Five months ago (24 February) Russia launched a military invasion of Ukraine, affecting many livelihoods, businesses and sectors across the world.
The conflict in the Black Sea region saw a surge in energy and commodity prices, forcing the price of grain and oilseeds to skyrocket to 21st-century highs, but what does this mean for the global packaging industry?
This month GlobalData published a report titled ‘Ukraine Conflict Executive Briefing – seventh edition’ stated that Russia had made gains in its goal of controlling the two southeastern regions of Ukraine known as Donbas and that there is a real risk of stagflation. The ‘previous edition that was published on 8 June reported that as the war passed the 100-day mark, there are no signs of the conflict fizzling out. This will continue to have repercussions for the packaging industry and companies reliant on Ukrainian materials are already feeling the side effects. In fact, Switzerland recently said it was considering emergency stockpiling plastic granulate for food packaging due to the ongoing conflict.
How has the conflict affected the packaging industry so far?
In the fifth edition of the report, information recorded that as of 3 May, 5.6 million people had fled Ukraine since the conflict began. The war has caused an exodus of over 300 major western companies, including the widespread closures of packaging and production facilities in both Ukraine and Russia. Uncertainty over when it will end has also led to some companies initially reluctant to suspend activities, either scaling or shutting down operations.
The declaration of martial law in Ukraine on 25 February forced many facilities such as Karpatneftekhim, Ukraine’s largest petrochemical (PET) plant to shut down operations.
Swiss glass packaging providers Vetropack, owners of Ukraine’s largest glass factory also made the move to send all employees home on full pay on 24 February. Situated in Gostomel, Kyiv, the facility suffered severe damage due to military conflict in March. On 18 May the company stated that “only clean-up work, as well as the protection and preservation of assets, were possible there in the medium term” and resuming operations was not possible with no given date.
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“We are aware of the impact this step will have on our employees in Ukraine – but we see no alternative at the moment,” explains CEO Johann Reiter of Vetropack Holding Ltd. “The damage to our plant caused by military action is significant, although not irreparable. Nevertheless, in our estimation, it will not be possible to immediately resume our production in Gostomel – even if the war ends, which is currently not foreseeable.”
“The requirements for resuming production will not be met in the near future,” emphasises Reiter. “In the interest of our entire corporate group, we have to act accordingly.”
In early April, Irish paper packaging company Smurfit Kappa, one of Russia’s largest corrugated paper companies and Finnish food packaging provider Huhtamäki, a company active in Russia for over 30 years, joined the growing list of businesses exiting Russia.
The ongoing conflict is causing companies operating in the area with strong financial ties to the region to consider the long-term effect it will have on business. Ball Corp, Coca Cola, Nestlé, Carlsberg, ABInbev, and ArcelorMittal are among the other companies closing Russian operations.
Paper and packaging specialist Mondi, the parent company of Mondi Syktyvkar, has already suspended operations in its paper bag plant in Lviv, Ukraine and is said to be considering its options in Russia. The company owns a paper mill in Syktyvkar, Komi Republic which operates an integrated power plant and is legally bound by the Russian government to supply energy to around 60,000 people.
In a statement dated 10 March, the company said: “Syktyvkar is currently operating, but the mill is starting to see a number of operational constraints, including the importing of process chemicals, spare parts and other critical supplies. While difficult to assess the ramifications in what remains a fast-moving situation, this may significantly impact the operation of the mill.”
A sharp rise was also seen in aluminium and paper as noted by Trading economics. The price of aluminium, which was as low as US$2,885 per tonne, just before the conflict started (early February), skyrocketed to US$3,825.2 per tonne by 4 March. Rising aluminium prices and disrupted exports from Russia helped Chinese smelters scale production to record levels, seeing the price drop once activities had resumed. The kraft pulp industry hasn’t fared as well. The end of January saw the price of kraft pulp stand at US$5,911.7 per tonne before seeing an increase of US$1,000 per tonne in early March as a result of the conflict. As of 11 May, the price of kraft paper stood at US$7,256.6 per tonne.
“If you look at oil and gas prices, in the last few months, you’ll see that it was actually starting to drop off towards the end of last year, and then it’s actually gone right back up again. Packaging materials require energy for production, some more than others such as glass containers, where they use oil and gas for manufacturing. Any rising oil price will affect them, not directly but further up the chain. Essentially driving up the price of polymer, wood and corrugated cases,” said GlobalData director of packaging consulting Dominic Cakebread.
What will be the long-term effects on the packaging industry?
It is uncertain exactly how the packaging industry will be affected in the long-term but such actions as companies pulling out from the region and worldwide sanctions are liable to have long-lasting effects. Already imposed sanctions such as the US banning the import of all Russian oil and gas, along with the EU’s plans to ban all coal imports, industries across the board could feel the long-term effects. The rise in energy prices is liable to stay at elevated levels as Western Europe attempts to reduce its energy dependency on Russia.
Russia has reacted by banning the export of more than 200 products including medical, agriculture and timber. Russia and China are two of the world’s biggest producers of aluminium, with Russia accounting for 6% of global production. Tensions between Russia, China and the West will inevitably affect the price of commodities globally and some experts believe it could lead to a rise in recycling.
“It might drive the industry towards more recycling because of this big push for recycling in the West. If you can’t get raw aluminium supplies, or it’s very expensive, you’ve got a large volume of currently non-recycled cans out there,” explained Cakebread. “It’s a similar situation with paper. There are probably going to be shortages because of the paper, board and wood coming in from Russia and Ukraine, as it is quite important to Europe. If you increase the recycling, you’ve already got the board there without taking out the supplies, so I think they will adjust that.”