Every inch of businesses reviewed, huge investment in automation, unnecessary processes removed, sustainability plans accelerated, energy price hedges, increased stock volumes, price adjustments… and more. Report by freelance journalist Simon Creasey.
Even before Vladimir Putin’s “special military operation” in Ukraine, energy prices were starting to creep upwards. The conflict only served to exacerbate an already challenging situation across Europe and other parts of the world. All industry sectors have been negatively impacted by these increases and some have suffered more extreme hardship than others. The tissue industry, which is highly intensive in terms of energy consumption, falls into the latter category and has had to endure price rises that haven’t been witnessed in decades.
According to Pau Vila, General Manager at L.C. Paper, European gas prices have been stable for the last two decades hovering between €12/MWh and €17/MWh. However, today the price of gas is around the €222/MWh mark and has reached peaks of €350/MWh – a 2000% increase.
And because gas is used to generate electricity the price of the latter has also risen rapidly. Vila says electricity prices in Spain have historically hovered between €35/MWh and €60/MWh, but they are now between €300/MWh and €400/MWh – an increase of between 6x and 10x.
“In monthly terms, this means our average energy monthly bill has moved from around €350,000/month to upwards of €2,000,000/month, something which is very hard to digest at the speed at which it has happened,” says Vila.
Increases of this scale in such a short period are unprecedented and there is little the industry can do to mitigate against such hikes. Especially at a time when shipping, labour, packaging, pulp and other raw material costs are also on the rise, as the world lurches towards a recession caused in large part by spiralling inflationary pressures.
So how bad has the situation been for businesses in the tissue sector, what measures have they put in place to offset the impact and how bad might the situation get in the future – assuming we’re not over the worst of it just yet?
The picture differs from country to country globally, but Europe, and in particular the UK, have had a tough run of things in the last few years in terms of economic turmoil. On top of issues relating to Brexit and the Covid-19 pandemic, there have been climate disasters, supply chain issues, labour shortages, rising insurance costs, raw material inflation and interest rate hikes. It’s little wonder Khalid Saifullah, Managing Director of Star Tissue, says manufacturing businesses have had a torrid time over the last few years and that doing business in today’s volatile and political climate has been exhausting.
“It’s times like these when quotes like the one from Donald Rumsfeld [secretary of defence under US President George W Bush] start making sense,” says Saifullah. “There are known knowns, things we know that we know; and there are known unknowns, things that we know we don’t know. But there are also unknown unknowns, things we do not know we don’t know.”
He adds that the resilience of his company has been sorely tested due to this whirlwind of different economic issues and it has forced him to “review every inch of the business to help mitigate each crisis as it fell”.
Oday Abbosh, Founder and Chief Executive of Better All Round, says his business has also endured massive inflationary pressures thanks to rising shipping costs, labour shortages and HGV driver shortages, but the thing that’s had the single biggest impact on the business has been the soaring cost of energy.
“Energy prices have [been] a double whammy,” he explains. “It hits the cost of running our own operations as well as of course massively inflating the cost of paper and other raw materials purchased. We can see daily in the news the impact energy prices are having on everyone’s business and lives right now.”
For Pau Vila, the other big issue all tissue companies have had to grapple with is the growing cost of raw materials like pulp, due to the fact that pulp production is also energy intensive.
“So, intuitively, if the energy cost situation was fixed, it is likely that pulp prices would also decrease significantly,” says Vila. “The very high freight costs have not helped in that regard, since if freight costs allowed for it we could have imported pulp from places where energy costs were not so severe, but that was not a feasible option as the sea freight costs also climbed considerably. The same situation applies to chemical products, even though they represent a much lower percentage of the overall cost structure of the tissue industry compared to energy or pulp.”
The fallout from these increases have been stark. Vila says whenever prices increased rapidly his business inevitably entered periods of negative margins, which impacted on L.C. Paper’s Q4 2021 and Q1 2022 financial performance. In addition, several mills have been forced to close over the last few months, some temporarily and some permanently.
There is a looming threat the inflationary pressures could quickly deteriorate into bankruptcies as recently happened with German toilet paper company Hakle, which went into insolvency in September.
Different companies have dealt with the price rises in different ways to ensure their survival. Saifullah says that at his business “huge investment has gone into automation removing unnecessary processes and improving productivity – removing human touch where possible”.
Poppies Europe has also gone down the investment route. According to Armindo Marques from Poppies, the energy bill for his business has increased by more than 300% and that triggered an investment in solar panels to cover 90% of the manufacturing plant’s roof space to offset some of the cost.
“It was always the plan in our road to sustainability, the energy crisis put us ahead of our own agenda,” he says. Marques adds that “to maintain or at least slow down the erosion of our margin we had to become more agile and flexible in our cost and price structure, we must review all pricing on a regular basis”.
The business also recently invested in another TV840 OMET Twin line couple with a Multipack wrapper to just run 40cm 8-fold products – the 18th line dedicated to napkin production. This investment in new technology has helped to improve the energy efficiency of the business.
Most businesses are thinking creatively to come up with solutions to address inflationary pressures. A spokesperson for Essity says: “We carefully prepare and assess the risks and effects of different scenarios, such as rampant price developments and possible energy shortages in Europe. In order to avoid and reduce the effects of possible disruptions, we implement a series of measures such as finding alternative fuels and increasing stock volumes. We also have energy price hedges in place and implement energy optimisation measures at all our production facilities. Essity is a company with a wide production footprint across the globe. Through our network of mills, we also have the possibility to move mother reels and finished goods between countries and sites.”
As for L.C. Paper, Vila says his business has deployed a number of contingency measures. In additional to accelerating the rollout of renewable electricity self-consumption it has incorporated alternative combustibles such as biomethane as a replacement for some of its gas needs and ‘hedged’ energy prices “whenever the future markets had reasonable purchasing indexes, which has not always been the case,” says Vila. “Despite those measures, the speed and severity at which the crisis unfolded made it very difficult to keep up with the contingency and so the business has suffered from very degraded margins”.
The business has also made “great efforts” to pass price increases on to its customers and Vila says that whereas around 18 months ago the average tissue parent reel price was around €900 per tonne the company is currently selling at €2,100 per tonne. “This has represented a huge effort for both our company and our clients, which are also suffering from this situation,” says Vila.
Better All Round’s Abbosh says his business works “collaboratively with all our customers in a transparent fashion to agree price adjustments as needed. No one likes a price rise just to cover rising costs, especially in these challenging times for households”.
The challenge Abbosh and his industry peers face is establishing when the current turmoil impacting the market might settle down. Abbosh admits it’s impossible to predict with any certainty what might happen over the coming months as we head into winter.
It’s a view shared by Saifullah who says it’s difficult to know with any certainty what new disaster is lurking around the corner. “Just when we think the worst is over a new worst comes and hits us in the face. We can plan for the known knowns, mitigate some of the known unknowns, but we cannot do anything about the unknown unknowns and unfortunately these seem to be growing,” he adds.
Vila also thinks that there could be further pain on the cards in the coming months and we could see a number of businesses in the sector fall by the wayside due to the combination of challenging economic factors.
“The winners and losers of this crisis are going to be shaped very much by luck: the lucky companies that happened to close a very good energy purchasing deal before the crisis without knowing what was going to happen; the lucky companies that had an energy supplier which didn’t break their contract once the prices started climbing uncontrollably; the lucky companies that had enough cash or diversification to survive prolonged periods of time on negative margins or production shutdown,” says Vila. “This is a worrying sign to me, since we are going to see failing companies which are overall modern, competitive and with a mature product and market – there is currently no institutional support to avoid those industrial collapses.”
The industry could be in for a long hard winter ahead.