Nordic papermakers accounting for a fifth of global output are fighting curbs on sulfur emissions from ships in the Baltic Sea that they say will make transport costs higher than for rivals in regions where limits are lower.
Rules adopted by the International Maritime Organization mean it will become cheaper to ship pulp to Rotterdam from Brazil than northern Sweden, said Jan Johansson, chief executive officer of Svenska Cellulosa AB (SCAB), Europe’s top tissue producer. SCA runs a fleet of vessels that must also sail via the North Sea, another area affected by the curbs, to reach end markets.
Directives aimed at stemming air pollution from ships say the amount of sulfur used in fuel in the two European seas and waters off North America must be cut to 0.1 percent from 1 percent by Jan. 1, 2015, versus 3.5 percent elsewhere. Sweden exports 85 percent of its forest products, prompting companies including Holmen AB (HOLMB) to seek a delay in the steps until 2020.
“I just don’t get why we are making a rod for our own back,” Holmen CEO Magnus Hall said in an interview. “We are talking competitiveness, welfare and GDP growth prospects.”
A jump in costs would weigh on an industry struggling to make money as Europe’s debt crisis dents demand. UPM-Kymmene Oyj (UPM1V) of Finland, the region’s No. 2 papermaker, said yesterday that writedowns and charges clipped fourth-quarter profit by 1.6 billion euros ($2.1 billion), and Nordic stock performances are also lagging behind those of competitors in the tropics.
SCA has gained 35 percent in the past six months and Holmen is up 5.8 percent, versus jumps of almost 70 percent at Fibria Celulose SA (FIBR3) of Brazil, the largest pulp producer, and close to 90 percent at Suzano Papel e Celulose SA, the country’s No. 2.
The European Union, where the rules were enacted on Dec. 17, says tighter curbs are necessary to improve public health and protect fragile ecosystems. Ship emissions increase the risk of conditions such as chronic bronchitis and lung cancer and cause 50,000 premature deaths a year in Europe, according to a study by Denmark’s Centre for Energy, Environment and Health.
Exporters face a 28 billion-krona ($4.3 billion) increase in costs in Sweden alone, including 13 billion kronor in higher fuel bills, SCA’s Johansson estimates. Holmen, Europe’s fourth- largest producer of publication paper, fears an additional 150 million kronor in annual fuel expenses, Hall estimates.
Foreign trade accounts for half of Sweden’s gross domestic product, and with only a single road to mainland Europe, the Oeresund Bridge to Denmark, about 90 percent of goods go by sea.
At SCA, half of total volumes are carried in three roll-on roll-off ships measuring 170 meters (558 feet) long and with a capacity of 8,200 tons, plus a single container carrier.
Operated by Stockholm-based SCA’s Transforest shipping unit, the vessels load up twice a week in Umeaa and Sundsvall, north of the capital, and sail to Rotterdam and London, where their cargo is disgorged for transfer to ports around the world. A second route serves Germany via the Baltic harbor of Luebeck.
Ships outside the designated areas must cut the sulfur content of fuel to only 0.5 percent by 2020, the IMO regulations say. That may hand an advantage to Brazil’s Fibria and Suzano.
Tropical producers are already squeezing European companies by tapping a longer annual growing season that means eucalyptus trees can be harvested after eight years, compared with 50 for pines. Some European papermakers including Helsinki-based Stora Enso Oyj (STEAV), the biggest in the region, and UPM have added mills and plantations in South America to help counter the threat.
International Paper Co. (IP), the No. 1 U.S. papermaker, has a far bigger home market than the Nordic producers and does not operate its own ships. The Memphis, Tennessee-based company estimates the cost of the sulfur regulations at less than $1 million dollars spread over 3 million export tons.
“While we do not like to see any of our costs rise, the increase for low-sulfur fuel is relatively modest,” International Paper spokesman Tom Ryan said in an e-mail. “Our exports would only be partially affected for the portion of time that our ocean carrier ships would be on U.S. or EU waters.”
The variation in charges means Nordic companies couldn’t raise prices to pass higher expenses to customers without losing market share, leaving cost cutting as the only option at a time when operations are already being slashed, Johansson said.
SCA said Dec. 19 it would cut two sawmills and 200 posts at the forest-products unit after announcing 1,500 job cuts at its hygiene operations the previous month. Net income at the company fell 72 percent to 356 million kronor in the third quarter while dropping 27 percent to 249 million kronor at Holmen.
Operators can comply with the IMO directive in three ways; using low-sulfur fuel oil in the restricted zones, fitting ships with exhaust-gas cleaning systems or “scrubbers,” and switching to propellants such as liquid natural gas. The first two steps are more costly, and Baltic ports generally don’t supply LPG.
Lobbying has so far fallen on deaf ears, according to Hall and Johansson, with a letter dated June 29 to Swedish Prime Minister Fredrik Reinfeldt receiving no reply. Another from Confederation of Swedish Enterprise Chief Urban Baeckstroem in October was also ignored, his spokesman, Peter Isling said.
The letters were forwarded to the Environment Ministry, Reinfeldt’s spokesman Daniel Valiollahi said by phone. Erik Bratthall, a spokesman for Environment Minister Lena Ek, whose Centre Party describes itself as “green social liberal,” didn’t respond to e-mails, phone calls or text messages.
Sweden could, in collaboration with other EU countries, apply to the London-based IMO for an exemption from the rules, Karolina Boholm, director of transport at the Swedish Forest Industries Federation, said in an e-mail. This has to be done by March, and companies can’t apply individually, she said.
IMO spokesman Lee Adamson said the measures it adopts always originate from countries in whose waters they will apply, and become law only with the force of national or EU law.
Johansson said a campaign by ministers to scrap a ban on exports of snus, a Swedish tobacco powder consumed by placing it under the lip, is an example how aggressively the government should handle the IMO regulations.
“When you look at how much Sweden is fighting for snuff you wish someone would fight like that for us too,” he said.
To contact the reporter on this story: Janina Pfalzer in Stockholm at firstname.lastname@example.org