What do new international shipping standards imply for the pulp and paper industry?

Shifting and increasing demand for pulp causes alterations in global trade flows. With longer average transport routes, the share of maritime transport will increase, while the industry’s new stricter emission limits will bring added cost pressure throughout the value chain.

New streams of global trade flows

The growing demand for paper and packaging products in China and other parts of Asia has altered global trade flows of pulp and wood chips. The increased demand for tissue and high-grade packaging materials on these markets has fostered demand for virgin market pulp. Much of the additional volumes have come from Latin America and Europe.

Pulp imports in Asia totaled some 26 Mt in 2018, China accounting for a lion’s share, namely 22 Mt. Hardwood chip imports for the same year summed up to 25 million bdmt, with import origin being more widespread from Japan to South Korea and China.

Traditionally, the pulp and paper industry has relied on a combination of road, trail and ocean transportation. When logistically possible, maritime transport, both container lines and open hatch cargo, tends to be the most cost and environmentally efficient alternative. With higher trade volumes of forest industry products and increasing average distances, an increase in maritime transport is inevitable. The key question is how this will be reflected in the pulp and paper industry’s cost structure and sustainability standards?

Legal power steering market power

New rules for maritime shipping entering into force in 2020 are expected to cause major turbulence. The International Maritime Organization’s set standards ban all vessels using fuel with sulphur content above 0.5% (currently at 3.5%), unless the ship is equipped with a “scrubber”, a system to clean sulphur emissions.

Out of the international fleet of some 90,000 vessels, only 2% are equipped with scrubber systems. Fuel oil consumption by the shipping industry is roughly 4 million barrels of fuel oil a day, of which none yet meets the 0.5% threshold. The impact will therefore be felt overnight, when most demand will be substituted by marine gasoil, diesel and other low-sulphur fuels. Biofuels could also become an alternative in upcoming years.

Oil producers, fuel resellers and shipping companies are scouting the situation, but the impact will finally be felt by consumers. With some 90% of global trade occurring by sea, everything from commodities to consumer products are expected to see price hikes alongside increased transportation costs (especially for air, lorry and maritime transport using low-sulphur fuel). The forest industry will be no exception, where transportation covers an important share of the end-product costs.

Conflicting consequences on the environment

International shipping is a major cause of greenhouse gas and carbon dioxide emissions. Yet, the environmental impact of the new restriction is controversial. While sulphur emissions create sulphates, causing acid rain and air pollution, they have a significant cooling effect by scattering sunlight and helping to form clouds. Therefore, by current standards the industry is estimated to have a net cooling effect on the climate, reducing effects of global warming by up to 7%, according to some estimates. Hence, many experts are promoting to steer the focus from sulphur limits towards the enforcement of CO2 targets.

However, with increased price pressure from transportation, companies will be forced to optimize their supply chains and logistics. The forest industry companies are also likely to screen the impact of raw material and product transportation more carefully in their overall environmental footprints. This is, no doubt, going to have also a positive effect on the environment.

Vision Hunters provides strategic advisory services for the forest industry 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.