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Annual Report

The big topic of the year was the global pandemic and the impact that the Corona virus is still having on us all today. This raised a whole series of questions, medical ones first of course: What are the characteristics of Covid19 ? What do I have to do to avoid catching it? What help can quarantine, hospitals and vaccinations offer? An important legal issue was this: How many restrictions on fundamental rights are proportionate to keep the population healthy. Politicians were confronted with this: How do federal structures in Austria and at the EU level have to function in order to effectively contain the pandemic. And last but not least, the economic future was at stake: which reimbursements and subsidies would keep unemployment low and preserve economic structures in such a way that the economy could be restarted immediately after the pandemic. At the same time, in the course of the extensive public discussion, it was repeatedly asked how we can use the situation and the additional budgets to get closer to the continuing, parallel goals of digitalisation and climate protection.

Pandemic brings economic slump

After a peak in 2017/18, the economy began to slow in 2019/20. However, the impact of this was eclipsed by pandemic containment constraints from March 2020. With the first Covid19 cases, a wave of infections occurred in the spring. Following a national lockdown, incidences remained low during the summer, but a second, stronger wave occurred in the autumn, which was again met with a public shutdown. A third wave developed in March 2021, just before widespread vaccination programs began in Austria and around the world. Economically, the service sector with tourism, gastronomy, culture and trade was particularly affected. The ongoing restrictions and closures in Austria led to a GDP development of -7.3 percent, slightly better than the European average. For 2021, experts expect a rebound effect and growth of over four percent. Unemployment rose by one percentage point to 5.4 in the course of the year, which was only possible due to very expenditure-intensive measures by the federal government. For employment, the focus was on the short-time work schemes, which were extended several times. By the end of the year, the budget deficit amounted to -10.1 per cent, which led to an increase in the public debt ratio from 71 to 84 per cent.

Paper industry also loses internationally

2006 remains the record year for the Austrian paper industry with its 5.2 million tonnes of production. In 2020, the volume of paper fell by 5.3 per cent to reach around 4.7 million tonnes. The weaker result was caused less by the quarantine measures in the mills than by the market and the demand gap, especially for print media. Machine utilization was down to 84 percent. Capacity, meanwhile, had hardly changed, and the shutdown of KM 4 in Hirschwang did not take place until the end of the year. The graphic arts sector declined sharply, by 13.5 percent to 2.0 million tons.

Growth for packaging papers, on the other hand, continued,
this time by 2.0 percent to 2.4 million tonnes. The sector
Specialty Papers also lost slightly and ended up at around 305,000 tonnes. For the small country of Austria, such production volumes are only possible thanks to a very high export ratio, which was 86.6 percent in 2018. Cost management, quality and customer orientation have a high priority. On the production side, the Austrian paper industry developed in line with the European average, which was -5.0 percent. The 85 million tons of paper produced in Europe represent a significant decline compared to the 102 million tons produced in the record year of 2007. In these quantities, the sectors are roughly weighted with 30 percent graphic, 60 percent packaging and 10 percent specialty paper. The decline in graphic grades hits European wholesalers particularly hard: they do most of their business with publication papers.

No growth in print media

Due to the change in living conditions in the lockdown, the use of paper products changed significantly. Overall, paper consumption in Austria fell by 4.0 percent to 1.9 million tons. Even though the need for quality media was high during the pandemic, other print segments declined. Examples would be menus in the gastronomy sector, advertising for events, travel catalogues or the magazine circulation at the hairdresser. In addition, competition from electronic media, which are ideal for the rapid consumption of information, is continuing in the case of publication papers. The increase in consumer goods, smaller pack sizes in the food sector and the currently booming mail order business are contributing to a positive development in the consumption of packaging papers. A growth market within the specialties is hygiene papers, which continue to have a good consumption forecast.

Timber availability remains important

In Europe, 37 million tonnes of pulp and mechanical pulp were produced, 2.8 percent less than in 2019. In Austria, the volume trend for virgin pulp was also weak, with production falling by 3.3 percent to 2.0 million tonnes. At the same time, demand for the raw material wood decreased by 1.3 percent to 8.6 million solid cubic meters. It was possible to obtain most of the required volume from domestic sources, with an import ratio of 23.7 percent. Imports from regions close to the border, such as Slovenia, Bavaria or southern Bohemia, are particularly relevant here. Further reasons for imports can be the offers of special assortments, or simply the quantitative availability in the domestic market. Due to the ÖSG-supported burning of biomass, the demand for wood has increased strongly in the last 15 years. However, logging in Austria has not exceeded 20 million solid cubic metres for years, with additional volumes only arising from storm or beetle damage. In the medium term, pulp production in Austria will continue to increase, as there are plans to expand capacity at sites such as Pöls, Lenzing, Hallein or Gratkorn. In order to secure the wood supply mainly from domestic wood also in the future, the industry cooperates closely with the domestic forestry industry. This is done particularly intensively when large quantities of wood are to be removed and stored after extensive damage events. For the discussion of the climate strategy, the paper industry brings in arguments such as efficiency, independence from raw materials and investment instead of tariff subsidies:CO2 should be saved as best as possible, taking subsidy costs into account.

The second important raw material is recovered paper - with around 2.6 million tonnes used in 2020. A good part of the secondary fibres comes from domestic collection, but the larger part from imports. Recycling in Austria works well in principle, even though the return rate of 68.6 percent achieved in 2020 fell sharply due to business closures and the unclear market situation in the middle of the year. As the economy recovers, however, collection is expected to move back toward 80 percent. This is also about the limit of technical feasibility. After all, some used or soiled paper products are not supposed to return to the cycle at all.

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Energy as an important by-product

In order to increase competitiveness, several companies in the paper sector are moving into more attractive markets and niches. To this end, they are developing paper grades with new properties for special applications, especially in the technical and packaging sectors. For pulp mills, dissolving pulp, from which textile yarns are produced, is an alternative way of adding value. Biorefineries are developing further ways to make better use of the wood components cellulose and lignin and to make higher-value fibre products, chemicals and fuels, especially bioethanol, from them. In particular, mills that have pulp liquor or biosolids available improve their sales when they feed in electricity or extract district heat for nearby communities, most recently to the tune of about 30 million euros. The future use of free waste heat potential and easier access to the market for congestion management in the grid would be further contributions to achieving the climate targets.

Falling average revenues

2020, average revenues for a ton of paper fell to below 650 euros by the end of the year. In this economically weak situation, however, some items in the preliminary costs also went down. What pulp mills pay for wood is made up of the cost of the wood and the transport costs. The level for a solid cubic meter of wood free to mill was below 60 euros in 2020. The price for the pre-product pulp fell noticeably to only 800 dollars per tonne of the reference grade Scandinavian kraft pulp (NBSK), but picked up again towards 1,000 dollars at the beginning of 2021. The exchange rate to the dollar also affects the purchase cost of short fiber pulp (BEK) from Latin America, but it has remained relatively stable over the past five years. Recovered paper is the second important raw material in the industry. Due to market uncertainties in the first lockdown, the average price sagged sharply in Q2 2020, but then returned to its pre-pandemic level of over €100. In principle, however, the market remains tight: On the one hand, collection is becoming more difficult as paper consumption declines; on the other hand, demand for recovered paper in the packaging sector is increasing significantly. International trade in the raw material continues to be influenced by an Asian import ban on certain grades of recovered paper. A critical factor for mills is energy costs. In particular, ancillary costs such as grid fees, taxes,CO2 costs and green electricity subsidies have a negative impact. In contrast to other countries, where there are relief measures for energy-intensive companies, Austrian companies are at a clear competitive disadvantage here. And this is exacerbated if policymakers are unable to set stable framework conditions for long-term business planning. Additional costs arose from 2018 due to the separation of the joint German-Austrian electricity price zone. With a declining number of employees, total wages and salaries amounted to less than 480 million euros, a decrease of 0.9 percent. One problem frequently mentioned by companies is bureaucracy: businesses have to spend more and more time and effort to keep all the required documents and evidence.

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Solid results in the crisis

Sales in the industry developed unpleasantly, falling by 14.2 percent to 3.6 billion euros - a minus that can be explained by lower volumes, but also by significantly lower sales prices for pulp and paper. Nevertheless, the consistent cost management of the paper mills helped in many cases to keep the results positive. The strong crisis performance of the paper companies operating in Austria is also due to a solid equity ratio of almost 50 percent - ten points above the industry as a whole.

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Investing in CO2 reduction

Investments were down in 2020 at just under € 190 million. The largest completed project was the construction of the new energy plant in Nettingsdorf. However, the industry continues to invest and has planned and started several projects for 2021, which are expected to have a volume of around 300 million euros by the end of the year. Included on the list are two energy projects in Gratkorn and Bruck, which will reduce fossilCO2 emissions, two expansions of pulp production in Pöls and Hallein, as well as the comprehensive optimization of KM 3 in Frohnleiten. However, with European paper demand developing weakly since 2010, overcapacities are emerging in some sectors. In the last ten years, for example, almost half of the production capacity in the graphics sector in Europe has been shut down, but the packaging sector has been expanded at the same time. Specifically for 2020, this means: shutting down three million tonnes of production capacity and at the same time building new plants for two million tonnes, mainly in the packaging sector.

China continues to invest

Global paper production stood at around 410 million tonnes in 2019, with the paper regions that had been strong in the past - North America, Western Europe and the Far East with Japan and Korea - showing signs of weakening. Even if the production volume of the Chinese paper industry increased only slightly in 2019 and 2020, this should not obscure the fact that the planned economy-controlled system has continued to invest even during the crisis. New capacities of several million tons per year are now ready and will supply the paper market in the recovery.

The country already produces more than 110 million tonnes of paper per year. The companies there mainly supply the domestic market, but also ship large quantities of graphic paper to overseas markets. The domestic focus is on packaging paper, which the Chinese export industry needs to transport its goods. Five of the top 20 global companies are based in China. The top five globally are International Paper (US), Nine Dragons (China), WestRock (US), Oji (Japan) and DS Smith (UK). This year, Mayr-Melnhof has risen to the top of the list, increasing its total capacity to well over two million tons of cartonboard through the acquisition of the integrated mills of Kottkamills (Southern Finland) and Kwidzin (Northern Poland).

Following progress in global free trade, protectionist measures have recently been on the rise - including for wood, paper and recovered paper. For the EU, effective trade policy instruments, such as anti-dumping procedures, remain important. The UK consumes around seven million tonnes of paper and has to import half of it. Consequently, the European and British paper industries had expressed scepticism about Brexit, as the now completed exit will lead to noticeable delays in the value chain. Quarantines for truck drivers and border closures, as ordered at the beginning of the pandemic, on the other hand, hardly hinder the international movement of goods.

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High attention for environmental issues

For the next 15 years, Pöyry Consulting has forecast global growth of 1.1 percent annually in paper consumption. The reasons for this are an increase in population, increasing urbanization and a growing middle class, especially in the large markets of China and India. However, in the developed economies of Europe, North America and Japan, the market is predicted to shrink at minus 0.8 percent per year. Here, manufacturers must expect to fight for lower unit costs in a crowded-out market with excess capacity. This applies both to the companies themselves and to the locations within a group. In such a situation, it is helpful to score additional points with the customer with excellent quality and convincing sustainability. At the same time, opportunities will arise for those companies that differentiate themselves from others by specializing in new paper applications. For example, many companies in Austria are currently working on new types of coatings for food packaging and other applications. This not only broadens the spectrum of possibilities, but also helps to reduce the amount of plastic in circulation. Additional potential for the industry lies in supplementing paper production with new products from biorefineries. It is well suited for this because it can handle large-scale plants and has a lot of experience in processing biomass with added value. The first steps in this direction have already been taken. There are already companies that generate high-quality chemicals or fuels from the by-products of wood, from lignin and hemicellulose. Numerous research projects are underway in the companies.

For the time being, however, the number one environmental issue remains climate protection and all measures that contribute to lowerCO2 emissions. The paper industry is well positioned in this respect because it manufactures products that store carbon and uses raw materials that are renewable and easy to recycle. Mills are making steady progress in energy efficiency. The industry has a very high bio content in its fuel supply and a roadmap to complete decarbonisation by 2050.