Impacts of the Russian-Ukrainian Conflict on the Pulp and Paper Industry

The conflict between Russia and Ukraine started with a full-scale military invasion of Ukraine by Russia on 24 February 2022. The conflict has been the major cause of concern to the European trades and economies. Economic stress and lowered economic growth are expected in the coming months. Growing list of sanctions against Russia is expected to have a knock-on effect on many economies around the globe, particularly Europe.

The European pulp and paper industry is also not spared from the impact of the conflict. According to Bernard Lombard, Director of Trade and Industrial Policy of the Confederation of European Paper Industry (CEPI), it is difficult to assess the overall impact that the conflict has on the European pulp and paper industry at the moment as it depends on how the conflict develops and how long it lasts. Instability and unpredictability in the trade and business relations between EU and Ukraine and also between EU and Russia can be seen as the short term effects of the conflict.

In a statement released by CEPI on March 23, 2022, the association and its members across Europe have responded decisively in face of the unjustified military aggression against Ukraine and in the spirit of solidarity with the people in Ukraine at this difficult time. At the time of the statement release, many paper mills across Europe were forced to stop production or to introduce temporary downtimes. This situation puts at risk the jobs of over 4 million people in the industry value chain.

The situation is critical in Ukraine as its paper and board industry has come to a standstill following the invasion of the country, according to Eduard Litvak, Head of Ukrpapir, the Ukrainian Association of Paper and Board Producers. Transportation has also been affected with closures of Ukrainian seaports of Odessa and Mariupol, closures of Ukrainian-Russian and Ukrainian-Belarus borders and blockage of international maritime traffic off the coast of Ukraine. Major shipping companies, such as One Network, MSC, Hapag-Llyod and Maersk are staying clear of Ukrainian ports, and many are avoiding Russia too. However, the closure of the Ukrainian production and trade of paper and board will minimally impact the global markets, even for Europe. Ukraine has some 1.2 million tonnes of capacity – including roughly 750,000 tonnes of containerboard – accounting for less than two percent of paper and board capacity in Europe, and most of its capacity serves its domestic market.

On the trade front, Ukraine and Russia have been exchanging trade restrictions affecting various paper grades, wood fibre and recycling papers since the Crimea conflict in 2014. The effects on trade between the two countries due to the current conflict are smaller than they would have been before 2014. However, EU could suffer from short-term paper shortages in some segments, particularly kraftliner, if we assume trade restrictions imposed on Russia will result in elimination of paper and board coming from Russia. However, capacity ramping up in Europe and better availability from North America as market eases there will provide some degree of flexibility to compensate for the potential loss of Russian kraftliner.

Stora Enso has announced that they will stop production and sales in Russia until further notice due to the conflict in Ukraine. It has also stopped all export and import to and from Russia. Stora Enso has three corrugated packaging plants and two wood products sawmills in Russia, employing around 1,000 employees. The company’s sales in Russia account for approximately three percent of the Group’s revenues. Meanwhile, UPM has also announced its cessation of deliveries to Russia while closely monitoring the situation in Ukraine. UPM Raflatac has a distribution terminal in the Kyiv region with 13 employees and another 800 employees are at the Chudovo plywood mill. UPM’s sales to Russia and Ukraine combined were approximately two percent of UPM’s total sales in 2021.

Stora Enso corrugated packaging (Photo: Stora Enso)

No doubt, energy supply and cost inflation will have the biggest impact to the European economy and the EU pulp and paper industry. A large portion of the EU’s gas supply is at risk as it imports roughly 35-40% of its natural gas from Russia. Countries such as the Nordics, Poland, the Czech Republic, Italy and Germany are heavily dependable on Russian gas. European natural gas prices has increased rapidly since the conflict started, reaching almost EUR120 (USD130.41) per megawatt hour. Besides increased transport costs coming from high natural gas and oil prices, a wave of inflation in commodities such as steel aluminium and grains are also expected.

It is everyone’s hope that a diplomatic solution to the conflict can be found soon, allowing the conflict to end. The longer it continues, the greater the consequences will be for Russia, Ukraine, Europe and the rest of the world.