Rising from the slumps of the pandemic, the paper industry has found new sustainability goals in 2022
Rising from the slumps of the pandemic, the paper industries have found a new winner, paperboard.
- In 2022, the global paper output is predicted to be 416 million tonnes, down 4 million tonnes from 2018. The worldwide paper industry fared slightly better during the 2020 collapse, owing to increased demands from e-commerce, but has since rebounded at a slightly slower pace than the international rate of growth. The good thing is that next year’s trajectory should be on the upswing. Although Asia would have more than caught up on its output lag, with an increase of +7 million tonnes of paper and board output in 2022 compared to 2020, Europe is set to fall back, with its paper and board output expected to gain just roughly 40% of the levels shed during the pandemic.
- The main winner is the paperboard. Due to rising e-commerce sales, paperboard would make up two-thirds of worldwide paper production by the end of 2022. In this scenario, we see that China’s paperboard shipments have acquired market share over either Canadian or Finnish counterparts. Furthermore, the current rise in oil rates should favour paperboard over plastics, providing paperboard with an edge over plastics, which has been stagnating at 41 per cent of worldwide packaging sales for ten years, even while plastics’ share has risen by +5 percentage points to 37 per cent during the same period.
- Will the party be ruined by growing input costs? Even though paperboard sales are predicted to increase by 5% in 2021 over 2020, they will not be able to keep up with the 1.5-fold increase in (European) pulp prices YTD. The downstream industry has been hurt the hardest: Downstream papermakers’ operating margins are expected to be slashed by USD7 billion (or -3 percentage points) in 2021 because they’re unable to pass through rising input expenses, however, pulp and wood prices are expected to stabilise in 2022.
On the plus side, the recent spike in energy costs should not have a significant impact on the paper industry: For the past two decades, papermakers have significantly increased their usage of renewable biomass (from 40% to 55%) versus power and fossil fuels, resulting in a significant reduction in their energy consumption impact.
Paperboard is the pandemic’s great winner.
Global paper output is expected to rebound to 416 million tonnes in 2022, although it will still be more than 4 million tonnes below its 2018 record. Paper and board manufacturing is an industry that often trails after the global GDP growth. It weathered the 2020 collapse a bit better, owing to a rise in e-commerce sales, but has since rebounded at a slower pace than the worldwide growth rate. The best part is that the next year’s trend should be on the upswing.
In 2022, Asia ought to be the victor: it would have more than caught up on its production lag, with an increase of +7 million tonnes of extra paper and board output since 2020, putting it in front of North America. Europe is set to fall behind, as its paper and board production is expected to recover only about 40% of the amount lost during the epidemic.
Paperboard is predicted to account for two-thirds of worldwide paper production by the conclusion of 2022, owing to the Covid-19 issue, which has exacerbated the divergence trend amongst sub-sectors, with paperboard jumping ahead of printing and writing papers (from 50 percent before the pandemic). While tissue papers retained a steady market share of 16 percent in terms of production between 2015 and 2019, all types of paperboards had seen their market share rise from 53 percent in 2015 to 57 percent in 2019 because of increased demand for flexible packaging to fulfil soaring online purchases.
But at the other end, the global market share of all types of printing and writing papers has decreased from 31 percent in 2015 to 26 percent in 2019. During the Covid-19 crisis, the broad transition to remote employment and online classrooms accelerated a downward trend in printing and writing paper production.
After a decade of flatlining sales, paperboard hopes to get the advantage over plastics with the current rise in oil costs. Global packaging demand increased from USD810 billion in 2015 to USD930 billion in 2020, while paperboard sustainable packaging increased from USD333 billion in 2015 to USD385 billion in 2020.
What is the cause of this increase?
- Low-cost shale gas in the United States: Shale gas is used to make ethylene, the primary raw ingredient for plastics.
- Plastic packaging, rather than paperboard, is preferred by agri-food businesses to preserve their edible goods from humidity, filth, and grease.
But, if gas prices continue rising, paper packaging may acquire a competitive advantage in the near term.
Will growing input prices put a damper on the fun?
Even though paperboard sales increased by 5% in 2021 compared to 2020, the industry is unable to catch pace with the 1.5-fold increase YTD in the European pulp price. The most significant danger to the whole paper sector, in our opinion, has been the rise in pulp prices ever since the start of the year. The European pulp price had increased by 53% y/y even by end of September, and the Asian pulp price had increased by 47% y/y. Despite upstream businesses who may pass on increased timber costs to their sale prices, the downstream paper industry has been heavily hurt by the increase in pulp prices.
In respect of profit, upstream and downstream papermakers are distinguishable. The great news is that since the start of the decade, the operating income rate of paper exporters and makers has increased in general. Furthermore, due to their higher added-value processing activities, downstream paper mills are often more lucrative than their upstream equivalents. When pulp prices unexpectedly surge, as they did in 2018, they have struggled to control their margin levels.
Upstream paper firms, on the other hand, should anticipate a considerable increase in operating margins and a gearing ratio in 2021. The best part is that downstream papermakers have managed to reduce their borrowing and, as a by-product, their gearing ratio to just under 100% by ensuring a high level of cash flow. This offers businesses the financial flexibility to invest in higher-value items backed by a strong brand, while also producing them in a more ecologically responsible manner.
The paper industry has become more ESG compliant thanks to a 55 per cent rise in renewable biomass utilisation, but significant investments in water recycling plants are required. Each one is expected to cost between $9 million and $12 million. For perspective, consider the following: In Europe, there are about 900 functioning paper mills, and the free cash flow of all paper manufacturers globally was USD18 billion last year. The argument is that if paper players’ turnovers decline, such investments may become unsustainable.
On the plus side, the recent spike in energy costs should not have a significant impact on the paper industry: For the past 20 years, papermakers have significantly increased their integration of renewable biomass (from 40% to 55%) versus power and fossil fuels, resulting in a significant reduction in their energy usage footprint.