Cheap dollar ties noose around forest industry neck

Export tonnages meant for dollar area remain in circulation in Europe and tighten competition

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By Jyrki Iivonen
     
      It's an old story: a short-lived joy leading to a lengthy sorrow.
      This more or less sums up the past decade from the point of view of the Finnish forest industry.
      When Finland joined the euro area on January 1st 2002, the possibility of using our classic trump card - devaluation - was removed from the nation's industries.
      After the wars this possibility had been taken advantage of regularly and with no little enthusiasm, most recently in 1992.
      In the euro frenzy it was initially believed that the exchange rates no longer had any weight.
      Even the Finnish Forest Industries Federation scoffed at the negative implications of the disappearance of the Finnish markka.
      Since then the assessments have become more realistic.
     
The accompanying graph proves that the exchange rates do play a role in the success of the forest industry.
      In the graph on the right the customary dollar/euro relationship has been turned the other way round. The euro/dollar ratio tells us how many euros one dollar buys.
      The forest industry’s turnover and net profit results shown in the graph on the left have been compiled from the Helsingin Sanomat "What's the Bottom Line" analyses of financial statements from 2000-2008.
      The rate of exchange of the euro has increased dramatically. At the beginning of the decade one US dollar would get you between 1.0 and 1.2 euros. Today’s exchange rate is only 68 cents.
     
According to Pekka Ylä-Anttila from the Research Institute of the Finnish Economy ETLA, the downward trend of the dollar is inextricably linked with the results of the forest industry. “Especially if this trend is lengthy”, adds Ylä-Anttila.
      In the view of the researcher, the forest industry itself also advocated the euro connection. The branch assumed that the challenges in prospect could be dealt with.
      “This illusion was brought on by the surprisingly good results posted at the beginning of the decade. Then the exchange rate mayhem presented itself, after which there was little that could be done to rectify the situation.”
      The forestry companies sell most of their production to Europe and therefore submit their invoices in euros. Their own expenses the firms cover likewise in euros, and so the situation should be in equilibrium - in theory, that is.
     
The devaluation of the dollar and the revaluation of the euro have diverse multiplier effects.
      Exports to the USA have turned unprofitable, but the important American clients still have to be attended to.
      The forest industry countries that charge in dollars or have tied their currency to the greenback, such as Brazil, Chile, Indonesia, and China, have a decided competitive edge.
      These countries dictate the price level on what Finland calls the overseas market.
      But at the same time the new players in the forest industry sector also wield an effect on the prices in the European market.
     
In yesteryear, the areas across the ocean were a tip, into which the excess tons were dumped. This was a way of protecting the European price level.
      The situation has now been turned on its head. Europe has now become the dumping ground where the new forest industry countries offload their surplus output.
      The weak dollar governs the flow of goods. The tonnages meant from Europe to overseas remain in circulation in Europe and tighten the competition hereabouts.
      This brings down the prices, which in turn eats into the profitability of the whole business.
      The curves on the adjacent graphs show this clearly.
     
An interesting side plot to the devaluation of the dollar is that in recent years there have no longer been cheap American consignments appearing on the European market.
      This is primarily because the production in the United States is not enough to satisfy even the local demand. Therefore the U.S. purchases a lot of paper and sawn timber from Canada.
     
Another explanation is the weak situation in the North American industry.
      The production plants are in poor-to-appalling shape. Those mills still in operation have been patched up with metal wire and duct tape and the branch has not seen any significant new investments within living memory.
      Millions of tons’ worth of the antiquated production capacity has been closed down, and especially the newsprint and paperboard output can no longer spare any reserves to be exported to Europe.
     
     
Helsingin Sanomat / First publishedin print 2.1.2010

More on this subject:
 A bitter return home from their world adventures

Previously in HS International Edition:
  PM Vanhanen urges forest industry to come up with new products (20.5.2009)
  Forest industry leaders warn of consequences of new energy tax (7.4.2009)
  UPM uses plant shut-downs to fight slowing demand for forestry products (29.10.2008)

JYRKI IIVONEN / Helsingin Sanomat
jyrki.iivonen@hs.fi