Why are paper prices rising again?

Why are paper prices rising again?

We all know that the pandemic caused dramatic shifts in operating patterns within the paper industry, which resulted in fluctuations in pulp and paper supply, and recurring price increases throughout 2021. Just as this we thought things were settling down, another massive incident on the world stage has again resulted in prices rocketing; Russia invading Ukraine.

Given the status of Ukraine and Russia as key suppliers of timber, with exports alone worth in excess of €12 billion, it’s clear that the paper industry would be acutely affected by the crisis.

Around 900,000 tonnes of paper and board are imported by Russia from the EU, while Russia exports close to 700,000 tonnes to the EU. Regarding pulp, EU-Russia trade is quite balanced with around 400,000 tonnes traded in total.

A first short-term effect of the war in Ukraine is that it is creating instability and unpredictability in the trade and business relations between the EU and Ukraine, but also with Russia, and to some extent Belarus. Doing business with these countries will obviously become more difficult, not only in the coming months but in the foreseeable future. This will have an economic impact, which is still very difficult to assess.

Particularly, the exclusion of Russian banks from SWIFT and the dramatic plunge of the Rouble’s exchange rates are likely to lead to far-reaching restrictions on trade between Russia and Europe. In addition, possible sanctions may lead many companies to halt business transactions with Russia and Belarus.

A couple of European companies also have assets in paper production in Ukraine and Russia which may be threatened by today’s chaotic situation.

Ukraine first, and its commercial partners. Finland (20%), Germany (15%), and Poland (13%) represent together about half of the EU’s paper and board exports to Ukraine, with some 212,000 tons of products. They are closely followed by Hungary (10%), Austria (9%), and Sweden (8%). Germany and Sweden account for 55% of the EU pulp exports to Ukraine. The war will stop these exports, temporarily at least.

Finland and the Baltic States’ exports might also indirectly suffer because of the borders these countries share with Russia. As pulp and paper trade flows between the EU and Russia are quite large, any restrictions to the bilateral trade of goods could impact EU pulp and paper industry significantly. Finland is by far the main exporting country to Russia when it comes to paper and board, representing 54% of all EU exports to this country. Germany (16%), Poland (6%), and Sweden (6%) are also exporting paper and board to Russia, but at much lower volumes. As for pulp, close to 70% of the EU exports to Russia are originating in Finland (45%) and Sweden (25%).

In any case, neighbouring countries, including Poland and Romania, as well as their industries, are also going to feel the impact of the war in Ukraine, mainly because of the economic disturbance and overall instability it creates.

Sanctions already in place are primarily targeting individuals and various financial institutions in Russia. At the time of writing, it is still unclear whether Russia will impose restrictions on the trade of goods with the EU and which sectors they would target. The countermeasures adopted by Russia to date are aimed at limiting the possibility of transferring foreign currency abroad, and the possibility of foreign investors and foreign capital leaving the country.

If we might expect a symmetrical response from Russia to trade bans already enforced by the EU, it is good to note that there is not any EU or national embargo affecting pulp and paper trade to date. Looking at precedents to the current situation, it should be noted as well that the invasion and annexation of Crimea in 2014 did not lead to any ban on pulp and paper imports by Russia.

It remains that any restriction on the trade of goods could substantially affect the paper industry and we will have to remain vigilant as the situation could evolve in many ways and restrictions on wood and wood-based products could be included in the sanctions by either EU or Russia.

Finally, it is expected for fuel prices to further increase because of the current situation, which will lead to even higher costs for all modes of transport.

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