Potential impacts of Red Sea crisis on Asian paper packaging trade flows?

There is a lot of uncertainty around how disruptive the Red Sea crisis will be on trade flows. Reports suggest that it is adding costs and extending shipping times as major shipping companies opt to sail around the Cape of Good Hope rather than through the Red Sea. In some instances, it appears that for now the impact of higher freight rates is manageable and may just lead producers to push for price increases. In other instances, the impact may be to shift trade flows due to higher costs, leading buyers to look for alternative sources. We thought it would be worthwhile to look at trade data on sources and destinations of packaging paper trade for Asia and provide some preliminary thoughts on the impacts that may occur.

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Let’s start by looking at Asian containerboard trade flows. Figure 1 provides data on sources of Asian imports of recycled containerboard grades. This data is based on Asian country customs trade data as available, with figures for some Asian markets relying on source country data. The chart clearly shows the dominance of intraregional trade flows, with Asia supplying an estimated 88% of its recycled linerboard imports and 81% of its corrugating medium imports.

Asian recycled containerboard import trends

For recycled linerboard, the volume that seems most vulnerable is from Western Europe, which in 2023 accounted for 7% (324,000 tonnes) of Asian receipts. The risk exposure is apparent from the sharp drop off in 2022, when higher costs made shipments from Western Europe less competitive.

After Asia, the next largest corrugating medium providers are Eastern Europe, which accounted for 9% of supplies in 2023 (425,000 tonnes), and Western Europe, which accounted for 5% (220,000 tonnes). Much of these volumes are lightweight medium being produced on newsprint machines and often used as interliner or cushioning for e-commerce packaging, and almost all of the Eastern European volume comes from Russia. We expect that this volume will not be disrupted given its low-cost position and the option to transport via rail to China (where it is destined). The Western European volume, however, may be vulnerable, although in 2022 corrugating medium did not see the kind of contraction that was seen in recycled linerboard. This may have been the case because some of the corrugating medium going to Asia is semichemical medium, which may be needed for strength in some end uses.

Finally, Western Europe accounted for about 7% of Asia’s kraftliner receipts in 2023 or about 100,000 tonnes. These volumes will definitely be vulnerable, but they may have been anyway given the likely pressure from rising shipments from Ilim’s new kraftliner machine at its Ust-Ilimsk mill, which came on line last July and started commercial production in October.

Asian exports of recycled containerboard grades predominantly go to other Asian countries and therefore will likely see minimal disruption. In 2023, 97% of both recycled linerboard and corrugating medium exports went to other Asian countries, with the remainder going to Africa, the Middle East, Oceania and Latin America. With the exception of Oceania, this trade could be disrupted, but given the modest volumes, the impact on the market would be mild. The bigger impact on Asia’s recycled containerboard market will involve how much the crisis raises the price of OCC and how much pressure it may put on recycled containerboard prices within Asia.

The impacts on boxboard trade flows, however, could potentially be more noticeable because Western Europe ships more boxboard than containerboard to Asia and China is a significant exporter of boxboard, with significant volumes going to destinations outside of Asia, especially in 2023.

As shown in Figure 2, intra-regional trade within Asia accounts for the largest share of Asian boxboard imports, although Western Europe and North America also account for a substantial volume. This likely relates to quality characteristics that Asian suppliers are not able to provide at this stage. Furthermore, the cost differentials are not that large, allowing non-Asian suppliers to continue to place product within Asia. There may be some vulnerability for outside suppliers, but in our view, Western European suppliers will largely maintain export levels to Asia due to quality needs and established customer relationships, albeit possibly with negotiations on price to accommodate any added transport costs.

China, South Korea and India were the top three Asian boxboard exporters in 2023. Shipments from these suppliers could prove vulnerable because considerable volumes go to destinations with routes impacted by the Red Sea crisis. The shares of exports destined for Western Europe, Latin America, Africa and the Middle East for China and India are substantial: 29-37% for China over the last three years and about 50% for India in 2022-23. South Korea is a little less exposed with a share for these regions at a combined 12% in 2022-23. For China, reductions in exports will just add to its oversupply.

Overall, there are definite vulnerabilities to packaging paper trade flows, more so involving boxboard than containerboard. The impact, naturally, will be higher costs, which in some cases could lead to higher prices. But the ability to pass on these higher costs to customers will vary, depending of course on price differentials and the availability of volumes from alternative sources with similar quality. Given the excess boxboard supply in Asia, reduced opportunities for export could reduce producers’ ability to push through price increases.

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