July 31, 2009 - Two years after beginning a series of cost and capacity reduction measures, Stora Enso said that more needs to be done.

In the company's January-June 2009 interim report, CEO Jouko Karvinen didn't pull any punches and said although the rationalization actions have paid off, market conditions have not improved and further cost cutting is in order.

“Three months ago we expected the second quarter of 2009 to be a repetition of the extraordinarily difficult first quarter. We were unfortunately right about the demand remaining weak. Our continued push for pricing quality, including heavy curtailments, paid off with a slightly positive year-on-year development in paper and board pricing, however combined with materially lower pricing of wood products and market pulp,” Karvinen said.

“What is important as well is that our cost improvement actions in the past two years are now paying off. The overall costs went down by about EUR 280 million (13 margin points) year on year in the second quarter, mostly through a EUR 109 million year-on-year improvement in quarterly fixed costs and EUR 83 million lower fiber costs. A material part of the latter is due to our actions in curtailing the high cost Finnish asset base and directing the limited volumes to our lowest cost assets.

Looking Ahead
Karvinen warned that his company doesn't see market conditions improving in the near term and that Stora Enso can't sit back and take a wait-and-see approach to the future.

“We foresee that demand will continue to be weak during the third quarter of 2009,” Karvinen said.

“Our lower cost level will help us to defend our earnings against price pressure in certain paper grades. Our Next Step program announced in April to streamline the organization and cut overhead costs by a further EUR 250 million is progressing on time and cost targets,” Karvinen noted.

“However, the completed and announced actions are still not enough to solve the external cost issues that have made some of our assets unprofitable, especially in Finland. For three consecutive quarters, the profit the Group has made outside Finland has been to a large extent or even completely lost in Finland. We are therefore preparing plans for not only continuing curtailments, but also permanent capacity closures in areas where we cannot see a rapid recovery to clearly positive returns,” Karvinen said.

“The specific plans, once finalized will be announced separately during the third quarter of 2009,” he added.

“We have not waited for better times, but instead acted, and that has proved to have been absolutely the right thing to do. We will never say we are ready, we have done everything. On the contrary, now we want to move even faster.”

Near-term Outlook: Markets and Products
According to Stora Enso, though the pace of contraction is slowing, demand is forecast to remain weaker than a year ago for newsprint, magazine paper and fine paper in the third quarter of 2009. However, some seasonal improvement in the newsprint and magazine paper market in the third quarter is predicted compared with the previous quarter.

Demand for liquid packaging board is forecast to remain the same as last year, but demand for other packaging products is expected to be weaker, Stora Enso said.

The demand outlook for wood products remains weak due to depressed construction markets throughout Europe, Japan and the U.S., it added.

Europe
In Europe, some graphic paper grades are exposed to price pressure. Prices for consumer board and industrial packaging products are forecast to remain largely unchanged. Production curtailments have led to an improved balance between supply and demand in wood products. Some wood product prices are expected to increase, Stora noted.

China
In China, the economy is recovering and demand for uncoated magazine paper is predicted to be stronger than a year ago. Prices for uncoated magazine paper are expected to stabilize. Market demand for coated fine paper is forecast to improve further and prices to maintain their slow improvement, the company said.

Latin America
In Latin America a seasonal improvement in coated magazine paper demand is anticipated in the autumn. Prices are expected to stabilize, Stora said.

SOURCE: Stora Enso