Europe Will Bear The Brunt Of The Short- And Long-term Timber Market Contraction Due To The War in Ukraine. Paper Packaging Industry Paper Prices.

In a recent report, Wood Resources International (WRI) predicted that Europe will bear the brunt of a short- and long-term timber market contraction due to the war in Ukraine. The organisation predicts disruptions to the global movement of lumber, lumber, wood pellets, logs, wood chips, pulp and paper packaging, with Europe, China and the US all likely to be affected.

01

European situation

The immediate impact of the war in Ukraine and the imposition of sanctions on Russia has been a "dramatic reduction" in forest product exports from Russia, Belarus and Ukraine, according to the World Resources Institute. The three countries will reportedly account for nearly 25 percent of the global timber trade in 2021, with exports of forest products worth $17 billion in the same year.

Since the outbreak of the Ukrainian war in February 2022, most of Europe's response has been to impose economic sanctions on Russia and Belarus, which have disrupted shipments of timber to Europe. Notably, Russia, Belarus and Ukraine supply nearly 10% of total European demand for softwood lumber in 2021, with exports of 8.5 million cubic meters, WRI said.

In a previous report, the World Resources Institute predicted that the log and timber trade in Europe will change significantly in the coming years due to several converging factors. Timber harvests in Central Europe have peaked and are expected to decline from current record levels soon, which could mean the region will transform into a net importer of logs. At the same time, the war in Ukraine is likely to create more uncertainty in terms of trade flows and forest product prices.

These factors will result in a 4% decline in EBITDA for the European paper and forest products company, according to Moody's. The Federation of European Wooden Pallet and Packaging Manufacturers (FEFPEB) points out that Estonia, France, Germany, Hungary, Italy, Finland and the Netherlands are some of the countries most likely to feel the effects of the tightening of timber supplies, as they are important importers of timber , is also an exporter of products such as wooden pallets.

In response to this challenge, WRI explained that European sawmills could divert overseas cargoes to European markets in the short term, which could help mitigate the impact of declining supplies from Russia, Belarus and Ukraine. In addition, major overseas markets such as China, the United States, Japan, and the Middle East and North Africa (MENA) region are highly diversified in terms of product demand, price acceptance, exchange rate volatility, political stability and consumption outlook. This change in market conditions could mean that European exports are choosing to limit overseas exports to suit specific product mixes and risk tolerances, as the region seeks to mitigate challenges to domestic supply of timber and forest products.

As a long-term solution, some wood production companies may consider investing in new capacity. However, as already mentioned, log supplies in many parts of Europe are becoming increasingly tight, which could complicate this option. Moody's said challenges facing the paper and forest products industry, such as supply instability and rising energy costs, could prompt some mills to switch to packaging paper.

02

global challenge

The impact of the Ukrainian war on the forest products market is not limited to Europe. Countries and regions such as the United States, Canada, Japan, Taiwan, Australia and New Zealand have imposed sanctions on Russia. As a result, timber shipments to some locations outside Europe have also stopped, again presenting a similar challenge of tight supply.

While some countries have opted not to impose sanctions on Russia, Russian and Belarusian companies have apparently struggled to conduct financial transactions and access credit due to embargoes imposed elsewhere. As a result, exports of forest and wood products appear to be slowing even to those countries that continue to trade with Russia.

Additionally, wood originating in Russia and Belarus is now considered "conflict wood". This means that it cannot be used in any PEFC or FSC certified products, further weakening the supply of wood and forest products in these countries.

The World Resources Institute claims that Russian sawmills are the main source of timber destined for Europe and cannot quickly or easily switch to markets where sanctions are not imposed in the short term. While China, which has not yet sanctioned Russia, accepts about 47% of softwood lumber exports from Russia, Belarus and Ukraine, there are logistical challenges in getting lumber from northwest Russia to China by ship or rail.

As a result, the Ukraine war has had a significant overall impact on the global timber and forest products market. With the impact likely to be felt globally, which could complicate the way regions such as Europe try to respond locally, the WRI predicts the disruption will be felt for an extended period of time.

03

What does this mean for the paper packaging industry?

The WRI noted that the impact of tighter wood supplies could lead to changes in prices, availability and supply chains for wood pallets, pulp and paper products. According to FEFPEB, the supply of wooden pallets in Europe could be under huge and increasing pressure due to the war in Ukraine. Some countries are said to source up to 25% of their pallet and packaging wood from Russia, Belarus and Ukraine. Wooden pallets are a key requirement for the movement of many goods around the world, which could lead to further disruptions to the flow of products as global supply chains continue to be strained.

As for pulp and paper, the impact may depend on the application. According to Moody's, the carton packaging industry implemented price increases last year to offset rising input costs. Revenues for this segment of the wood and forest products industry could reportedly grow by 6% over the next 12 months. However, Moody's also pointed out that earnings across the industry will decline and that the growth trend in the paper packaging industry will not be enough to offset declines in other areas. While Cepi reports that the paper and board industry is "rebounding" from the challenges of the Covid-19 pandemic, it explains that even before the Ukraine war, the supply and demand for materials such as pulp faced significant uncertainty.

Cepi has since written to the European Commission requesting assistance for the paper and pulp industry amid rising costs. Slowing production at European paper mills threatens the jobs of more than 4 million people, while the supply of paper packaging used to transport and deliver vital downstream industries such as food and medicines could come under pressure, the group said. Cepi's call for the industry to be deemed essential so that it can "stay alive" suggests current and emerging challenges could have serious consequences for the timber, forest products and adjacent packaging industries.