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European paper industries are largely powered by natural gas and electricity. Wholesale prices of these key cost drivers skyrocketed in the second half of 2021 to their current record-high values. The monthly average of both Nordpool day-ahead electricity and EGIX natural gas front month German reference prices have more than tripled from the beginning of the year. The price of carbon dioxide (CO2) emission rights in EU has also increased substantially, although not quite as dramatically as electricity and natural gas.
However, the effect of this massive cost inflation is not equal for all paper mills. Even if all producers feel the effects of inflation one way or the other, its magnitude strongly varies between them due to several factors. The following list is by no means meant to be complete, but at least these factors are considered likely to offer an increasing competitive advantage in the current situation.
Fastmarkets RISI’s Analytical Cornerstone cost benchmarking tool always shows the average quarterly mill gate price estimates within each region. It gives the best available proxy for the actual production costs of the industry, with the option to apply both regional and mill-level scenarios with varying raw material price levels.
The full effect of the wholesale prices does not necessarily have a direct impact on mill gate prices. Both companies and individual mills have various mechanisms to protect themselves from the extreme price fluctuations of their key cost drivers, although the ability to utilize them also varies. Those who have been able to operate with futures markets and hedging products, or otherwise negotiate long-term contracts, obviously have much better prospects than those who have chosen, or have been forced to, rely on spot-price-based electricity and fuels. Large companies are typically better positioned in this context, as they have often both better negotiation status and more resources to utilize the cost stabilization mechanisms.
As shown in the chart above, the price difference between electricity and natural gas prices has recently increased. Many paper mills, even those who operate with 100% natural gas fuel, have varying amounts of co-generation capacity. Even if there are losses in the conversion of natural gas into electricity, plus the cost of the additional CO2 emission rights, we can still conclude that the bigger the difference, the more profitable the co-generation business.
On average, the last three months have probably been some of the most profitable periods to operate gas-fired co-generation plants, even without subsidies. At extremes, this may sometimes mean that some or even all other mill operations are temporarily idled to maximize the electricity output for sale.
Many paper mills have invested in technologically advanced boilers, which are able to incinerate varying mixes of waste and biofuels. Such investments have been substantial, often in the range of €30-60 million, but there has been a good return on the money. Even before the current inflation, the cost of steam and co-generated electricity produced from these fuels has been substantially lower compared to producing them from fossil fuels. Even if the operational costs of the waste and biofuel boilers have seen certain fluctuations as well, it is safe to say that on average their competitiveness is only improving when fossil fuel and electricity prices increase. Most of these fuel fractions also have minimal or even zero fossil CO2 emissions.
A special case of this category is the mills with chemical pulp lines, which can also burn black liquor and often achieve at least energy independence, while the best ones can have even substantial green electricity sales to the grid.
Technologically advanced paper machines typically have multiple advantages over aging equipment. One of them is lower energy consumption, which obviously translates into a higher difference in cost competitiveness when energy prices increase. In the electricity consumption of a full papermaking line, for example, 20% differences can be easily found also in Europe, which may mean a quite different magnitude for different grades and depending on energy prices. For example, a modern recycled containerboard line may consume only around 0.4 MWh per tonne, while there are also several machines with 0.5 MWh per tonne consumption. The cost of this saved or additional 0.1 MWh per tonne, depending on perspective, is quite different if the electricity price is 50 €/MWh or 100 €/MWh. The effect only increases in products like tissue, where the difference between modern and old technology can easily be 0.2 MWh per tonne, as a modern line can produce at around 0.8 MWh per tonne, while many aging machines consume over 1.0 MWh per tonne.
Paper producers in those nearby regions where energy costs have so far remained significantly lower are feeling the least negative effects. For example. the available statistics in Russia, Northern Africa and the Middle East hint that local energy price inflation has been very modest compared to Western and Central Europe. Many local producers have suddenly seen an increased cost advantage against traditional European importers, who are also burdened by the equally skyrocketed logistics costs.
On the other hand, those who are able to export to the high-demand European markets, may find very attractive opportunities, assuming they can find and afford containers or trucks to deliver their products in the current logistic mayhem – but that is another story.
You can learn more about mill cost competitiveness and risk scenarios from our latest study, here.
Learn how to monitor packaging prices using cost and price indices and understand the underlying cost drivers, from material cost to labor, energy and more. Examples include cartonboard, liquid container and paper bag.