UPM uses plant shut-downs to fight slowing demand for forestry products
UPM would rather lose market share than lower prices; 1,000 to face temporary layoffs at sawmills and board plants next year
Forest industry company UPM warns that the global economic crisis has increased significantly the insecurity factors related to the demand of the company’s products. This means that next year the firm expects its paper, board, sawn timber, and other processed products to be more difficult to sell than this year.
“We are not immune to the shifts in the world economy”, said UPM CEO Jussi Pesonen on Tuesday while presenting his company’s interim result for Q3/2008.
According to Pesonen, the company has prepared itself for the slowing down of demand and higher production costs.
Even though the world’s economic difficulties are curtailing the demand for forestry products, this is not directly reflected in the company’s productivity. What is essential is the balance between supply and demand.
In recent months all European and North American forest companies have shut down production facilities, or otherwise limited their output. This has happened in the field of magazine paper production in particular. Thanks to the move, the producers have managed to even raise the price of the paper type.
In newsprint production the Nordic manufacturers have announced price increases, even though the demand for the paper type has decreased by three per cent this year. More than likely the demand will continue to fall next year as well.
What increases the producers’ negotiating power is the diminishing number of newsprint production facilities. Next year UPM will close down its Kajaani mill.
According to Pesonen the company increases the price of paper whenever possible. “With our customers we have entered into negotiations, the objective of which is a rise in prices.”
UPM has revised its marketing strategy. The company states that it is prepared to compromise its market share rather than start selling paper for unprofitable prices.
The firm’s quarterly report reveals that the plans are to cut production by 200,000 tonnes during the last quarter of 2008. This is a message to clients that they should not expect any discounts from UPM.
Stora Enso’s aims are similar. Only the wording used is different. Stora Enso speaks about "quality pricing".
First and foremost Pesonen is worried about the price and availability of raw material.
According to its competitors, UPM has heated up the domestic wood market by paying around ten euros more than the other buyers for raw logs. The average prices for a cubic metre of spruce logs and pine logs are now EUR 58 and EUR 60 respectively.
Jaakko Sarantola, vice president of Forestry and Wood Sourcing, argues that UPM is not paying excessive prices. UPM favours felling whole areas, which is cheaper than thinning out stands of trees.
What matters to the firm is the price of wood fibre at the mill, not in the forest.
UPM is Finland’s largest user of spruce. Sarantola admits that the low quality logs have been hauled to the paper mills, when normally sturdy logs are used to produce planks and boards for the construction industry. The UPM sawmills reported heavy losses towards the end of summer.
UPM announced on Tuesday that it would be temporarily reducing its sawmilling and plywood production capacity in 2009.
In a statement issued to investors, UPM wrote that the company:
"...will begin employee negotiations on a plan to temporarily reduce sawn and processed timber products production at all the company's production units located in Finland. The main reason for the capacity reduction is the still weakening market situation. The production reductions at each mill will be carried out according to plans made separately for each mill. The employee negotiations on production reductions and the possible temporary layoffs will start immediately. Approximately 800 people are affected by the negotiations."
"In addition, UPM plans temporary layoffs at its Heinola plywood mill. The company will begin employee negotiations due to the quickly weakened market situation in birch plywood. The whole mill and all employee groups are affected by the employee negotiations. The possible layoffs in Heinola are estimated to last over 90 days."
In the case of Heinola, some 230 employees are likely to be affected.
As far as profitability is concerned, UPM is still in a league of its own among the Finnish forestry firms.
In July-September its operating profit was running at just over 9% of net sales, whereas Stora Enso’s corresponding figure remained below 5%. Metsäliitto and Myllykoski, in turn, struggled to keep their trading profit a couple of percentage points on the plus side.
UPM received positive feedback from investors on Tuesday. The company’s stock price strengthened in Helsinki by 4.37%. In UPM’s wake, Stora Enso also managed similar advances.
Previously in HS International Edition:
Stora Enso and UPM issue profit warnings (19.6.2008)
High price of wood and other rising costs lead to cuts in forest industry (11.9.2008)
Kajaani leaders expect extensive relief package from UPM (12.9.2008)
Paper manufacturer UPM cutting thousands of jobs in Finland (9.3.2006)
Links:
UPM Q3/2008 (.pdf file)
UPM home
UPM Investor News: UPM to temporarily reduce its sawmilling and plywood capacity in Finland in 2009
Helsingin Sanomat
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| 29.10.2008 - TODAY |
UPM uses plant shut-downs to fight slowing demand for forestry products
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