Have paper prices peaked or are there more price increases to come? If they have peaked, how much will they drop, and more importantly, when?!

As the weather warms up in Europe, we find many mixed signals for both the micro and macro-environment, in the paper industry.?

Following the good news relating to the end of the UPM Finnish papermill strike, the other Finnish giant, Stora Enso, announced that it was selling four of its five remaining graphic paper mills, namely Nymolla (UWF) & Hylte (Newsprint) both in Sweden, Maxau (SC Magazine Papers) in Germany and Anjala (Improved News & Book Papers) in Finland. Then last week, SE also announced that it plans to convert the large Newsprint machine at its fifth and last graphic paper mill, Langerbrugge in Belgium, to packaging papers, but not before 2025. This machine currently makes 400,000t pa of Standard recycled-based Newsprint, although the mill also has a smaller and older machine making approx. 150,000t pa of SC Magazine \Papers.?

As a recap, here’s the SE capacities involved:?

Mill?????????????????Grade???????????????????????Capacity????????% Share of 2022 W.E. Capacity

Langerbrugge Newsprint*?????????????????400*???????????????8%

Hylte???????????????Newsprint???????????????????245?????????????????5%

Anjala?????????????UM/IN ??????????????????????260????????????????15%

Maxau????????????SC???????????????????????????????530?????????????????17%

Anjala?????????????CM Papers?????????????????170????????????????3%

Nymolla ?????????UWF??????????????????????????490????????????????10%

Graphic Papers?????????????????????????????????2095??????????????9%?

* This table excludes the 150,000t SC machine at Langerbrugge, for which SE have not yet made any announcements re. future plans (and this mill is not up for sale). ?

Separately, UPM has signed an agreement to sell 100% of its Austrian subsidiary UPM Kymmene-Austria GmbH to the HEINZEL GROUP. The transaction includes the UPM Steyrermühl site including the newsprint PM with a capacity of approx. 300,000tpa, as well as the sawmill operations. This will mark the end of newsprint production at UPM Steyrermühl by the end of 2023, adding further pressure on buyers in 2024.?

Looking at current European Demand and Operating Rates, we have the following: ?

Graphic Paper, May 2021 - W. European: +2% (demand), 85% (Op Rates)?

These numbers include UPM (Finnish) shipments as of 1st May, but despite this, Operating Rates are still relatively weak, especially so for mechanicals, if a little stronger for woodfree paper grades; but all grades are seeing a weakening trend for both Demand and Operating Rates. ?

For prices the picture is more mixed; we have historically massive prices, but the ranges vary considerably, partly due to the variability of the speed and magnitude of price announcement from different mills/suppliers, but also partly caused by mills announcing energy surcharges since the first gas price hikes in October 2021.?

With gas – and oil - prices rising and falling at unpredictable and very fast rates, mills, whose cost bases are quite different from country to country and supplier to supplier, announced various forms of cost-related prices surcharges - alongside “regular” price increases - some of which have since been partly removed. This has caused a price picture to develop that is both confusing and highly variable, with some equivalent newsprint and magazine paper prices showing top and bottom levels, some €300/t apart. This is quite extraordinary for paper grades whose price levels hovered around the €370-400/t just two years ago!?

But as a price-hit demand begins to weaken more heavily with each passing month, we are likely to see more price uniformity ahead, with price gaps between grades being squeezed as prices fall. This will restore some order to price levels by the end of this year.?

This year has not only been a record year for paper prices. Looking outside of the paper industry, we have seen inflation rates not witnessed for over 40 years, which has caused central banks to react by raising interest rates multiple times for the first time in over a decade (since the sub-prime crisis of 2008-09). Oil prices have reached new highs, rising gradually since they dropped out of the sky in April 2020, but rising to over $120/bbl, a level not seen since the summer of 2008. Equally, most commodity prices have hit multi-year highs, with Gold remaining at a record high level following its 50+ year high in summer 2020. ?As for exchange rates, the US$ has climbed strongly following moves by the Fed to increase rates in the US. Against the GB￡, it has come down from 2014 peaks of $1.7 to the pound, to just 1.2 this month. Against the Euro too, we can see how close to US1.4 in 2014 has dropped to near parity ($1.04 to the Euro) today.?

Some of the problems are quite new, following the war in Ukraine which begun end-February and which has not only disrupted the energy trade flows and prices, but has exacerbated an already challenging shipping situation. All this is having a profound impact on economic activity and we can see from Consensus Economics that GDP expectations have been slashed massively in just a few short months (see below):

Even more shocking – in addition to economic downgrading by world experts – is the state of industrial production in China, the world’s second biggest economy, where monthly YoY growth in the latest month (as recently reported in our monthly Global report) dropped from around -3% to -8%! Chinese PMIs have been negative for the past three months now, supporting this Industrial Output reading. And it’s not just China showing signs of global recessionary weakness ahead, as prices drives demand down hard across the world, European exports are taking an absolute hammering; given Operating Rates, this is not due to a lack of available paper, but due to shipping issues/costs supported by a distinct slowdown in paper demand everywhere!

W. European Graphic Paper Exports (Jan-May 2022 YoY): -25%???????????????????????????

And here’s the prices which are causing so many buyers and printers a real headache re. the choice and volume of paper to buy. The questions beg: how much higher will prices go? How much higher can they go?! If they’ve reached the top, when will they fall, and how low might they go?

The downsides including soaring pulp prices, all driven by problematic logistics, which we’ve talked about repeatedly and even ad nauseum over recent months; but we have to because this problem has not been resolved and continues to cause high costs (of shipping, in addition to pulp and paper prices) and long lead times, from mill to buyer warehouse.

But mills are continuing to plan machine closures and conversions to packaging to counter the threat of over-supply and any subsequent price reductions, with more announcements such as the Stora Enso & UPM/Heinzel ones (above); in fact, of the 4.3 million tonnes of additional packaging capacity announced for Europe between Q4 2022 and 2025, 3.5m tonnes of it comes from former Graphic paper machines (which in their day, produced 2.2m tonnes of paper capacity)!

In short, if there is now any change in the situation since our last update, it is not an easing in raw materials prices – quite the opposite – or a resolution to the shipping crisis, but a gradual and strong weakening in paper markets due to both global macro-economic factors and surging paper prices.

EMGE have recently published an update top both the European Woodfree Forecast and Quarterly Publication Paper Price Forecast reports - for more information/TOCs, see here: https://www.emge.com/reports/forecast-reports/european-woodfree-forecast https://www.emge.com/publication-paper-price-forecasts