Finland's paper industry sees a silver lining: trade disputes are never pleasant for either side, but the Finnish strike and lockout appears to have delivered some long-term gains as well as short-term pain.

Industrial action is rarely a cause for celebration by any of the parties involved, even at the conclusion of hostilities. The recent strikes and lockouts in Finland are certainly no exception. But, if nothing else, at least most of those affected by the dispute will be glad that a) it is now finally over and b) that it appears to have been resolved in a reasonable manner with some positive outcomes.

At the crux of this dispute was a desire by the employers to secure more flexible working systems. The particular emphasis focused on removing the shutdown periods that have traditionally taken place over the mid-summer and Christmas periods in Finland.

Following protracted negotiations, a strike and then a lockout by paper companies, that main goal has been attained. The question now is, at what cost and with what medium and long-term effects.

Of course, in any long, drawn out dispute such as this, there will always be some residual resentment on one or both sides. It is probably fair to say that it will take a little time for some relationships to mend. But in the main, it does seem that the employers have won some vital gains and, crucially, it seems that the spectacle of the entire Finnish paper industry shutting down twice a year is now over for good.

RECENT HISTORY

The strike itself began on May 15, 2005 when some 24,000 members of the Finnish Paperworkers' Union and the Finnish Electrical Workers' Union declared they would be downing tools, although the actual event was preceded by skirmishing in the form of overtime bans, lightning strikes and a number of difficult negotiations.

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The strike was due to end on May 18, but the employers retaliated by announcing that they would stage a lockout from the date the union strike was due to finish as a means of "speeding up negotiations." Clearly, speed was a factor neither side could overlook, especially as the industry was estimated to lose thousands of tonnes in lost production and of course millions of euros per day in sales. But for both sides the stakes were high and it took until July 1 for a deal to be hammered out.

In essence, the agreement is a three-year deal that gives the union's members a pay increase largely in line with the national income policy agreement, i.e. hourly wages will increase by an average of 2.5% in 2005 and by a further 1.9% in June 2006.

New shift patterns were also agreed that provided extra benefits for workers. But crucially for management, new working practices are now in place that allow paper machines to be operated all year round, thus increasing productivity. On top of that, the agreement also outlines a new framework for negotiating subcontracting arrangements, subject to local negotiations.

According to the president of the Finnish Forest Industries Federation (FFIF), Timo Poranen, the agreement is nothing less than a blueprint for a far more efficient Finnish paper industry.

"The labor agreement supports the development of the Finnish paper industry's competitiveness, provides new opportunities to renew the practices of the sector, and stabilizes operating conditions in a rapidly changing business environment," he said.

Esa-Jukkka Kaar, vice president of the FFIF, echoed these sentiments when he pointed out that the deal represents more than just details about shift patterns and pay scales. As he explained, "The new agreement we have achieved gives Finnish companies a chance to develop their productivity in comparison to other countries and also in terms of the productivity of the whole sector. It's not about increasing productivity by adding more working days. The changes mean that companies now have a chance to manage their costs and supply chains more efficiently. Hopefully, they will be able to lower the cost of maintenance and services as they will not be forced to carry out their maintenance stops at their mills at the same time."

TAKING A HIT

Of course, paper companies have had to pay a price for their new, more flexible working practices and the short-term costs are very evident from the financial results reported for the second quarter. Hannu Anttila, president and CEO of M-Real, noted that, "The labor dispute in Finland weakened the operating result by about EUR 70 million. The operating result [for the second quarter] was a loss of EUR 72 million."

The world's biggest company by capacity, Stora Enso, confirmed that its second quarter results were negatively impacted by approximately EUR 150 million as a direct impact of the dispute. Not only that, as CEO, Jukka Harmala, explained, the after-effects of the strike/lock-out would also slash third quarter operating profit by some EUR 40 million with around 100,000 metric tons of lost paper and board production.

Meanwhile, UPM's president and CEO, Jussi Pesonen, reported that the dispute had a negative impact of approximately EUR 175 million on second-quarter profits before tax, with paper deliveries down 13% on the same quarter in 2004. As the figures illustrate, UPM was one of the worst hit of all the major players and, somewhat ominously, Pesonen went on to highlight what he called the "country risk" of having so many operating units based Finland. "The new labor agreement will create better opportunities to improve the long-term competitiveness of the Finnish units," he said. "On the other hand, we will have to consider how to reduce the country risk in paper grades where production is based only in Finland."

Whether or not that translates into an even faster paced international diversification of assets than the country's producers have already been pursuing remains to be seen. But Kaar of the FFIF, at least, believes that the outcome of the dispute could actually do more to secure Finnish paper jobs.

As he explained, "Of course, it's pretty hard to say for definite how this will affect future investments. There are markets that are growing faster elsewhere, there are issues such as raw material costs, distance to market and all these other factors that affect investment decisions. But personally, I'd say that, in principle, companies now have more of a reason for investing in Finland than before as they will have a better chance of being more productive and competitive."

It is also fair to say that--despite their sizeable short-term losses--almost all the CEOs did claim that the flexibility of the new working agreement was most welcome.

Stora Enso's Harmala was fairly typical of the response when he said, "The new agreement, with its significant changes in labor practices such as production continuing during the midsummer and Christmas holidays and increased flexibility in outsourcing, will contribute to the long-term competitiveness of the Finnish forest products industry."

However, as several industry commentators pointed out, the strike also managed to provide some much needed price support for a sluggish paper market during a weak demand period. Ironically, perhaps, it could be argued that the production lost in the eight-week fight to secure the ability to produce more paper throughout the year has helped solve the overcapacity in today's market.

One consultant recently returned from his Finnish summer cottage noted, "People are asking me why prices haven't gone up, pointing out that the FOEX prices have hardly moved at all. My question to them would be what would prices be if the strike hadn't taken place at all? Besides, you wouldn't expect to see too much movement yet anyway as a lot of the contracts are still valid through to August or even September, so I am personally not too surprised to see there's been little movement. There is now a possibility that we will see more movement in the third quarter. A couple of the companies like Burgo on coated mechanical grades and Norske Skog on magazine papers have already made announcements, and I think we'll definitely see some others move on coated woodfree and LWC in September as long as demand doesn't completely dry up."

Industry insiders have also noted that the loss of Finnish production looks to have helped sustain U.S. price levels and a glance at the latest statistics from Cepifine and Cepiprint certainly seem to indicate that shipments are sharply down, especially on the coated mechanical grades that are a mainstay of Finnish production. In fact, International Paper and Bowater were looking for US $35-45 increases as the strike started to bite.

It could also be argued that the price support could even extend much further than that, according to another consultant who points out that the loss of Finnish pulp output could not have come at a better time as new capacity is introduced from the Stendal and Veracel pulp mills. "It's not dramatic, but the end result is that pulp prices have held rather than fallen," he believes.

LOOKING LONG

Certainly, the financial analysts following the industry appear to believe that the lockout is generating some positive price impacts, even if there is nothing dramatic to note as yet.

According to the team at Morgan Stanley, "We believe operating rates are now high enough to give producers pricing power if demand reaccelerates, [however] downside risk exists if demand remains sluggish." Several sources also suggest that inventory levels have been driven down during the dispute and that looks to chime with the views of the main companies involved.

As Anttila at M-Real explained, "Now that the labor dispute in the Finnish paper industry has come to an end, there is a more favorable market balance for most paper grades, and I believe that this will support price increases in the latter part of the year, especially in magazine paper."

Anttila did also point out that the third quarter results would be adversely affected by the lockout, but he was clear that operating rates in the latter part of the year will be "high," particularly at the paperboard and magazine paper mills.

Harmala at Stora Enso sees a similar outcome and believes that strengthening demand will also help matters. "In Europe demand for advertising-driven paper grades is expected to remain rather good. Firm demand for publication papers is forecast, because the Finnish labor dispute has decreased inventories in the value chain and demand normally picks up in the catalog season," he said. "Fine paper demand is expected to improve and prices should be stable. Packaging board demand and prices are anticipated to be stable. The market balance in wood products is expected to remain good, thus improving the price outlook."

Meanwhile, Pesonen at UPM appears to be another believer that better times are around the corner, partly as a result of the inventory run-down, but also due to reasonably strong demand. "Our order inflow recovered soon after the labor settlement was reached [and] the inflow is now strong. The improved balance of supply and demand has enabled price increases, particularly in North America and our export markets," he said.

COMING BACK

It appears that the lockout has not been all bad from the employer's side. Inventories are down, they believe they have secured greater long-term competitiveness for the Finnish pulp and paper industry, and if demand remains reasonably buoyant, the dispute could even help them secure better prices. Of course, there is also the small matter of the millions of euros lost in quarterly profits and the stress placed on the employer/worker relationship, but whoever said the course of industrial relations always runs smoothly.

ABOUT THE AUTHOR

Jim Kenny is contributing editor/Europe for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].

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JIM KENNY, INTERNATIONAL EDITOR

WHAT YOU WILL LEARN

* How the Finnish trade dispute was resolved.

* What terms were agreed to.

* What impact the lockout has had on the market.

ADDITIONAL RESOURCES

* "Finland: Strike Action Could Have Long-Term Implications," by Jim Kenny, Solutions!, June 2005. To access this article, type the following Product Code into the search field on www.tappi.org: 05JUNSO42. Or call TAPPI Member Connection at 1 800 332-8686 (US); 1.800 446 9431 (Canada); [phone] (International).

* Web sites: www.forestindustries.fi; www.storaenso.com; www.upmkymmene.com; www.m-real.com; www.poyry.com.

                                June                  Year-to-Date
(1,000 tonnes)           2005  2004  % change  2005   2004      % change

NEWSPRINT
  Total Shipments        789   831    -5.0%    4 484  4 565      -1.8%
    to Western Europe    670   702    -4.6%    3 826  3 848      -0.6%
      to Outside W.E.    119   128    -7.1%      658    717      -8.3%
  W.E. Demand*           787   787     0.0%    4 399  4 355       1.0%
SC-MAGAZINE
  Total Shipments        316   376   -15.8%    2 015  2 107      -4.4%
    to Western Europe    250   283   -11.9%    1 525  1 610      -5.2%
      to Outside W.E.     67    93   -27.7%      489    498      -1.6%
  W.E. Demand**          250   283   -11.9%    1 525  1 610      -5.2%
COATED MECHANICAL REELS
  Total Shipments        721   771    -6.4%    4 620  4 351       6.2%
    to Western Europe    535   566    -5.4%    3 267  3 291      -0.7%
      to Outside W.E.    186   205    -9.4%    1 353  1 061      27.5%
  W.E. Demand**          535   566    -5.4%    3 267  3 291      -0.7%
UNCOATED MECHANICAL
(IMPROVED & OTHERS)
  Total Shipments        211   259   -18.6%    1 478  1 532      -3.5%
    to We stern Europe   176   195   -10.1%    1 154  1 150       0.4%
      to Outside W.E.     36    64   -44.6%      324    381     -15.1%
  W.E. Demand**          176   195   -10.1%    1 164  1 150       0.4%

Western European mechanical papers statistics. Provided by CEPIPRINT.

                       unit       2005  change %   2005  change %
                       1000       1stQ  2005/2004  2ndQ  2005/2004

Coniferous             [m.sup.3]  3240  -5.5       2820  -22.4
  sawnwood (1))
Plywood (1))           [m.sup.3]   330  -5.7        345   -1.4
Chemical pulp          tons       2063   1.4        816  -56.0
  sulphate, of which   tons       2063   1.4        816  -56.0
  bl. sa softwood      tons       1061   3.3        420  -55.5
  bl. sa hardwood      tons        837   0.7        332  -56.0
Other pulps            tons       1265   3.6        558  -51.4
(incl. mechanical and semi-chemical pulp)

PULP TOTAL             tons       3328   2.2       1374  -54.3
Paper                  tons       2919   4.9       1225  -53.8
  pr. & wr. paper, of  tons       2612   5.0       1092  -54.0
    which
  wood containing      tons       1805   5.8        751  -53.4
    (incl. newsprint)
  woodfree             tons        807   3.2        341  -55.1
  other paper          tons        307   4.0        133  -52.5
Paperboard             tons        756   4.7        346  -49.4

PAPERAND PAPERBOARD
TOTAL                  tons       3675   4.9       1571  -52.9

                       2005     change %
                       6months  2005/2004

Coniferous             6060     -14.2
  sawnwood (1))
Plywood (1))            675      -3.6
Chemical pulp          2879     -26.0
  sulphate, of which   2879     -26.0
  bl. sa softwood      1481     -24.8
  bl. sa hardwood      1170     -26.3
Other pulps            1823     -23.0
(incl. mechanical and semi-chemical pulp)

PULP TOTAL             4702     -24.9
Paper                  4145     -23.8
  pr. & wr. paper, of  3704     -23.8
    which
  wood containing      2556     -23.0
    (incl. newsprint)
  woodfree             1148     -25.6
  other paper           441     -23.5
Paperboard             1102     -21.6

PAPERAND PAPERBOARD
TOTAL                  5246     -23.3

(1)) estimate

Forest industry production in Finland from January-June 2005.
SOURCE: Finnish Forest Industries Federation.