Cost structures

As with the energy structures described in the preceding chapter 4.2.2.1, the cost structures of pulp and paper manufacturing need to be understood prior to modelling and will be outlined in the following paragraphs. Raw materials – fibre and chemicals – as well as energy – fuels and electricity – deserve special attention.

(1) Fibrous raw materials

In upfront considerations, a potential fibre cost increase turned out to have a potentially signi-ficant indirect effect on the manufacturing costs of pulp and paper. The mechanisms behind this have been outlined in previous chapters (the dual nature of wood as fibrous raw material and fuel). Some of the interviewees also explicitly stressed this threat. Accordingly, detailed numbers on the consumption and costs of fibrous raw materials have been gathered for all mills. The subsequently displayed numbers provide the reader with an order of magnitude but cannot claim statistical generalisability.

1 A specific emission of 0.00 t CO2/t may occur if the process requires no steam supply (partially TMP, CTMP and fibre recovery) or if the steam required is purchased from a neighbouring power plant.

Looking at chemical pulping first, the specific consumption of six investigated mills ranged between 1.79 and 2.23 bdt/t, typical numbers when compared with statistics. At prices between 54 and 89 EUR/bdt, the mills had fibrous raw material costs between 121 and 183 EUR/t, whereas 183 EUR/t was rather an outlier, while the remaining costs ranged between 121 and 147 EUR/t. Due to comparable requirements to the raw material properties and yields (55-60%), significant differences between sulphate and sulphite pulping should not be expected and have not been observed. Semi-chemical pulp, in turn, should have slightly lower fibre costs, as the yield is typically higher compared to chemical pulps (70-90%). The fibre costs of (thermo-) mechanical pulps should be even lower as their yields are close to 100%.

The consumption of recovered paper in six investigated lines of fibre recovery ranged between 1.11 and 1.34 t/t. Due to different qualities of consumed recovered paper, the purchase prices ranged between 63 and 90 EUR/t, resulting in fibrous raw material costs between 70 and 117 EUR/t.

Looking at paper and board manufacturing, the specific pulp consumption of 14 investigated mills ranged between 0.77 and 1.08 t/t causing specific costs of fibrous raw materials between 111 and 374 EUR/t. The wide range suggests a differentiation in paper manufacturing processes. Again, two of them will be highlighted. Five of the mills investigated produce writing paper, a category containing significant amounts of fillers. Accordingly, the specific consumptions of pulp (0.77 to 0.91 t/t) were at the lower end of the above-mentioned range.

Four of these five mills paid average pulp prices of between 405 and 428 EUR/t resulting in total costs of fibrous raw materials between 316 and 381 EUR/t. One integrated Eastern European mills took advantage of significantly lower pulp prices, resulting in about 250 EUR/t total costs of fibrous raw materials. Comparably higher is the specific pulp consump-tion in the producconsump-tion of case materials. Due to strength requirements, the use of cheap fillers is tightly limited in this paper grade category. Accordingly, the specific consumption in four investigated lines ranged between 0.93 and 1.08 t/t, resulting in 111 to 191 EUR/t total costs of fibrous raw materials. Specific pulp consumption and costs of other paper and board manufacturing processes range between those of both the processes described.

(2) Chemicals

Like other sectors, the chemical industry faces cost increases due to emission trading.

Although chemical installations are not directly – via the industry route – subject to the European emission trading scheme, the industry is affected due to their combustion installations and – even more severely – due to increasing electricity prices. As producers of chemicals pass on a significant share of their cost increase to their customers, pulp and paper manufacturers are affected too. To allow a quantification of the respective indirect effect on the manufacturing costs of pulp and paper, the specific chemicals costs needed to be researched.

In pulp manufacturing, dissolving chemicals such as sodium sulphate (Na2SO4) and calcium sulphite (CaSO3) with respective make-up chemicals need to be differentiated from bleaching chemicals such as sodium hydroxide (NaOH), oxygen (O2), ozone (O3), hydrogenperoxide (H2O2) and chlorine dioxide (ClO2). Thus, (semi-) chemical pulping and CTMP manufacturing can be separated from all (thermo-) mechanical processes of defibration. The specific costs of chemicals are significantly higher in these processes, compared to processes, which require chemicals for bleaching purposes only. In four investigated sulphite and sulphate lines, the specific costs for dissolving chemicals and bleaching chemicals ranged from 26 to 51 EUR/t, whereas costs in the sulphate mills were at the lower end, costs in the sulphite mills were at the upper end of the range. With specific chemicals costs of 10 and 18 EUR/t the investigated CTMP lines supported the assumption of lower chemical input due to basically thermo-mechanical defibration. Finally, in the fibre recovery lines, the costs of chemicals for floatation and bleaching ranged in the same order of magnitude. In two mills, costs of 12, respectively 14 EUR/t, have been observed.

The most relevant chemicals for paper manufacturing are fillers such as clay (Al2Si2O5(OH)4), natural and precipitated calcium carbonate (CaCO3) and talc (Mg3Si4O10(OH)2), and pigments such as titanium dioxide (TiO2) and starch ((C6H10O5)n). Whereas coated papers (magazine, printing) have mineral contents of between 20 and 50%, uncoated papers (especially newsprint and case materials) have very low mineral contents (see Laufmann (1998)). This is of course, reflected in the specific chemicals costs. Five investigated lines of writing paper had chemicals costs between 61 and 96 EUR/t, while costs in three lines of case material ranged between 8 and 37 EUR/t.

(3) Fuels

Specific fuel costs of pulp and paper are driven by the respective consumption of steam and direct heat, the fuel mix, and fuel prices. Detailed descriptions of consumption and supply – overall and differentiated by process – have been given in preceding chapter 4.2.2.1 paragraphs (1) and (2). Thus, only the price component remains to be considered before an overall perspective of specific fuels costs can be taken. The price can be broken down into net fuels costs (including shipment), on the one hand, and energy, respectively emission taxes, on the other hand. Looking at purchased fuels, the net cost component does not cause difficulties as the respective costs can be gathered from accounting systems. With regard to internally supplied fuels (bark, black liquor, sludges etc.), the situation is different. As these fuels do not cause out-of-pocket expenses, usually no prices are deposited in the accounting systems.

Transfer prices – typically based on the energy content – can be calculated, but are subject to wide valuation scopes. Only one out of seven investigated chemical pulp mills had a defined transfer price for black liquor, but none of the mills recovering fibres from recovered paper was able to quantify the value of sludge. Energy and emission taxes of fuels are the second price component to look at. While emission taxes are an exception in Europe – considering

the nine countries investigated, only Sweden has such a tax system – energy taxes are have a wide spread due to the respective EU legislation¹. The EU defines minimum levels for energy and electricity taxes, although the member states can decide to levy higher taxes.

Furthermore, nominal and real taxes need to be differentiated as numerous exemptions exist². For this investigation, the real tax payment is considered as relevant. A comparison of energy taxes and emission trading will follow in chapter 4.2.3.

Due to the above-mentioned difficulties, the specific gross fuel costs were available only in a limited number of cases. Thus again, no statistical generalisability can be claimed.

Nevertheless, some typical numbers will be listed to provide the reader with an idea of the right order of magnitude of fuel costs in pulp and paper manufacturing.

The only chemical pulp mill with existing transfer prices for black liquor and other internal fuels had specific gross fuel costs of 77 EUR/t. The fuel costs of the remaining six investigated chemical pulp mills – excluding internal fuels – ranged between 10 and 43 EUR/t. As liquid and solid internal fuels typically have a significant share of the primary energy supply in chemical pulp mills, their true fuel costs should end up in the same order of magnitude as displayed for the first mill mentioned. TMP and CTMP mills, in turn, have very limited heat demand and, thus, comparably low fuels costs. This assessment is supported by the investigated TMP and CTMP mills with internal steam generation. Two mills showed specific fuel costs of 1, respectively 2, EUR/t (neglecting the combustion of small volumes of internal sludges.) Looking at fibre recovery, the situation is similar. As the heat demand emerges from disperger and pulp dryer only, mills which are not equipped with these features have zero fuel costs. In the remaining four investigated fibre recovery lines, the specific fuel costs ranged between 1 and 4 EUR/t, although the value of burned sludge needs to be added in all cases.

Compared to the wide spread of specific fuel costs in pulp manufacturing, the costs in paper manufacturing fluctuate rather moderately. Within the limited spread, newsprint should be at the lower end, due to its comparably lower steam demand, and tissue should be at the upper end, due to the expensive gas-fired heating of Yankee-cylinders. As only six of the 22 investigated paper mills were able to quantify their entire specific fuel costs, these assumptions could only be conditionally supported. The specific costs ranged between 26 and 63 EUR/t. If the numbers of nine further mills, which could provide thorough quantifications of external fuels costs only, are investigated carefully and estimates for internally supplied fuels are added, their total specific fuel costs likewise end up at about 20 to 60 EUR/t.

1 Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (Council of the European Union, 2003), see chapter 2.1.2.2.

2 See the German example regarding settlement of energy taxes and pension insurance in chapter 2.1.2.3.

(4) Electricity

About two thirds of the electricity consumption of the European pulp and paper industry is covered by purchases. The numbers published by CEPI (see Fig. 31 on page 70) have been validated empirically in this investigation. Details can be found in Fig. 40 in the preceding chapter 4.2.2.1. While the purchased volumes have been touched on beforehand, the focus of the following section is on the price of electricity. It can be broken down into five components:

• Energy costs

• Grid fees

• Taxes on energy and emissions

• Fees for promotion of generation from RES (renewable energy sources)

• Fees for promotion of CHP (combined heat and power generation)

Depending on the national legislation and the resulting competition in the electricity markets within the EU member states, the magnitude of the overall electricity costs and their above-mentioned drivers vary significantly. Liberalisation has been implemented to different degrees and with quite different results for generation and grid in the single countries. Energy taxes are in place in entire Western Europe – some countries have chosen to apply EU minimum taxes, others levy higher rates and define exceptions – while electricity customers in Eastern Europe are benefiting from a transition period. RES and CHP are also promoted in different ways and with different effects on electricity costs. The subsequent figures, although originating from a limited number of mills each¹, influenced to some degree by differences in consumption patterns, grid levels and purchasing power, give a good indication of the variations between the nine countries investigated.

The actual energy costs of the electricity price were relatively equal across the Scandinavian, Central, and Eastern European countries if two outliers (the Czech Republic at the lower end and Hungary at the upper end) are disregarded. The 2004 power prices ranged between 22.52 and 28.11 EUR/MWh. Scandinavia (Sweden and Finland) was at the lower end of the range, but the difference compared to Central and Eastern Europe was only about 2-3 EUR/MWh.

Other than actual energy costs, the grid fees vary significantly across the investigated mills, even if voltage levels are taken into account. If all fixed and variable grid costs are divided by the supply from the grid, the numbers range between 1.75 EUR/MWh for a mill in Finland to 19.98 EUR/MWh for a mill in the Slovak Republic. Grid fees in all other countries are almost equally distributed within this range. Again, the Scandinavian countries are at the lower end of the range.

1 This, however, should not be a distorting problem, as grid fees, taxes, and fees for the promotion of RES and CHP are regulated. Thus, they are equal for all mills with the same consumption patterns and access to the same grid level in the country (or region).

In 2004, electricity consumers in Poland, Slovakia and the Czech Republic were still benefiting from the transition phase toward energy taxes. In all other countries, taxes were paid, although real taxes were typically lower than nominal taxes. The lower end of the range was marked by a mill in Belgium with 0.30 EUR/MWh, most countries were below 1.00 EUR/MWh, and the highest real taxes were paid in Finland (4.40 EUR/MWh).

Fees for the promotion of RES and CHP were missing entirely in the Eastern European countries except the Czech Republic. Sweden and Poland have mandatory systems of green certificates; Finland has a voluntary system but finances promotion of RES and CHP recycling through energy taxes. Mills in other countries can benefit from international green certificate systems, but have no direct costs in purchased electricity. In Germany and Austria, the fees actually paid for RES and CHP were 4.71 EUR/MWh, respectively 5.16 EUR/MWh, but the fees in the Czech Republic were about 1.24 EUR/MWh.

The summation of the five components results in the effective costs of purchased electricity.

While the actual energy costs were relatively equal across the Scandinavian, Central, and Eastern European countries, the total costs of purchased electricity deviate markedly. In Swe-den and Finland, the average effective costs were 26.81, respectively 30.36, EUR/MWh. The mills in Central and Eastern Europe, which were not subject to certain special supply situations, paid between 41.83 EUR/MWh and 48.09 EUR/MWh. The average costs for a German mill were 43.58 EUR/MWh. With 53.29 EUR/MWh, the mills in Hungary paid more than twice as much as the Swedish mills – a severe burden for all electricity-intense processes.

(5) Administrative costs

A thorough quantification of all the direct and indirect effects of emission trading requires not only the gathering of actual cost data for raw materials and energy but also an approximation of administrative costs. Here, of course, no actual data from the base years could be used.

Thus, the interviewees were asked for estimates. As outlined in chapter 4.2.1, all of the mill representatives interviewed reported administrative efforts associated with the introduction of emission trading and expected further efforts due to the obligation of annual emission reporting. Moreover, they differentiated internal and external administrative costs. They assumed that the magnitude of these costs primarily depend on the complexity of the mill's energy supply situation, i.e., on the number of combustion installations and variety of fuels, while the number of pulp and paper production lines and the respective production volumes were assumed to have only limited relevance. However, an in-depth quantification proved to be difficult. About half of the interviewees abstained from estimating these internal and external costs entirely, while estimates provided by the other half seem to be of limited construct validity. For upfront as well as for recurring costs, numbers between a few thousand and 150,000 EUR per mill were stated. It was obvious that most interviewees had no

substantiated idea of upfront and recurring annual costs or provided consciously exaggeratedly high numbers. This problem was solved by applying equal default numbers for all mills (see chapter 4.2.2.4.2.1).