Explainer: Energy crisis & the paper industry
What has caused Gas & Electric wholesale prices to jump?
Vaccine Roll-outs for COVID-19 have largely allowed developed countries to re-open their economies and on the back of government support schemes such as Furlough in the UK and Cheques in the post in the US; households have accumulated sizeable bank balances and are feeling more confident to spend in the economy.
Consumers are spending, and this has caused the suppressed global supply chains to come under strain. The service sector of developed economies is still at pre-pandemic levels; especially in sectors such as tourism & travel, however retail and manufacturing is booming.
A significant proportion of global supply chains start in China. Over the summer many of China's largest coal producing provinces have suffered terrible floods and this has reduced the availability of coal, which is the mainstay of electricity production in China. In turn this has forced China to generate more electricity from its Gas PowerStations.
Over the past weeks and months a price war has ensued between the East and the West on who is willing to pay the highest price with LNG supertankers, who've departed from places such as Qatar & Iran turning around and heading to whichever country has bid more.
Is it Brexit? No, not really. Europe is suffering with the same high gas, and then in turn high electricity prices as the UK. The impact has felt more acute in the UK for the following reasons: The UK generates 20-30% of its electricity from wind, and whilst cheap and clean, when the wind doesn't blow we need to either import electricity from our neighbours, France or Norway, or alternatively generate from other sources such as Gas, Biomass or Nuclear. September was a particularly un-windy month and a high capacity supply line from France was brought down due to an fire and won't be operational for many months.
Why is the paper industry particularly impacted by higher energy costs?
In short: Paper making is very energy intensive. The recycled paper needs to be pulped, heated and mushed to be able to be reformed so that it can be remade into Coreboard that we can use to create label cores, carpet tubes and even industrial cores.
To put this in perspective: The paper-making industry is the fourth (4th) largest energy consuming industry in the world.
All paper production sites in Europe use both electricity and mostly, gas. The need the gas to run the boilers that create the steam that is an essential part of the paper making process. Later in processes they need to dry the paper, which they again do by heat created from electricity and gas.
This is why energy prices are having a much larger impact on paper based products such as tape cores, flexible film cores and textile tubes. The impact on pricing will also be seen on cardboard boxes. As this energy crisis is happening globally we can't mitigate the price increases by buying paper from other regions of the world.
How long will prices be higher in the paper industry?
We just do not know. If the past 18 months has taught us anything it is that you can't predict the future. We don't expect the price surge to be short term and to last well into 2022.