The European Economy Under a Snowball Effect
The war in Ukraine inflicted an economic shock and upheavals on the forest industry value chain. The sagging economy, increasing inflation, the energy crisis and disturbances in the supply chain may reshape the long-term business environment, and the European industry must cope with this new normal. The first challenge is surviving the macroeconomic shock.
On the verge of the new normal, no segment of the forestry industry remains unaffected.
Time of Depreciation
One consequence of the war is the rising inflation, which started already prior the Russian invasion as the central banks were engaged in heavily expansionary monetary policy. The financial experts forecast high inflation records for Europe. The inflation has been increasing in major economies like Germany, which reached inflation of 7.3% in March 2022. The rate is expected to go up especially in the regions with high dependency of Russian energy. The European Central Bank states that its primary focus will be on tackling European inflation that is currently nearly three times the official target of 2% p.a.
Setback for Economic Recovery
We have seen the consumer confidence dropping. The economy has been chocked by supply disruptions, the energy crisis and independence measures. The increasing number of refugees will have direct budget implications in coming years. Europe needs to rethink its position on the global map, its international relations, macroeconomic policies and market regulations.
Despite the growth in the US and Asia the European economy will be stagnated. An economic iron curtain is expected to descent and remain between European Union and Russia. Due to wave of sanctions Russia halts exports to the EU, which causes some commodities shortages and disturbances to logistic routes to Baltics and the Black Sea.
The long-term full impact of the ongoing Russian invasion of Ukraine is still unknown. Economic growth has slowed down and forecasting the rate of recovery is challenging. In the best-case scenario, Europe will still experience a slight growth during the next few years.
Energy Supply at Stake
The energy crisis is caused by the supply restrictions. The demand for gas has increased for several reasons, among them the goal to decarbonize electricity. Gas demand is increasing as the economy recovers from the pandemic.
Supply disruptions from Russia will have an impact on Europe in an already vulnerable situation, since Russia exports approximately 40% of the gas and 10% of the oil consumed in the region.
The risks of energy dependence are finally realised. Europe’s energy sector is going through the energy transformation, but immense investments are required to build sustainable, economically viable, and reliable energy generation capacity. C02 permits will come more expensive. This may pose a threat to goals related to sustainability and carbon neutrality.
European Competitiveness Under Stress
The biggest impact on European factories and competitiveness takes place via rising energy prices. This concerns especially large mills running on Russian gas. New, energy-efficient lines strengthen their position in the cost competitiveness curve, increasing the gap to competing mills. CO2 emissions permits, chemicals and freight will become more expensive and weaken Europe’s global competitiveness.
Exits from Russian business will force both raw material and final product trade flows to opt for alternative routes. This will increase costs and volatility. Key question will be how the non-integrated players will be able to tackle the increasing manufacturing costs.
Changes in global trades will have implications on logistics, but Russia is minor exporter in the pulp and paper sector. The most significant changes in trade have been made by major companies and corporation, as it looks like that B-to-B firms are unwilling to buy raw materials or products from Russia. Additionally, the national governments start to imply import tariffs to Russian goods. Russian companies will face production disruptions due to lack of access to European market. Hence, they need to seek new markets.
The Russian and European companies serve the same markets at SEA and MENA region and players operating in those regions will be impacted.
Due to the depreciated rouble exchange rate the cost competitiveness is the strongest in Russian export products such as folded boxboard, office paper, newspaper and market pulp.
European mills compete with Russian players in many commodities. Longer-term the limited access to finance and technology will have a negative impact on Russian asset competitiveness and capability, as no major investments are expected to take place, at least not without government support.
Wood Shortage Disrupting Supply Chains
The availability of wood in the Nordics, especially in Finland and the Baltic countries is becoming significantly more difficult due the trade bans. Members also supported the PEFC’s decision to classify Belarusian and Russian timber products as conflicted, rendering them unsuitable for accredited certification. Similarly, the European Timber Industry agreed that as long as the armed conflict continues, wood and forest products from Russia and Belarus cannot be used in FSC products or to be sold as FSC certified anywhere in the world. Abundant raw material streams from Russia will be directed to other markets. The missing share of 22% of global softwood lumber and pulpwood exports will have major impacts on wood supply.
In 2021, nearly 10% of the sawn softwood consumed in Europe originated from Russia, Belarus and Ukraine. In the hardwood sector, oak goods originating from Ukraine accounted for a significant portion. Ukraine has also been a major exporter of other commodities such as grain and steel. Further, logistic chains will be disturbed when Ukrainian drivers have to exit the labor force.
Shortages are expected and many processed wood products, such as birch plywood and sawn timber, will be highly impacted. This has major implications on the European furniture and construction sector that has relied on Russian birch plywood. In the middle of the surge in wooden construction, European consumers must look elsewhere for materials. Companies in the Nordic and Baltic regions, in particular, must identify sustainable and effective ways to increase their own supply and utilize existing wood resources. This could lead to an increase in production in the Baltics and Finland. Latin American exports are also projected to rise.
The best way to mitigate the uncertainties is to build different scenarios and evaluate the whole value chain from bottom to the top. By doing so a strategic roadmap can be formed to guide companies towards sustainable growth amidst this situation called The New Normal.
Vision Hunters provides strategic advisory services for the forest and bio-based industries, and energy sectors. We assist leadership teams in making the smartest strategic choices to improve the outcome of their company in the future. We are highly experienced and result-oriented and have advised many of the leading companies in our industry.