T360°: Can you give us a snapshot of the challenges being presented to the tissue market at the moment?
Kottwitz: In addition to energy, the tissue market faces supply chain disruptions, high fiber costs (although the first signs of increased price pressure on fiber suppliers and reduced energy price levels have been seen due to a mild winter season) compared with a low cost level in mid-2020, high inflation in large parts of the world, and a weak economy, even recession, in parts of Europe.
In energy, mainly for gas and electricity, part of the industry faces a supply threat in winter along with extremely increased price levels and partly huge differences between neighboring countries and regions.
WEPA CEO Martin Krengel stated in an interview late last year that the energy costs of WEPA’s French mill has an advantage of 250€/t over its German mills. Germany is no longer supplied cost-efficiently by Russian gas due to the Ukrainian war.
The countries that are suffering the most (because of the former dependency on Russian gas) look to be Italy and Germany. Both countries produce an aggregated volume of well over 3 million tons of tissue per year. But not only Europe is being affected.
Morocco’s gas needs, for instance, are supplied by Spanish LNG terminals, while Algeria has local gas in excess and even exports via pipelines to Italy, but not to Morocco. This own gas offers significant cost benefits and security of supply.
Energy prices have also increased more or less globally with only single exceptions, however, on a somewhat lower level compared to Europe.
These soaring energy prices as well as insecurity of availability are obviously major factors when it comes to challenges the industry is currently facing. Can you give us a general overview as to just how bad the situation has been in the various regions?
In parts of Europe, the gas supply to private households is prioritized over the industry. This means a scarcity of gas would likely impact the industry first.
In the EU, the price of gas in particular has risen temporarily by more than 1,000 percent compared with the start of 2021, due to Russia’s supply restrictions.
The huge price increases can be seen, followed by recent falling prices, until the end of 2022. The main reasons are:
- continued high gas imports to Europe despite a drastic drop in Russian flows
- gas storage levels of 95 percent in the EU and close to 100 percent in Germany
- decline in gas consumption, especially in European industry, by 30 percent
- mild weather this winter resulting in reduced demand for heating
In 2022, spot electricity prices were five to 10 times higher than in previous years.
Short-term electricity prices are also at record levels in other European countries. In particular, France, Italy, and the Baltic region are affected. In France, electricity prices are even higher than in Germany. The low availability of French nuclear power plants due to weather and repair-related outages are affecting the country. In November, only about 45 percent of nuclear capacity in France actually generated electricity—a 30-year negative record. However, it can be expected that in the medium term the French situation for electricity should be improved compared with other countries. The utilization rate of nuclear capacity recently improved to around 70 percent.
Since the Iberian Peninsula is less integrated into the European interconnected grid, the Central European markets with high prices do not exert such an upward pressure on Spanish day-ahead prices. Other reasons for the declining electricity prices in Spain since June 2022 are the independent supply of Spain by liquefied natural gas and thus lower primary energy prices than in other EU countries, as well as a state-imposed maximum price for natural gas used in gas-fired power plants for generation (source: EU Commission). The price of natural gas used in power generation was limited by the Spanish government to 48.8 EUR/MWh. In comparison, gas prices on the spot market in Central Europe were over 240 EUR/MWh as of the end of August.
Electricity prices on spot markets are generally higher in winter than in spring and summer due to higher electricity consumption. This year, there is the added fear of a gas shortage. Since gas-fired power plants often determine the price on the day-ahead market during peak electricity demand periods, it is likely that low gas imports in winter will lift both gas and electricity prices to new records. The main risks that could exacerbate the shortage situation are a cold winter, a reduced supply of LNG due to rising prices in Asia, an insufficient reduction in gas demand in Europe, a complete absence of Russian gas supplies, and continued low availability of the French nuclear fleet.
What are producers doing about these challenges?
Tissue mills are reacting by re-activating former means of energy generation, for instance coal, oil, or LNG instead of gas. Not really the sustainable way to do it, but this has to be seen as an emergency measure for this winter in parts of the Northern Hemisphere.
Price increases in tissue took time and effort, but it looks like it has been successful in most regions. After some challenging months, a lot of tissue companies have gone back to profitability.
What tissue producing companies particularly stick out when it comes to their handling of energy challenges?
Kimberly-Clark UK has signed a Power Purchase Agreement (PPA) that will lead to the construction of a new wind farm owned by Octopus Renewables Infrastructure Trust that will make almost 80 percent of all its electrical power consumption in the UK renewable.
The new Cumberhead onshore wind farm in South Lanarkshire, Scotland, will supply Kimberly-Clark with approximately 160,000 megawatt hours of renewable energy annually for consumer and business-to-business brands. This represents an emissions reduction of 55,625 MTCO2e per year—the equivalent of taking 38,628 passenger vehicles off the road every year.
Also, Sofidel has made moves with photovoltaic plants at its mills and contracts with onshore wind farms in Sicily and LC Paper in Spain with a range of unique solutions.
What is your forecast for these energy challenges?
The war in the Ukraine will end hopefully soon; however, the gas pipelines from Russia to Europe are not expected to re-open in the foreseeable future.
The alternative plans on energy sources are quite different between regions and even on a country level in Europe. While countries like Italy, Lithuania, and Germany (later in 2023) put a ban on nuclear energy, other countries—supported by a decision of the European Parliament (European Parliament backed EU rules labelling investments in gas and nuclear power plants as climate-friendly)—are pushing this technology.
It can be expected that nuclear energy and own gas sources will put those countries in a favorable cost position over solar and wind power and even LNG, at least for a number of years.
We will likely see very different costs of energy for tissue manufacturers in different countries and regions. For such a significant part of the cash costs, this might have an impact on future investment decisions.
In the short term, what can tissue producers be doing to reduce the impact of energy prices and the volatility of supply?
In the short term, tissue mills in critical regions need to save energy. So we will see a lot of energy audits and resulting action lists for reduction. While a potential shoe press or steel Yankee installation will not be a feasible option in the short term, numerous smaller process optimizations have almost certainly been put in place.
Is there any particular technology you can see becoming the “go to” for the future of energy production at a tissue mill?
Induction heated Yankee dryer and fossil-free hood heating would be a solution for the largest part of the energy requirements of a tissue mill, if the electricity comes from sustainable sources. There are some first attempts at hydrogen as an energy alternative, but this technology is still very expensive. Biomass and bio-residues are of course another way to generate energy.
What is really impressing you currently when it comes to the latest technology across tissue production? What about digital applications? Are they making a difference in your opinion?
The mill scale pulp mill based on local agricultural residues (for instance, Essity’s Mannheim mill using straw) can strengthen the regional approach. In addition, there might be resulting opportunities for biofuel or other by-products.
In terms of digitalization, we estimate an improvement of some 10 percent in the level of efficiency; however, there is still a lot to be done to really raise this potential.
What does the near future hold for tissue makers?
With the re-start of Ence’s Pontevedra pulp mill and the new start-ups of MAPA and UPM’s Paso de los Toros, mills producing between 3.5 and 4 million tons of BEK are coming to the market, which will definitely have an impact on fiber costs for non-integrated tissue mills.
The weak economy in China might still have an effect globally—the forecast halved the economic growth for China in 2023.
And of course, it is necessary to continue on the path of sustainability for our energy intensive industry to strive for the lowest possible carbon footprint, including a best possible regional approach.