The European Deforestation Regulation, a crucial element of the EU Green Deal, has swiftly become a focal point of apprehension for the European and global pulp and paper industries. This unease stems not from a lack of understanding of the EUDR's purpose but from the numerous ambiguities surrounding its implementation, including the development of tools for companies to comply with the regulation.
The premature enforcement of the EUDR is expected to have profound implications for the industry. It is projected to reshape trade and supply chains for sectors that can be mistakenly linked to deforestation, such as pulp and paper. Companies will face increased operational expenses, regulatory scrutiny, and the risk of fines for non-compliance, which could reach a minimum of 4% of the annual turnover, confiscation of goods, and even a temporary ban from participating in EU procurement or tenders.
Selling products into the EU will lead to higher costs for companies, inevitably resulting in price increases when selling in Europe. This is bound to increase production costs for the paper industry, further jeopardizing its competitiveness. The truth is that most of the rest of the world is unlikely to introduce legislation to combat deforestation and reduce exposure to the EUDR in the short term. Instead, the focus will be on enforcing existing efforts. Even if countries adjust, the challenges of tracing complex supply chains and the associated costs will heighten the incentives for companies to shift to low-risk markets.
The primary risk for the European paper and board industry revolves around pulp, as it imported over 6 million metric tons in 2023, mainly from Brazil, North America, and Chile. Imports of market pulp from Brazil might appear to be at a higher risk due to the chances of the country being classified as having a high risk of deforestation, leading to even more rigorous compliance requirements. However, considering the modern operations of most pulp producers in the country, the EUDR might present an opportunity rather than a threat.
At first glance, the issue may not appear overly complex, considering that Europe has a surplus of net trade in pulp. Out of all the pulp used for paper production in Europe, 60% is integrated, and 40% is market pulp. The challenge primarily lies within the market pulp segment. Most of the bleached hardwood kraft and bleached softwood kraft pulp used in the region is market pulp, accounting for 65-70% of the total. Additionally, up to 50% of the BHK pulp used in Europe is imported, indicating a significant dependence on overseas suppliers. If imports were to suddenly stop, there would be a significant decrease in BHK pulp availability in the region. This could lead to changes in market prices and could trigger paper and board producers to explore other alternatives, such as increasing their usage of recycled papers.
Given the widespread use of woodchips, BSK producers face greater challenges in complying with the EUDR due to the complexities of tracing fibers back to individual forest plots. Although significant, the effects on other paper and board grades must be analyzed separately, given the complexity of each market.
The European graphic paper industry may face two challenges due to the EUDR. First, there might be difficulties in obtaining enough market pulp at a reasonable price, which could increase production costs and put domestic production at risk. Second, there is a potential for disruptions in global trade. If overseas suppliers redirect their exports away from the EU, European producers could benefit by substituting imports with domestic production. However, this assumes that all European producers can comply with the EUDR and maintain their exports. It also assumes a minimal loss of global competitiveness. In this scenario, operating rates could increase by up to 6 percentage points from the current forecast.
The decrease in competitiveness, along with the potential failure to comply with EUDR regulations, could affect European exports and create opportunities for producers in other regions, like Asia, to gain a larger share of the European market overseas. As a result, the EUDR could lead to an unintended increase in the use of high-deforestation-risk pulp and paper outside Europe. Without changes in domestic demand or capacity, operating rates for European graphic paper could decrease by as much as 11 percentage points from the current forecast, putting even more producers at risk.
With less than seven months remaining for companies to comply with the new EUDR, the risks of market disruptions are significant. Many industries in Europe and overseas affected by the EUDR are concerned about meeting the current compliance deadline. The number of requests for a material change to the legislation or a delay in its implementation is rising. Although still low, the likelihood of a delayed implementation is increasing.
