Finland: strike action could have long-term implications.

Finland may be relatively small in terms of population, but where the pulp and paper industry is concerned, it is truly a global giant. Not only is it home to some of the world's largest paper and board producers by volume--Stora Enso, UPM and Metsaliitto (owner of M-Real)--it also is home to one of the world's main paper machine suppliers--Metso--and arguably the most prominent forest industry consultant--Jaakko Poyry.

As the world's sixth largest paper and board producer (after Germany, Canada, Japan, China and the United States), it is clear that Finland takes its forest products industry rather seriously (see Figure 1). Indeed, even as the rise of other notable Finnish icons such as Nokia have diminished the economic contribution of the sector in percentage terms over the years, the broad forest products supply chain still represents a sizeable 7% of the country's total GDP and almost a quarter of export goods.

EXPLOSIVE ATMOSPHERE

Currently, the country's papermakers are less concerned with their relative ranking in global league tables than they are with trying to ensure that the country remains a key player in the global pulp and paper game. And in the game currently being played, the stakes are extremely high.

"At the moment, we're in the middle of negotiations with union workers and it has got to the point where the mills are partially working or not running at all in some cases," explains Esa-Jukkka Kaar, vice president of the Finnish Forest Industry Federation (FFIF).

Finland runs an extensive collective bargaining agreement with the Finnish Paperworkers' Union and as the employers and employees celebrated May Day (May 1), relations between the two parties were reportedly deteriorating.

The initial negotiations on a new agreement for the country started back in the beginning of the year and, according to Kaar, the Finnish Paperworkers' Union has reacted extremely negatively to a number of requests from the employers. Among the main sticking points are a demand for more flexible working hours that would (controversially for Finland) involve giving up the workers' traditional midsummer and Christmas vacations, which require plants to be shut each year. Another disputed issue is a demand for the union to allow companies to outsource some maintenance, subcontracting and ancillary activities to non-union staff.

By the end of March, negotiations were not progressing and the union introduced an overtime ban that developed into a series of small-scale, but highly disruptive stoppages across the country. According to the FFIF, the strikes in the Spring caused 300,000 metric tons of lost production, corresponding to some [euro]40 million per day.

A "National Conciliator" was appointed to help bridge the gap between the two sides, but the atmosphere quickly became even more highly charged when the union announced a strike from May 15-18. In retaliation, the employers announced that they would implement a lockout from the date the union strike was due to finish as a means of "speeding up negotiations."

According to Arto Tahtinen, senior vice president of Labor Market Policy at the federation, "The Finnish Forest Industries Federation has declared a lockout starting on Wednesday, May 18 at 6 am and ending on Wednesday, June 1 at 6 am, unless the parties have not concluded a collective labor agreement before that. The lockout would include about 24,000 members of the Finnish Paperworkers' Union and the Finnish Electrical Workers' Union, excluding salaried employees. We are serious about wanting to save the competitiveness and jobs of the Finnish paper industry ... the quicker the terms of employment can be agreed, the more both employers and employees will benefit." On May 17, the FFIF announced that it may consider extending the lockout an extra two weeks, until mid-June.

HIGH DRAMA

Needless to say, tensions are running high on both sides and everyone connected with the industry will be hoping that an equitable deal is hammered out as quickly as possible. Whether or not the two sides reach an amicable settlement before their respective threats materialize, the dispute has highlighted some interesting issues that remain vital to the long-term future of the Finnish pulp and paper industry.

As one industry consultant noted, "If you look at the root of this, you'll find that a lot of it is to do with productivity development. It's not increasing as fast as it used to, simply because the investment level has come down among all the big paper companies, including the Finnish ones. Before, they could increase productivity quite a lot by investing in new machines and big rebuilds. But today, there's not the same investment as more money goes into emerging markets and acquisitions overseas, so they're looking at other ways of increasing productivity at home so that they can continue to compete in a world market. Getting a new, more flexible, agreement with the unions is one of the ways they aim to do it."

This view appears to be confirmed at least partly by the figures (see Figure 2). As Finnish forest industry groups have internationalized, the share of investment heading overseas has increased. Even if the very large acquisitions in 2000-2001 represent obvious peaks, the figures for 2004 are fairly typical of the longer term trend in that [euro]1.5 billion euros of the total [euro]2.3 billion in investments released by Finnish forest industry companies went abroad.

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Obviously, [euro]1.5 billion is not to be dismissed out of hand, but as industry consultant Jaakko Poyry noted, Finnish investment levels are unlikely to reach the heady heights seen in recent decades. "Recently, prospects in the forest industry have improved slightly. The number of new investments in Europe and North America is, however, expected to remain low during 2005, focusing primarily on modernizations. Large new investments are expected to go ahead during this and next year, mainly in South America. Good opportunities for growth in demand for energy-related services are emerging in East Asia, China and, as the EU expands, to some degree also in Europe."

A similar tale comes from Metso Paper, where the company explained, "Since the construction of new production capacity is still at a low level in Europe and the USA, Metso Paper has refocused its operations in these areas on customers' process improvements, machine rebuilds and the service business."

ALTERNATIVE INVESTMENTS

Clearly, there are still plenty of smaller-scale projects being undertaken in Finland or just ahead in the pipeline (see box on next page). But as pulp and papermakers seek high growth markets and access to lower-cost raw materials and labor in Eastern Europe, Asia, and Latin America, hard questions will be asked about embarking on massive new capacity additions at home.

As Kaar pointed out, "All the companies have more options and alternative investment opportunities available to them these days, probably much more than even just five years ago. The location of any investment will be determined on the most competitive place to invest. If the company thinks that it will be more competitive investing elsewhere, then it will have no hesitation in going outside Finland. The case looking forward will depend a lot on these negotiations and I hope that a favorable decision after the Spring will help us to stay competitive."

In the meantime, there is no shortage of evidence that the Finns are keenly aware of the benefits of developing strategic assets elsewhere. Just to take a couple of the larger schemes as examples, UPM and Metsaliitto/M-real are set to spend US$ 1.1 billion on a new pulp mill in Uruguay, while Stora Enso is involved with Aracruz in the similarly scaled Veracel pulp scheme in Brazil. With a host of other acquisitions, mergers and investments in Eastern Europe, Asia and elsewhere, it is clear that the Finnish companies do not intend to rely on the mature markets of Western Europe to deliver growth and profits.

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LOOKING BETTER

In the meantime, though, the groups do have to do something to address the issue of profitability. Overall, Finland continues to see growth in production across all grades. Indeed, total paper and board output was up a remarkable 7.5% in 2004, reaching just over 14 million metric tons, while pulp production rose 5.6% to reach 12,619 metric tons.

The only problem is that while the demand side of the equation is strengthening across Europe, operating rates across Finnish mills are hovering at stubbornly low levels. In 2004, operating rates averaged just under 93%, but that was mainly due to a good third quarter. As a result, profitability remains an issue for all the main players in Finland (see Figure 3).

The good news is that market demand has been getting stronger and even with a strong euro making imports into Western Europe more attractive, there are signs that higher paper prices are looking like a fair bet for 2005 across almost all the main grades.

As UPM CEO Jussi Pesonen points out, "Demand for paper has remained good during the first three months [of 2005]. Long-term forecasts for the advertising business are for this positive trend to continue. Demand for converted products is expected to remain good [but] possible strikes at Finnish mills may affect both deliveries and profit for the second quarter."

Stora Enso's CEO, Jukka Harmala, tends to agree. "In Europe, demand for advertising-driven paper grades is expected to be good. Publication paper prices increased in the beginning of the year and are expected to remain at that level. Coated and uncoated fine paper demand is improving, although uncoated fine paper sheet prices are under pressure due to overcapacity," he said.

Harmala believes that demand for packaging boards will be stable and consumer boards may even see some price increases, but corrugated board prices are still under pressure. Again, he noted that the ongoing labor negotiations could be a severe drag on the company's performance until the situation is settled.

It is clear that Finland will remain a pulp and paper powerhouse for some time. But even discounting the long-term impact of the current strike action, a number of factors could drive an even greater percentage of "Finnish production" out of the country.

Obviously, more flexible working practices will help, but if the dispute drags on and inflicts serious financial damage, it seems entirely possible that the "internationalization" of the Finnish forest products industry could accelerate even further.

Finland  15%
Sweden   12%
France   11%
Italy    10%
UK        6%
Spain     6%
Austria   5%
Others   14%
Germany  21%

Figure 1: Paper and paperboard production in Western Europe. Total
production: 96 million tons in 2004. EU countries total: 90 million
tons. Source: CEPI

Note: Table made from pie chart.

WHAT YOU WILL LEARN:

* Why Finland's paperworkers' union is at loggerheads with employers.

* How the fall-out could hit investment.

* How Finland's production engine is performing.

ADDITIONAL RESOURCES:

* "Comparing Canada and the Nordic countries," by Jaako Poyry Consulting, Solutions!, September 2004. To access this article, enter the following Product Code in the search field at www.tappi.org: 04SEPSO72.

* "Finishing strong: How Finland stays on top," by Alan Rooks, Solutions!, December 2003. Product Code: 03DECSO27.

* "Continuous upgrading of paper machines as a business strategy," by Jim Atkins, Solutions!, August 2004. Product Code: 04AUGSO05.

RELATED ARTICLE: SOME REPRESENTATIVE RECENT FINNISH PULP & PAPER INDUSTRY INVESTMENTS

* new finishing line ordered for Stora Enso's Varkaus mill

* major rebuild ordered for UPM-Kymmene's Jamsankoski mill

* large-scale specialty release paper machine rebuild for UPM-Kymmene's Tervasaari mill

* pulping and baling line ordered for M-real's Kaskinen mill

* a major rebuild ordered for BM3 at M-real's Simpele mill

* upgrade of the main peroxide bleaching plant for PM 6-7 of Myllykoski Paper's Anjalankoski Mill

* Stora Enso has signed a major IT and maintenance contract with ABB that covers several mills including Ingerois, Summa, Anjala, Kotka, and Imatra mills

* Kvaerner Power is set to deliver a [euro]20 million power boiler for UPM's Rauma paper mill

* UPM is upgrading the biological effluent treatment plant at its Kajaani paper mill.

JIM KENNY, INTERNATIONAL EDITOR

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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