NEWS ANALYSIS: Weak dollar and false self-incrimination hurt paper industry

print this

By Jyrki Iivonen
     
      The downsizing of the West European forest industry has a very simple background. Supply of forest industry products exceeds demand.
     When there is too much supply, prices go down. This affects the market assessments of the companies, forcing CEOs to take severe measures.
     
In practice, shutting down paper mills is difficult. For instance, the factories of Voikkaa, Kajaani, Tervasaari, Kemijärvi, and Summa have been on the butcher’s block for ten years, but the death sentences were put off for a long time.
     It is difficult to evaluate the benefits and disadvantages of shutting down plants. For instance, on the European fine paper market there are still very old machines, whose capital costs have been paid off decades ago.
     The owners of these ancient devices are simply pushing cash flow, without worrying about the productivity of the capital investment. Therefore, shutting down a machine is of no benefit to a paper company if its neighbour is interested in gross profit and nothing else.
     A fateful moment for the paper industry occurred in the year 2000, when StoraEnso and UPM expanded into North America, and when M-real went into Sweden and Central Europe. In retrospect, the cost of the corporate purchases were ridiculous.
     
There are reasonable explanations for the craziness. There had just been a number of good years, when demand for paper grew steadily, raw material was cheap, and the euro was cheap in relation to the dollar. It was sensible to ship the surplus tonnes to dollar countries, where they did not have a negative impact on the European price level.
     The situation changed when the dollar started to depreciate. Dollars brought in less euros than before, even though the costs were still denominated in euros.
     The cheap dollar reversed the flow of goods. The tonnes that were previously intended for dollar countries were now pushed on Europe.
     At the beginning of the decade, wood imported from Russia was much cheaper than domestic raw material. Additional capacity was built on the foundation of wood imports. Forest industry executives spoke about a “Baltic Sea price”, which would keep the price of Finnish wood under control. Now Finnish wood is significantly cheaper than that which is imported.
     
The spring of 2004 was an important turning point, when competition authorities raided the offices of paper companies around Europe. Even the waste paper bins were inspected.
     The force behind the raids was UPM, which informed on itself and its competitors for operating a price-fixing cartel. The operation ended in an embarrassing manner; no paper cartel was found in Europe or North America.
     The false whistle-blowing nevertheless left deep wounds in the sector. Forest industry companies began, just in case, to compete furiously with each other, even though there was no need to do so.
     The stupidity of the actions is apparent when one compares the utilisation ratio of the paper machines and the price development of paper. Prices used to rise as utilisation ratios improved, and fell as the utilisation rations declined.
     In 2004 the situation changed. Utilisation ratios continued as normal, but prices collapsed. After that cutbacks in operations became necessary.
     
Helsingin Sanomat / First published in print 11.9.2008


Previously in HS International Edition:
  European Commission drops paper cartel investigation (17.11.2006)
  Former UPM CEO Niemelä: Cartel affair linked with resignation (5.9.2006)
  High price of wood and other rising costs lead to cuts in forest industry (11.9.2008)
  Stora Enso pulp mill closed down in Kemijärvi (28.4.2008)
  Stora Enso pulls out of North America after massive losses (24.9.2007)

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