Stora Enso and UPM issue profit warnings

Finnish forest industry giants Stora Enso and UPM both issued profit warnings almost simultaneously on Wednesday. Stora Enso’s announcement is interpreted as being more serious of the two.
     
Stora Enso said that its operating profit excluding non-recurring items for the second quarter of 2008 is expected to fall by half compared with the same period in 2007.
      Half an hour later, UPM also reported that its operating profit for 2008 is expected to be weaker than that of last year due to higher than estimated costs of wood fibre sourcing and the weakening result for the sawn timber business.
     
In fact, UPM announced already last Friday that the result for its sawn timber business within the Wood Products Division is expected to further weaken markedly.
      UPM has already started the statutory negotiations with employees for the possible closure of the Leivonmäki sawmill in Joutsa in Finland.
      Reportedly, Stora Enso is also reviewing its plans for production curtailments in the second half of 2008 as well as permanent capacity reductions.
      The papermakers’ financial situation is uncertain as the forthcoming increases in Russian export duties on roundwood are causing continuing worries in the Baltic Sea region.
      On Wednesday Prime Minister Matti Vanhanen (Centre Party) appealed to the large forest-based companies, urging that in spite of difficulties they would refrain from abrupt closures and layoffs.
      ”Should the market situation and the increases in Russian timber prices result in some adjustments, I hope that they will only be temporary”, noted Vanhanen.
     
Russia, a major wood supplier for Finnish pulp and paper companies, intends to increase the tax on wood exports to EUR 15 per cubic metre, up from EUR 10 per cubic metre.
      Vanhanen also hopes that the forthcoming shortage of raw materials that could be triggered by the possible breakdown in the timber trade between Finland and Russia might be largely compensated by domestic wood.
     
A temporary stoppage in some of the company’s production plants could be considered, as the wood export tariff question with Russia continues to be somewhat uncertain, said Hannu Ryöppönen, the Deputy CEO and CFO of Stora Enso.
      ”The situation is extremely difficult, and we have to consider the heaviest cost alternative. However, certain information is needed as to whether or not wood prices will increase as the domestic demand is likely to grow”, Ryöppönen noted.
     
A new factor having negatively affected Stora Enso’s profitability in the first half of 2008 is inflation, according to Ryöppönen.
      As a result of increasing inflation, wood prices have continued to rise steadily, which was not anticipated.
      However, Ryöppönen was unwilling to take any stand on potential new closures of plants.
     
The plant most dependent on Russian wood is Stora Enso’s Enocell pulp mill in Uimaharju in Eastern Finland. Particularly its older production line is at risk of being closed down. At Imatra’s Kaukopää unit, mainly the production of fine papers is also threatened, while the company plans to sell off the entire Kotka mill.
      Moreover, Stora Enso is also likely to consider divesting the sawmilling operations in Tolkkinen and Kitee as they are not integrated with the Group’s other processing plants. Reportedly, the sawmill in Varkaus is already for sale, while the Veitsiluoto sawmill in Kemi is obviously unprofitable.
     
Wednesday's announcements saw stocks in both companies tumbling. The Stora Enso T share was down 7.92% in Helsinki, while UPM shed 4.42%.
      However, on a day when the OMX Helsinki Index was down by just over 1%, neither of these two shares were the biggest fallers.
      That dubious honour went to Huhtamäki, which also issues a profit warning in the morning. investors did not like what they heard, and the packaging materials company's share fell more than 11%.
      In the afternoon, the trio of profit warnings was joined by a fourth, from Kemira. The chemicals firm warned that operating profit and earnings per share in 2008 would not match the previous year's performance, and the stock shed around 4% on the news.


Previously in HS International Edition:
  Paper manufacturer UPM cutting 680 jobs worldwide (18.12.2007)
  Stora Enso to shut down two factories in Finland and one in Sweden - 1,400 jobs to go (25.10.2007)
  Stora Enso pulp mill closed down in Kemijärvi (28.4.2008)

See also:
  Väyrynen remains hopeful on partial solution to timber tariffs dispute (27.5.2008)

Links:
  Stora Enso press release 18.6.2008
  UPM press release 18.6.2008