The slow decline that still somewhat afflicts the North American industry is being addressed in Europe by ruthless and timely action. That action includes closures, eliminating redundancies and sell-offs. And Europe's big three have already swung the axe.

by David Price

This year in Europe will be seen as the endless night of long knives, which could last for another two years as overcapacity, rising energy costs, low prices and low-cost competition destroyed the bottom line. It all began as an “own goal” in May 2005 when Finnish pulp mill workers went on strike for nearly 10 weeks. Finnish industry lost millions of dollars and one CEO said, in an unguarded moment, that Finland should think of relocating its pulp-making operations. That's starting to happen.

Stora Enso
The Finnish strike made all European CEOs think about survival. First out of the trench was Stora Enso with its Asset Performance Review (APR). Between May 2005 and September this year, the company had divested its shares in Wolfsheckh (Germany), Celbi mill (Portugal,), sold Grycksbo and Linghed mills (Sweden), Advance Agro (Thailand), and closed down the Reisholz (Germany) and Berghuizer (Netherlands) mills.

The Summa (Finland) and Uetersen (Sweden) mills were spared as better efficiency improved their financial results. Stora Enso also withdrew from a board mill project in China because it didn't see enough potential profit in the deal.

But while Stora was slashing and burning in Europe, it formed a joint venture in China for publication papers production, and will build a corrugated plant in Russia. However, what I find most significant about Stora Enso's thinking is that it now finds it is cost-effective to ship pulp from its Brazilian mill to Oulu in northern Finland and to its Chinese mills.

UPM
UPM's option was for closures and the elimination of redundancies, all in Finland. This is tough, as some of the operations are the only business in town. The company is in the first stage of a three-year profitability program, so more closures, sales or divestments can be expected.

Once again the usual suspects are: overcapacity in coated papers, weak prices, and energy costs.

UPM will close the Voikkaa paper mill and Kymi PM 7 this quarter. Tervasaari PM 6 and the oldest pulp line will be closed early next year. And coated paper production at Jamsankoski PM 4 will end and be converted to label face paper. This drive towards profitability will cost 2,557 jobs in Finland in the next three years.

The only redeeming feature of the redundancy program is the generous retraining and relocation benefits.

Retraining will be offered at the Aker shipyards in Turku. This will be funded by UPM as will relocation expenses. Redundant employees will also be able to use UPM's occupational health services for up to two years. An additional training program will be set up by Empower, which is one of the largest service providers in energy and telecoms in Finland, specializing in forest industries maintenance.

And lastly, UPM has offered start-up advice and cash for those employees who wish to create new businesses. In the nature of things, the Voikkaa site in southeast Finland has already attracted interest from real estate firms.

M-real
M-real's options are capacity closures, cost reductions and the sale of assets. What is ominous is that UPM hinted that what will happen over the next 15 months may not be enough to restore competitiveness in Europe.

Kari Jordan, UPM chairman, said, “We firmly believe that further consolidation within the European paper industry is needed and that the structure of European paper merchanting is going to change.”

M-real will close two mills in the UK and Sweden, shutdown two paper machines in Germany, reducing the company's annual capacity of coated and uncoated woodfree paper by 485,000 tpy—15% of its fine paper capacity. In addition, three folding carton plants in Belgium, Hungary and Finland will be put up for sale. M-real also said there will be “ …a sale of additional assets in the future.”

Comments
A number of things are worth thinking about in these circumstances.

1. The first is that some CEOs believe that there is much more European capacity to be closed or sold in the next two to three years.

2. Some of the operations that were sold were bought by private equity players. The Celbi mill was sold to a Portuguese company, Advance Agro went to private investors in Hong Kong, and the Wolfsheck mill was sold to a Swiss finance company for one Euro!

3. The sale of the Celbi mill by Stora Enso was part of its strategic aim to “ ...refocus the group's short-fiber strategy on South America, where the first step was the start-up of the Veracel pulp mill in Brazil.”

4. Will pulp manufacturing gradually be run down in Scandinavia to a fraction of what it was? And will those mills in the region which remain operational be fed by southern pulps?

But just in case readers get the wrong idea about Europe, consider this. There will be 11 new projects in the region next year, including seven start-ups and four rebuilds.

PaperAge. Copyright © O'Brien Publications, Inc. All rights reserved.