Analysing the fall-out - How Russia's invasion of Ukraine has impacted the packaging industry.

The Russian invasion of Ukraine has reached Day 121 with no obvious peaceful resolution in sight. It’s a scary and dangerous time for people still trapped within certain key areas of the country, with the Donbas region now looking like the prime target for military action. On a fundamental human level, the carnage and destruction has been devastating for the people of Ukraine. Around the world, support for their cause remains unwavering.

The effect of the invasion has also been catastrophic in financial terms with estimates suggesting that the invasion is on course to shrink Ukraine’s economy by 45% this year. A somewhat overlooked aspect of the invasion in this context is the specific impact that it is had on the country’s manufacturing output and the global ramifications for the wider packaging industry.

According to Inside Packaging, prior to the start of the invasion in February, Ukraine was annually producing 90,000+ tonnes of PET beverage bottles, 700,000+ tonnes of transport packaging and 900,000+ tonnes of glass bottles. This level of manufacturing production is certainly impressive and despite not qualifying as one of world’s leading packaging producers, the country’s export market has certainly taken a huge hit in recent times.

However, there is no doubt that more significant shockwaves have been registered further down the supply chain. Since the start of the invasion, the price of raw materials has grown at an exponential rate with suppliers faced with an uncertain market, both short-term and long-term [in March alone, the Independent Commodity Intelligence Services (ICIS) reported that crude oil prices had risen to near decade highs]. The knock-on effect for many packaging companies that rely on these materials is that they cannot guarantee a fixed price for customers between point of order and delivery of goods. Due to this unpredictability, customers have either backed out of commercial agreements or have sought market reassurance elsewhere, perhaps from a multinational with the resources to mitigate against this issue. All in all, a worrying situation for the market to be in.

Another important consideration for the packaging industry is the decision made by several organisations to exit the Russian market in order to avoid reputational risks. In the corrugated space, Smurfit Kappa announced in April that they would be closing their 3 plants close to St Petersburg, whilst respecting the legal obligations it has to its 800 employees in the country. This mirrors the response in the plastic market with Amcor announcing very soon after the invasion that there would be a termination of any further investment in projects and product innovation in the country whilst also suspending all exports. Ron Delia, CEO for Amcor, emphasised the organisation’s commitment to its core values and added “our first focus is the safety of our people in Ukraine”. This response from two of the largest multinationals in the market certainly set a strong positive precedent and aligned it to decisions taken by other companies across the wider manufacturing sector.

In a holistic sense, a tough economic stance against Russia is admirable. But the cessation of trade with Russia will once again, similar to the issue of pricing of raw materials, affect smaller businesses the hardest. At the Packaging Innovations Conference in Birmingham last month, I spoke to several individuals who expressed concern about the impact this will have on their businesses. One individual in particular, who works for a business in the paper packaging market, told me that the main paper mill responsible for the business’s manufacturing output is based in Russia but has now been permanently closed. He confirmed that, in a rather unfortunate opportunistic sense, a mill located elsewhere in Europe has capitalised on this by quoting higher prices after knowing in advance about the closure of the mill. One can argue that this is supply and demand economics in action. However, for smaller businesses looking to survive in an ever-competitive market, this sort of action might not be sustainable for the long term and will result in an ever-expanding gap to the packaging market’s bigger players.

The overall outlook for packaging market is currently unclear with several moving parts in play. There remains an optimistic belief that the industry overall is resolute enough to withstand the current issues and bounce back in an assured state post-invasion, whenever that day finally arrives. However, with the world still coming to terms with the socio-economic effects of the COVID-19 pandemic and with Russia currently supply 14% of the global raw material output, it would take a brave person to confidently predict how things will look for the rest of 2022 and beyond.