“The new energy normal”: How decarbonization is essential in saving Europe’s paper packaging industry

29 Sep 2023 --- According to a new Rabobank report, Europe has gone from being one of the lowest cost paper producing regions to the highest cost region on Earth. To remain competitive on the world stage, Europe’s paper producers must act together to decarbonize their energy supplies and reduce prices by transitioning to new technologies, assert the report’s authors.

The paper states that a “new energy normal” has come into force since the COVID-19 pandemic, with price increases rising 210% between 2020-2022. In comparison, the North American and Asian markets saw increases of 70% and 40%, respectively – putting Europe at a significant disadvantage. 

Dr. Natasha Valeeva, senior analyst for food and agri supply chains at RaboResearch Food & Agribusiness, tells Packaging Insights that “energy will stay a major competitive differentiator for European producers, not only globally but also within the continent.”

“The new European energy normal brings challenges but also offers opportunities.”

“With the right decarbonization approach, the industry can keep its competitive position. Opportunities are, however, not the same for every company.”

Accelerating the energy transition 
To remain competitive against other global regions, Valeeva says EU policymakers should support mechanisms that ensure that companies in the member states are not exposed to competitive disadvantages compared to other regions and stimulate a level playing field within Europe.

“The playing field has been disturbed due to differences in energy supply systems and recent government intervention, next to existing differences in the energy market environment – for example, gas and electricity prices, taxes and grid transportation fees,” she says. 

New technology is essential in making the EU paper industry competitive globally again, says the report.Governments must also help provide long-term solutions during the energy transition period by supporting infrastructure development for alternative energy and gas supply.

According to the International Energy Agency, nearly 50% of the emissions reductions needed to meet 2050 neutrality will come from technologies yet to be on the market, the report notes. 

These technologies include green hydrogen and CO2 capture at industrial and commercial scales and other “breakthrough technologies” that can produce paper and paperboard without the need for water or steam. 

“Despite challenges, the new European energy normal accelerates the energy transition in the sector,” says Valeeva. 

Inevitable collapses?
Despite action taken by industry and government to accelerate energy transition in Europe and lower costs, the market has reached a point at which many companies are facing an inevitable downfall, according to Valeeva. 

“There will likely be companies – more often of small and medium size along the supply chain – for which coping with extra energy costs and pursuing all the strategies described in the report might be too challenging or prove insufficient to continue operating profitably and to remain competitive.”

Not all companies may have sufficient capital to invest properly, for example, given the effects of the energy crisis. This is especially true if they were not prepared, by investing earlier in energy solutions, Valeeva explains. A low-demand business environment, coupled with significantly increased costs of new investment projects, could prove too much for many companies. 

“Also, interest rates are rising in European markets, which might limit some companies’ access to working capital and, in turn, their ability to finance new projects,” she continues. Even with new technology hitting the market, many companies will not be able to survive the European market, according to the report.

“These companies might need to look for a way to survive. Some might go bankrupt, decide to exit the market and sell (sometimes minority shares – we have seen a couple of examples already) – if their assets are attractive enough for other players.” 

A European exodus? 
Some paper companies are already deciding to leave the European market for lower-cost regions like the US. The biggest example recently is the Smurfit WestRock deal, which Valeeva says supports the Rabobank analysis. 

“Before the merger was announced, we observed that a new situation in the European energy market stimulated European companies to review their strategies, also at a strategic level.”

The report notes several delayed development plans from major European paper players. For example, Stora Enso decided to delay a possible future conversion of its Langerbrugge graphic packaging plant in Belgium at a total investment of €400 million (US$424 million). 

Also, Schumacher Packaging postponed the construction of three paper packaging plants in Poland and the UK as part of a €700 million (US$742 million) investment plan. 

MM Paper & Board also decided to delay a €660 million (US$700 million) investment plan in Poland to 2024. 

These examples show that while some companies consider exiting the market altogether and selling, others are seeking opportunities to grow and improve their competitiveness through synergies and economies of scale, says Valeeva. 

The total amount of exits, delays and acquisitions from Europe have not been extensively outlined in this report but will be the subject of upcoming research, continues Valeeva. 

“However, the SmurfitWestRock deal might be the push for more M&A activities in Europe and European companies in other regions.” 

By Louis Gore-Langton