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Huacheng Import and Export Data Observation reported that on September 2, after Russia announced that it would indefinitely shut down the "North Stream No. 1" pipeline that transports natural gas to Europe, the price of European benchmark natural gas futures soared by 35%, and then fell sharply on Tuesday.

This week, the geopolitical situation has heated up again, rekindling the enthusiasm of the energy market bulls. European natural gas rose by 9%, close to 2,200 US dollars/thousand cubic meters, and the battle of Russia-Europe natural gas game ushered in a climax.

European countries have provided liquidity guarantees to utility companies to resist market turmoil. Germany, Austria and Sweden have introduced measures to relieve their difficulties. With the increase of leverage in European countries, the "Lehman crisis" alarm in the European energy market has been completely sounded. .

Higher energy prices have had an impact on the normal operations of the pulp and paper industry and on cost pricing. According to data from Eurostat, since the beginning of this year, under the influence of factors such as skyrocketing energy prices, frequent supply-side stories, and inefficient international transport capacity, the EU's corrugated paper and board and packaging paper industry production price index has risen by nearly 20%. In August 2022 The month rose to 139.60, a new record high; the price of northern bleached softwood kraft (NBSK) pulp on the Norwegian Pulp and Paper Exchange rose 18% this year.

Now, the Alps are starting to snow, and winter is approaching in Europe. Russia has drained the liquidity of the European natural gas market, European energy suppliers, energy-intensive industries and other industries are in a quagmire, and there are constant voices of production cuts and shutdowns in factories. The pulp and paper industry is one of the energy-intensive industries, and the crisis of "European pulp and paper is expensive" may not be over yet.

1. European energy structure

1. The extremely high dependence on Russian natural gas has kept natural gas at the forefront of the Russian-European energy game for a long time

From a structural point of view, the energy used in the EU mainly comes from five aspects: 35% of petroleum products (including crude oil) > 24% of natural gas > 17% of renewable energy > 13% of nuclear energy > 12% of solid fossil energy. According to Bloomberg’s 2020 import and export data, the sources of the above-mentioned commodities can be divided into two categories: imports from third countries and production within the EU, of which 42% are self-produced and 58% are imported from third countries, although self-produced energy accounts for more than 2019 Up 2% year-on-year, but external imports are still pulling in a tight balance.

Russia is the EU’s main source of third-country imports. In 2021, the EU imported 155 billion cubic meters of natural gas from Russia, including liquefied natural gas (LNG). Russia is Europe's largest gas exporter, accounting for about 45% of EU gas imports and nearly 40% of its total gas consumption, according to IEA import and export data. The high dependence on Russian natural gas has kept natural gas at the forefront of the Russian-European energy game for a long time. Since the conflict between Russia and Ukraine, the price of natural gas has soared, which has led to a surge in the price of electricity in the European continent. The recent record-high energy price is continuing to impact the European economy.

In terms of countries, the proportion of natural gas in the energy structure of different European countries is slightly differentiated, ranging from 19% to 40%. However, the dependence on Russian natural gas is generally high, and Finland is almost entirely dependent on Russian imports.

2. The ripples caused by rising energy prices impact high-energy-consuming industries

At present, the cold winter is approaching, the heating demand of residents is increasing, Europe is about to enter the peak of gas consumption, the worry of energy shortage is spreading, and the nightmare is backlash. Under the impact of the natural gas shortage crisis, energy-intensive industries are facing huge cost pressures, among which the high energy consumption system The pulp and paper industry may also usher in a cold winter. The European Paper Confederation (CEPI) has publicly stated that the reduction of natural gas supply will affect the supply chain of the European paper industry, especially the recycling of waste paper that relies on natural gas will be directly affected. Food, medicine packaging fabrics greater pressure.

2. Situation and energy structure of pulp and paper in Europe

1. Europe: an important production and export place for pulp and paper, beware of spillover effects

European pulp production: According to CEPI's import and export data, in 2020, Europe (CPEI 20.2% + other European countries 5.4%) pulp output is second only to North America (32.3%), accounting for 25.6% of the world's total pulp output , of which nearly 40% are used for export, and Asia is the main export destination, accounting for about 70% of the total export volume. It accounts for about 70% of the total export volume. Among the 18 member countries of the European Paper Federation, Sweden leads the way in pulp production with a share of 31.4% in 2021, followed by Finland (28.7%) and Portugal (7.3%).

Paper and cardboard production in Europe: According to CEPI data, in 2020, Europe (CPEI 21.4% + 4.6% of other European countries) pulp output is second only to Asia (47.3%), accounting for 25.6% of the world's total pulp output, Nearly 20% of them are exported, and Asia is the main export destination, accounting for about 30% of the total export volume. It accounts for about 30% of the total export volume. Among the 18 member states of the European Paper Federation, Germany and Italy lead the way in paper and board production, with a share of 25.5% in 2021 and Italy, 10.6%, respectively. As an important producing country, the turbulent and various influences of the European pulp and paper industry will inevitably spill over to all parts of the world, and the global pulp and paper prices will form a resonance.

2. The tragedy of the European pulp and paper industry: energy-intensive industries, highly dependent on natural gas, cannot escape the crisis of rising costs

The pulp and paper industry is an energy-intensive industry, and the pulp and paper industry uses two types of terminal energy: thermal energy and electric energy. Electricity is mainly used to drive pumps and fans. The heat energy is mainly used in the digester and pulp drying in the form of steam. Electricity and the heat energy converted from fuel mainly rely on biofuels and natural gas. According to the import and export data of the European Paper Industry Alliance, the energy consumption of the European pulp and paper industry in 2018 has accounted for 60% of the total consumption in Europe. From the perspective of the energy structure of the pulp and paper industry, biomass fuels account for 60% and natural gas accounts for over 30%.

From the perspective of the impact of energy prices on the cost of the industry, in the direct manufacturing cost structure of the European pulp and paper industry in 2017, energy costs accounted for 11.2% of the total production costs.

Moody's Investors Service reports that EBITDA in the paper and forest products industry could decline by 10%-12% over the next 12 months due to higher energy, transportation, materials and labor costs, which could eventually lead to forced production of some pulp and paper mills. Shut down and raise the price.

3. Revisiting the high point of the dance of natural gas and pulp and the moment when the price fell

1. 2008: Developing Economies and the Devaluation of the U.S.

In 2008, pulp and natural gas peaked in July and November respectively, and then fell back rapidly. The ups and downs of pulp and natural gas have followed the pace of the macro economy. In 2007 and 2008, the high-speed growth of developing economies, indeed dominated by South Asia, Africa, and East Asia and the Pacific, ensured that the world economy maintained a global GDP growth rate of 2.07% despite almost zero growth in North America and the European Union. The growing demand for natural gas driven by economic growth exceeds the demand for increased natural gas production, so the price of natural gas has been rising. A similar path of "economy driving demand - consumption growth - production capacity tightening - price rise" also occurs in the price of pulp. At the same time, according to some pulp production enterprises, the price of energy accounts for about 15% of the production cost of pulp, so the high price of natural gas further pushes up the price of pulp.

In 2009, after the financial crisis, the price of pulp and natural gas fell from high levels, almost in line with the negative growth of global GDP that year. Pulp prices rebounded after the economy picked up in 2011.

But a mere 2% economic growth cannot fully explain the 63% annual increase in natural gas prices and 17% in pulp prices. Because the economy is maintained at around 2% in years without frequent price peaks. At the same time, the economy cannot explain why the two are out of sync.

The devaluation of the United States has pushed up the price of energy even more extreme. Energy and pulp are both US-settled international commodities. In the 2008 financial crisis, after the short-term return of the United States in Europe and the United States pushed up the price of the United States, the United States depreciated for several months relative to the currencies of Russia, China, the United Kingdom and countries in the European area. As a result, the price of natural gas and pulp has been pushed up.

In March of the same year, an earthquake occurred in Chile, one of the main pulp producing countries. Therefore, the difficulties in pulp mill operation and transportation in Chile caused international pulp prices to rise earlier than natural gas due to supply problems. The shock of this volatile event was quickly overshadowed by the subsequent peak of the dual effects of economic energy. On August 7, 2008, Russia and Georgia sparked a military conflict over South Ossetia; the conflict between Israel and Iran that same year heightened concerns about whether the Strait of Hormuz would be closed. Therefore, the contradiction between the major oil and gas producing countries will support the high price of natural gas in the future after this round of economic downturn.

2. 2018: The trade war hits the commodity accelerator

The peak of this round comes from the trump card of the world GDP growth rate exceeding 3%. The main reason is that the major oil countries restrict production and the artificially created natural gas supply and demand imbalance. But natural gas production rose in 2018 month-on-month due to limited OPEC capacity. OPEC’s share of global oil output fell to 41.5 percent in 2018, the lowest since 2003. Although OPEC's action to limit production has achieved remarkable results within member countries, OPEC's overall output in 2018 increased by only 2 million barrels per day compared with 2008, an increase of 5%. But maintaining high energy prices has allowed non-member countries to gain market share, effectively easing the tight energy supply situation.

On July 6, 2018, Trump announced to impose a 25% tariff on some goods from China. The sanctions have added friction to the global trade of goods. Therefore, goods from countries that have not been targeted have seen the dawn of higher demand. . For example, most of Rusal's revenue comes from Europe. As soon as the news of the sanctions came out, the price of Rusal fell all the way, while London aluminum and Shanghai aluminum rose. Pulp also got on the fast train of this edition of the bulk upswing.

The underperformance of the stock market has also given commodities an opportunity to draw money from the market.

3. 2021: Radical carbon reduction policies and ongoing conflict

In 2021, due to the popularization of vaccines and the experience of responding to the epidemic, the world economy will take a breather from the shutdown in 2020, and the prices of natural gas and pulp will also begin to move towards a track of warming up with the economy. This round of prices is the highest in nearly 15 years. It's energy, energy, energy that's causing the peak, not the modest rise.

Europe's reliance on natural gas continues unabated. In order to achieve the goal of peak carbon neutrality, many European countries have implemented an auction system for carbon emission allowances. Therefore, natural gas with a relatively small displacement is preferred. Compared with the aforementioned European dependence on natural gas, especially natural gas from Russia, it has laid a hidden danger for the danger of sanctions and gas cuts.

Until the geopolitical energy crisis. Sanctions on Russia eventually led to varying degrees of natural gas shortages in many European countries. The shortage has in turn brought the shutdown of many pulp and paper mills and other plants, so other than energy, other supplies are also facing foreseeable shortages.

The price of carbon emissions also pushes up the price of energy-intensive commodities like pulp. In August, the EU's monthly auction of carbon emission allowances was 24.1 million tons, down 43% from July. The rapid tightening has led to tight market supply. Recently, the carbon price of the EU Emissions Trading System (ETS) exceeded 99 euros (about 688.56 yuan) / ton, a record high.

This round of pulp and natural gas prices peaked at the same time, although there were multiple reasons for economic recovery and energy crisis. But by multiple indices, it's making history. For example, the geopolitical crisis index has skyrocketed, and only after 9-11 can match it. For the short and medium term, the tight shipping has led to the strong operation of the pulp contract in recent months. And in the long run, we are in the midst of dramatic change.