As Europe’s paper and pulp industry reckons with high costs, lower demand, and overseas competitiveness, McKinsey delves deeper into the potential for digitalized paper mills to help companies improve their operations, commercial management, and capital allocation.
Rising costs, weaker demand, and growing competition are all considered challenges to the European pulp and paper industry.
The population of the European Union is expected to decline by 1.5% from about 452 million in 2025 to 445 million in 2050. Over the same period, the share of residents aged 65+ is set to increase from 22% to 29%. This outcome is expected to weaken consumption growth across several end markets, including paper and fibre-based materials.
Meanwhile, McKinsey notes that internet penetration is up from 75% in 2015 to 93% in 2025 – linking this outcome to increased digitalization among businesses, advertisers and consumers. These circumstances are thought to have reduced demand for graphic paper.
The rise of digitalization is thought to be weakening print demand and driving the long-term contraction of graphic paper across European markets. While McKinsey highlights the resilience of packaging compared to other paper formats, the transition from plastic to fibre-based solutions is said to be moving slower than expected – and value is reportedly replacing volume as the primary growth driver.
Cost pressures related to pulp, recovered fibre, wood, and energy are ongoing. Pulp prices in Europe were said to rise from 3% to 6% between 2015 and 2025, with bleached softwood kraft pulp found to increase more than bleached hardwood kraft pulp.
Inflationary pressure has continued through the loss of Russian wood imports, biological disruptions, weaker construction activity, and structurally tighter fibre availability. Regions with integrated and non-integrated mills are also facing differences in energy competitiveness.
For example, papermaking in Italy remains exposed to natural gas. Non-integrated mills are also said to lack the internal energy advantages of integrated pulp sites, such as black-liquor recovery.
Global trade dynamics are playing a further role. European producers are contending with intensifying competitive pressure and limited opportunities for sustained price recovery as capacity additions outpace domestic demand and excess supply flows into international markets.
For cartonboard, tissue, graphic paper, and other paper grades, Asia is becoming a structural export platform.
As for sustainability, the paper sector is already believed to exceed recycling rates of 70%. Even so, sustainable packaging formats are becoming a baseline requirement under regulatory developments such as the Packaging and Packaging Waste Regulation; this is believed to be driving investment more than consumer demand.
The data still shows that consumers value recyclability and circularity in their spending decisions, but macroeconomic uncertainty and inflationary pressure are impacting the general willingness to pay a premium.
McKinsey names six ongoing barriers to adoption for packaging producers: affordability, performance trade-offs, lack of alignment on sustainability definitions, regulatory uncertainty, supply limitations, and limited visibility into available solutions.
Additionally, flexibility is becoming limited by higher interest rates and lower asset valuations. Companies are responding by preserving liquidity, optimizing their footprint, leveraging procurement synergies, and pursuing restructuring programmes.
The solution
According to McKinsey, productivity has remained below historical levels across the pulp and paper sector – a shortcoming it attributes to its slow uptake of automation, digital integration, and end-to-end operating model redesign.
Artificial intelligence and analytics are expected to help market players address cost pressure, capture new growth opportunities, and navigate the current market environment. This includes optimizing mill operations, unlocking precision in pricing, customer targeting and product development, and more.
Reportedly, over 80% of paper and packaging industry leaders are actively considering, developing or launching generative AI initiatives, but McKinsey states that most of these efforts are in the early stages. Many digital and AI tools are thought to be isolated use cases, and aren’t embedded into general business management.
This fragmentation is described as a ‘core challenge’ for pulp and paper companies in Europe. Procurement programmes are often disconnected from mill performance itself and remain separate from capital allocation decisions and integrated management – affecting the whole company’s response to volatility, cost pressure, and regulatory complexity.
McKinsey argues that companies must redesign their enterprise around a more integrated operating model to achieve competitive advantage. Depending on their starting point and execution maturity, mid-performing pulp and paper companies in Europe are expected to unlock up to 15 percentage points of EBITDA improvement through better portfolio steering, intelligent operations, commercial discipline, and organizational redesign.
Rather than relying on annual planning cycles and separate tools for different business operations, McKinsey recommends an integrated engine for sales and operations and advanced planning. This is set to combine demand sensing, supply chain planning, production scheduling, procurement, logistics, and commercial priorities into a single, cross-functional decision process that detects demand shifts ahead of time.
Advanced planning and scheduling is set to help companies evaluate trade-offs across grade mix, machine allocation, inventory levels, service commitments, energy costs, and margin before decisions are made. Leadership teams can then make faster decisions driven by data.
From here, they are expected to achieve better service, lower cost-to-serve, stronger asset utilization, more disciplined margin management, greater resilience to external shocks, and even unlock 3-5 percentage points of EBITDA improvement.
AI and agentic workflows are also set to recalculate gaps between forecasts and actuals in real time, recommending corrective actions across production, inventory, and logistics.
Conversely, intelligent mills are running one integrated operating model that uses digital twins, real-time fibre mix optimization, AI-enabled chemical dosing, predictive maintenance, throughput debottlenecking, energy load optimization, automated quality control, and self-learning root cause systems.
This integrates data from sensors, control systems, laboratory results, and planning tools into a common digital layer. Companies can then predict issues, optimize process settings, and dynamically coordinate trade-offs across cost, quality, throughput, and energy use.
McKinsey considers this relevant to countries with higher gas costs for industry consumption, such as Finland, Sweden and Germany.
Countries that have already embraced integrated mills have reportedly experienced improvements in overall equipment effectiveness, lower maintenance costs, reduced energy intensity, and more stable quality performance.
Mills should be more adaptive, predictable, and easier to optimize across the network, McKinsey asserts. This is set to improve overall equipment effectiveness, reduce maintenance costs, bring down energy intensity, and stabilize quality performance.
Generative AI is also anticipated to help packaging leaders with lead generation, customer prioritization, pricing, and sales effectiveness. Even so, companies are still operating under broad segmentation and static pricing logic, which does not account for varying willingness to pay across applications and the increasing shift of value pools towards high-performance, sustainability-minded products.
McKinsey highlights the importance of SKU-level visibility for profitability, AI-enabled pricing corridors, elasticity and contract risk modelling, more precise customer targeting, and better visibility in a next-generation commercial model.
This is especially relevant for fragmented markets, with McKinsey naming Italy, France and Spain as examples – countries where many small and medium-sized enterprises operate and pricing discipline may vary across applications and customer segments.
It adds that forerunners in the intelligent mill space are embracing integrated data architectures, single centres of control, embedded analytics teams, and more centralized governance across operations, energy, procurement, and commercial decisions.
Companies are also encouraged to redesign their organizations to simplify decision rights, reduce hand-offs, and look beyond volume alone – margin, cash generation, capital productivity, and resilience should also be considered.
McKinsey adds that the operating model must account for sustainability, not manage it as a separate agenda. Linking product performance, traceability, circularity, and carbon footprint data to commercial decisions and customer value propositions is anticipated to set companies up for differentiation and growth.
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