In a recent report, Wood Resources International (WRI) predicts that Europe will bear the brunt of tightening lumber markets in both the short- and long-term because of the war in Ukraine. The group predicts global disruptions to shipments of lumber, panels, wood pellets, logs, wood chips, pulp and paper products, with Europe, China, and the US all likely to be affected.
The situation in Europe
According to WRI, an immediate impact of the war in Ukraine and the sanctions imposed on Russia has been a “dramatic reduction” in exports of forest products from Russia, Belarus, and Ukraine. In 2021, these three countries reportedly accounted for almost 25% of worldwide lumber trade, and their total forest product exports were valued collective at $17 billion in the same year.
Since Russia’s invasion of Ukraine in February 2022, the majority response in Europe has been to impose economic sanctions on Russia and Belarus. This has resulted in the halt of lumber shipments to Europe. Notably, Russia, Belarus and Ukraine supplied almost 10% of Europe’s total demand for softwood lumber in 2021, exporting 8.5 million m3, WRI says.
In a previous report, WRI predicted that the trade of logs and lumber in Europe will undergo a significant change in the coming years due to several converging factors. Timber harvests in Central Europe have peaked, with a decline from current record levels expected soon, which could mean the region shifts to a net log importer. Meanwhile, the group adds that the war in Ukraine will likely introduce further uncertainty in terms of trade flows and prices for forest products.
According to Moody’s, these factors will contribute to a fall of 4% in the EBITDA for paper and forest product companies in Europe. The European Federation of Wooden Pallet & Packaging Manufacturers (FEFPEB) notes that Estonia, France, Germany, Hungary, Italy, Finland, and the Netherlands are some of the countries most likely to feel the impact of tightening wood supply as significant importers of wood and exporters of products like wooden pallets.
To offset this challenge, WRI explains that European sawmills could redirect overseas shipments to the European market in the short-term, which could help to mitigate the impacts of the drop in supply from Russia, Belarus, and Ukraine.
Major overseas markets, such as China, the US, Japan, and the Middle East and North Africa (MENA) region are highly diverse in terms of product demand, price acceptance, exchange rate volatility, political stability, and consumption outlook, WRI adds. Such variation in market conditions may mean European exports chose to limit overseas exports to fit specific product mixes and risk tolerances, as the region attempts to mitigate challenges to domestic supply for wood and forest products.
As a longer-term solution, some lumber-producing companies could consider investing in new production capacity, according to WRI. However, log supply in many parts of Europe is becoming tighter, as already mentioned, which could complicate this option. Further downstream, Moody’s suggests that the challenges presented for the paper and forest products industry, such as unstable supply and rising energy costs, could facilitate the shift of some mills away from paper and towards packaging grades.
The impacts of the war in Ukraine on the forest products market are not limited to Europe. Countries including the US, Canada, Japan, Taiwan, Australia, and New Zealand have enacted sanctions against Russia. As a result, lumber shipments have also halted to some places outside of Europe, again presenting similar challenges of tightening supply.
While some countries have chosen not to enforce sanctions on Russia, Russian and Belarusian companies are apparently struggling to make financial transactions and secure credit as a result of embargoes imposed from elsewhere. As such, exports of forest and wood products seem to have slowed even to countries that have continued trading with Russia.
In addition, timber originating from Russia and Belarus is now considered ‘conflict timber’. This means that it cannot be used in any products that are PEFC- or FSC-certified, further undermining the supply of wood and forest products from these countries.
WRI claims that Russian sawmills, a major point of origin for lumber shipped to Europe, cannot quickly or easily switch to markets where sanctions are not in place in the short-term. While China – which has not sanctioned Russia – accepts around 47% of soft lumberwood exports from Russia, Belarus, and Ukraine, there are logistical challenges involved in sending lumber by ship or rail from north-western Russia to China.
Therefore, there have already been significant overall impacts on the global wood and forest products market as a result of Russia’s invasion of Ukraine. With the effects likely to be felt worldwide going forward, this could complicate how regions like Europe attempt to respond locally, with WRI predicting that disruptions will be felt for a long time to come.
What does this mean for the packaging industry?
WRI notes that the impacts of tightening wood supply are likely to result in changes to the price, availability, and supply chains of wooden pallets, pulp, and paper products.
According to the FEFPEB, Europe’s supply of wooden pallets could face significant and increasing pressure as a result of Russia’s invasion of Ukraine. Some countries allegedly source up to 25% of their pallet and packaging timber from Russia, Belarus, and Ukraine. Wooden pallets are a major requirement for the transport of many goods worldwide and, with supply chain tensions continuing to be felt globally, this could result in further disruptions in product flows.
As for pulp and paper, the impacts could depend on application. According to Moody’s, the paper packaging industry has implemented price increases over the last year in an attempt to counteract rising input costs. This segment of the wood and forest products industry could reportedly experience an increase in earnings of 6% over the next 12 months.
However, Moody’s also notes that there will be a decline in earnings for the industry as a whole, with the paper packaging sector’s growth trend not enough to counteract declines in other areas. While Cepi reports that the paper and board industry is “bouncing back” from the challenges of COVID-19, it explains that the supply and demand of materials, such as pulp, were facing significant uncertainty even before Russia’s invasion of Ukraine.
Cepi has since written to the European Commission to request assistance for the paper and pulp industry amidst rising costs. The organisation says that the slowing down of production across European paper mills threatens the jobs of over 4 million people, while the supply of paper-based packaging for the transport and delivery of essential downstream industries like food and pharmaceuticals could be under strain. Cepi’s call for the industry to be recognised as an essential sector so that it can “keep the lights on” suggests that current and emerging challenges could have severe consequences for wood, forest products, and adjacent packaging industries.