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Since the second half of 2021, European tissue producers have been confronted with rising energy costs. The cost of natural gas, the most important energy source to the European tissue industry, jumped from an average of €20 per megawatt hour (MWh) to €70 per MWh on average in the second half of last year. And the Russian invasion of Ukraine has worsened the energy situation in Europe. In 2022, gas prices have continued to soar, reaching over €300 per MWh in September 2022.
However, in the coming months, the issue will be not only price, but availability. Russia has already reduced or even completely halted gas exports to most countries. Deliveries to Poland and Bulgaria were stopped in April because they refused to pay for Russian natural gas deliveries in rubles. Other countries have since been gradually excluded from Russian natural gas supplies, including the Baltic States, Finland, the Netherlands, Italy and Sweden.
According to our estimates, if natural gas shipments continue at their current levels, Russia will only supply 47% of the volume it exported in 2021. Part of the deficit can be replaced by imports from other suppliers such as Norway, Algeria and Azerbaijan and with liquid natural gas (LNG) deliveries from others. If natural gas deliveries to Europe are maintained at the current level, the shortfall will amount to 2.3 billion cubic meters (bcm) by the end of the year compared with 2021.
In the second article of our multi-part series on the impact of Europe’s energy crisis, we focus on the impact of natural gas cost and availability on tissue producers, as well as what we expect to see the situation develop in 2023.
Read part one of the series here
Although supply seems to be secured until the end of 2022, the situation for 2023 looks bleaker. Various forecasts assume that 20-30% of Russian natural gas imports cannot be substituted in the short term, even though European countries have planned or already completed numerous projects in recent months to reduce dependence on Russian natural gas.
For example, in September 2022, Poland inaugurated the new Baltic Pipeline, which can deliver up to 10 bcm of natural gas from Norway to Denmark and Poland. Germany plans to install floating storage and regasification units (FSRUs) with a total capacity of 22 bcm until the end of 2023, two of which, with a total annual capacity of 6.8 bcm, will begin operations in December 2022. Europe is planning to increase its LNG import capacity by a total of 49.55 bcm in 2023.
Even if the envisaged increase in LNG import capacity could replace a large part of the Russian supply, it must be noted that 100% utilization is more theoretical than practical.
As a result, a return to the price level of €10-20 per MWh seen over the last decade is ruled out for at least the next few years and European consumers will have to adjust to significantly higher energy costs for the near future.
As mentioned, estimates vary, but up to 30% of natural gas previously imported from Russia could not be replaced in 2023. This would force tissue producers that purchase a large volume of natural gas to temporarily cease operations.
According to Fastmarkets’ Analytical Cornerstone, 83.4% of European tissue capacity depends on natural gas. Unlike other paper grades, where there is a significant share of integrated producers, who can use the heat and/or by-products generated during the pulping process, most tissue paper is produced by non-integrated (65% of capacity), semi-integrated (17%) and recycled producers (18%). Non-integrated and recycled producers have the highest dependency on natural gas, at 92% and 83%, respectively.
We have calculated two possible scenarios based on the current natural gas supply situation and planned LNG import capacity increases to determine how much of Europe’s tissue production capacity could be affected by a possible natural gas shortage.
In both scenarios, we assume that the natural gas needs for households and electricity generation will be prioritized over the needs of industries and other purposes. The share of overall natural gas consumption varies by country, sometimes significantly. In Germany and Italy, natural gas is an important energy source for industry, electricity generation and private households, while in Finland and Sweden, natural gas plays only a minor role in private households.
Italian tissue producers would be most affected by supply shortages in both scenarios. In Scenario 1, an estimated 23% of Italian tissue capacity, or 461,000 tonnes, would potentially have to be idled, while in Scenario 2, as much as 35% or 692,000 tonnes would be taken offline.
Other essential countries for tissue production, such as France, Germany and Poland, would also be significantly impacted by supply constraints. Depending on the country and scenario, between 9% and 21% of tissue production would be threatened. However, there are other important tissue producers, like Spain and the United Kingdom, for whom supply constraints will likely be far less severe.
The maximum capacity potentially in jeopardy if Russian imports cannot be replaced for these suppliers is 4% or 34,000 tonnes and 3% or 22,000 tonnes, respectively.
In the short term, it is challenging to track idled production for particular industries. However, in recent months, various economic think tanks have reported that energy-intensive industries in Europe have throttled production. As a result, overall natural gas consumption in Europe decreased by 16% in the second quarter of 2022. Furthermore, the Belgium-based Bruegel research institute estimates that natural gas consumption in the EU industrial sector decreased by 13% (January-October) compared with 2021.
As early as spring 2022, there were reports of temporary production stoppages in the tissue industry because gas prices had risen so drastically. For some, it was no longer possible to produce profitably, while for others, higher revenues from the sale of gas under long-term contracts generated more income than tissue production.
Various members of the European Union have already taken measures to cap natural gas and electricity prices. Spain, for example, is restricting the price of natural gas to €48 per MWh, while the consensus price cap in the European Union is €285 per MWh. France has restricted energy price increases to 7% for 2022 and a maximum of 11% in 2023. However, lower energy prices decrease the willingness to reduce consumption, and could accelerate the energy crisis and supply bottlenecks in Europe.
Want to get more in-depth insights the impact of the energy crisis? Speak to our team to learn more about our Analytical Cornerstone tool and how that can help your business navigate the risks.
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