The European Deforestation Regulation (EUDR), a key component of the EU Green Deal, is fast becoming a focus of concern for the pulp and paper industry in Europe and globally. This concern stems not from a lack of understanding of the EUDR's objectives, but from the many ambiguities surrounding its implementation, including the development of tools for companies to comply with the regulation.
The purpose of this Viewpoint is to explore the implications of premature implementation of the EUDR.
The EU Dispute Resolution Act is expected to reshape trade and supply chains in industries that may be wrongly associated with deforestation, such as the pulp and paper industry. Businesses will face increased operating costs, regulatory scrutiny and the threat of fines for non-compliance, which could amount to at least 4 per cent of annual turnover, confiscation of goods or even a temporary ban from participating in EU procurement or tenders.
Selling products into the EU will lead to higher costs for businesses, which will undoubtedly lead to higher prices when selling in Europe, which will inevitably increase the paper industry's production costs and further undermine its competitiveness.
The fact is that most of the rest of the world is unlikely to introduce legislation to combat deforestation and reduce the impact of EU regulations anytime soon. Instead, the focus will be on enforcing existing efforts. Even if countries adjust, the challenges of tracking complex supply chains and the associated costs will increase the incentive for companies to move to lower-risk markets. Image.
The main risk to the European paper and board industry lies in pulp, as European pulp imports exceed 6 million tonnes in 2023, mainly from Brazil, North America and Chile. The risk of importing commodity pulp from Brazil appears to be higher as the country is likely to be categorised as being at higher risk of deforestation, leading to stricter compliance requirements. However, given the modernised operations of most of the country's pulp producers, the EU regulation is likely to present an opportunity rather than a threat.
At first glance, the issue does not seem too complicated considering Europe's net trade surplus in pulp. Of all the pulp used for paper production in Europe, 60 per cent is consolidated pulp and 40 per cent is commodity pulp. The challenge lies mainly in the commodity pulp segment. Most of the bleached hardwood kraft (BHK) and bleached softwood kraft (BSK) pulp used in the region is commodity pulp, accounting for 65-70 per cent of the total. In addition, up to 50 per cent of the BHK pulp used in Europe is imported, indicating a high level of dependence on overseas paper wholesale suppliers. If imports were to stop suddenly, the supply of BHK pulp in the region would drop significantly. This could lead to changes in market prices and could prompt paper and board producers to explore other alternatives, such as increasing the use of recycled paper.
Given the widespread use of wood chips, BSK producers face greater challenges in complying with the EUDR because of the complexity of tracing fibre back to individual forest plots. Image.
Although the impact is significant, given the complexity of each market, the impact on other paper and board grades must be analysed separately. As a result of the EU Regulation, the European printing paper industry is likely to face two major challenges. Firstly, it may be difficult to obtain sufficient market pulp at a reasonable price, which could increase production costs and put domestic production at risk. Secondly, global trade could be disrupted. If overseas suppliers shift their exports outside the EU, European producers could benefit by substituting imports with domestic production. However, this assumes that all European producers are able to comply with the EU Regulation and maintain exports. It also assumes that the loss of global competitiveness is minimised. In this case, starts could be 6 percentage points higher than our current forecast.
Loss of competitiveness and the potential inability to comply with the EU Regulation could affect European exports and create opportunities for producers in other regions, such as Asia, to gain a larger share of the European market abroad. As a result, the EU Regulation could lead to an unintended increase in the use of high deforestation risk pulp and paper outside of Europe. If there is no change in domestic demand or capacity, European graphic paper starts could fall by 11 percentage points from our current forecast, putting more producers at risk.
With less than seven months left for companies to comply with the new version of the EU Regulation, the risk of market disruption is significant. Many European and overseas industries affected by the EU Regulation are concerned about being able to complete compliance on time. The number of requests for major changes to the Regulation or delays in implementation is increasing. Despite the implementation push