongoing dispute over its alleged attempt to undermine collective bargaining and organized labor. FINAT says these mills account for more than 25% of all grades of paper used to make self-adhesive label materials in Europe, the group adding this could destabilize supply chains in a number of adjacent industries.

Cogeneration plants also reduce the amount of energy needed for the production process, according to Moody’s. Lecta falls into this category, apparently producing 35% of its pulp consumption in-house – although, as we’ve already noted, the company plans to introduce additional energy surcharges. Similarly, Moody’s points out that Pro-Gest, which uses recycled paper as a raw material, has nevertheless also been forced to partially stop production.

Additionally, Moody’s says hedging strategies could potentially help companies mitigate the negative effect of energy prices on profitability. However, futures prices seem to indicate that the market expects the situation to persist for longer, so the company warns that hedging energy exposure on an ongoing basis could gradually increase energy bills.

A change of direction – but challenges persist

Moody’s predicts that rising energy prices and its impact on the paper industry will continue to drive the trend of mills converting from paper to packaging and specialty grades. Cepi recently reported that paper used in newsprint decreased by 7.4% in 2021, while packaging grades accounted for 58.7% of total paper and board production, a slight increase from compared to 2020.

Norske Skog, which Moody’s has identified as having halted some production, has apparently already started converting its Bruck mill from newsprint to packaging. On that note, recycled newsprint is a key ingredient for packaging types like molded pulp, with reduced newsprint production likely to impact raw material availability. There are, however, innovative solutions being developed; Oregon State University, for example, has developed molded pulp wrappers made primarily from apple pomace.

Even with paper mills turning to packaging applications, the paper and pulp packaging industry is not without its own challenges. As Moody’s points out, Russia’s invasion of Ukraine could also have a significant impact, as both Russia and Ukraine are major timber exporters to the EU. Wood from Russia and Belarus is now considered “conflict wood” and cannot be sold as PEFC or FSC certified products. According to the European Federation of Wooden Pallet and Packaging Manufacturers (FEFPEB), there will be significant pressure on the supply of wood, and therefore pallets and packaging, in Europe in the coming weeks.

Finally, in an interview with Packaging Europe earlier this month, Cepi said of soaring energy prices, partly due to the EU’s reliance on Russian natural gas “To compensate for this, access to clean and affordable energy should be one of the top priorities for the EU. . The paper industry expects concrete and rapid support measures from the EU and national authorities.”


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