Sweden sees restructuring allied with new investment: the Swedish pulp and paper industry is facing tough challenges on profitability, but there are plenty of schemes under way to boost performance.

Sweden boasts a long and distinguished history in the pulp and paper industry. Today, the world's largest paper producer in volume terms-Stora Enso-bears the name of one of the Sweden's oldest companies (even if the Stora name is now firmly allied with the Finnish group that merged with the Swedish giant in 1998), and the country is well known around the world for its pulp and paper products.

Apart from Stora though, there are plenty of Swedish names that attract instant recognition across the pulp and paper industry--SCA, Sodra, Holmen, Billerud, Tetra Pak and the STFI Packforst R & D organization, to name just a few. Also, there is little sign of the country's close connection to the forest based industry sector being severed any time soon.

In fact, it is often difficult for people in non-producing countries or larger, more diversified economies to understand the critical role that pulp and paper plays in Sweden. The forest based products sector accounts for 4% of the country's GDP, 10% of the employment, 14% of industrial added value, 12% of visible exports, and 20% of industrial investment.

The paper industry is not only of significance inside the country. Globally, Sweden is the fourth largest exporter of pulp, the third largest exporter of paper and the second largest exporter of sawn timber.

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Today, Sweden is one of the most competitive places for businesses to operate in the world, Indeed, according to the World Economic Forum (WEF), Sweden ranked third behind Finland and the United States on its growth competitiveness index this year.

At the same time, Sweden is noted for offering global leadership in terms of its environmental and social models. The WEF's environmental sustainability index ranks Sweden fourth in the world and despite a relatively high personal tax regime. The land of the Volvo appears to be rather like the car itself, running reliably and efficiently even if not everyone would want to employ its fundamental design principles.

COST CONSCIOUS

Of course, like the car the country's economy inevitably faces a few bumps in the road from time to time. And even in a country with an economy that is as comparatively well managed as Sweden's, pulp and papermakers face all of the same challenges that affect the rest of the industry. At present, there is one topic dominating all the headlines in every economic paper or financial report and that is the price of oil and its impact on the global economy.

As Marie Arwidson, managing director of the Swedish Forest Industries Federation (SFIF), points out, energy prices currently represent one of the hottest topics among the organization's members at present.

"I think energy is definitely the biggest issue for Sweden at the moment. Electricity prices have been moving up very fast and we're also seeing the effects of the emissions trading scheme (ETS). It's one of the main costs for the industry, so it's having an immediate effect," she explained.

In an industry as capital-intensive and power hungry as the pulp and paper sector, sensitivity to power prices is hardly surprising. But as one industry consultant noted, certain companies in Sweden are actually in a good position to benefit from the latest power price increases.

"I think you can see from the power investments taking place at the mills that some companies have been quick to spot the potential to make some money from this," he said. "For a few of the big integrated mills and pulp producers that generate a surplus of energy, particularly so-called 'renewable' energy, these prices are very helpful indeed."

Unsurprisingly perhaps, Sodra--as one of the world's leading market pulp suppliers--is among those leading the charge to exploit its renewable energy resources. The group has already installed a new turbine at its Morrum facility and two more are planned for startup next year at Monsteras and Varo. The three projects will require a total investment of SEK 580 million ($74.4 million), bringing some 1.8 TWh/yr of renewable capacity on to the market.

SCA is also working on a new recovery boiler for its Ostrand pulp mill as part of a massive SEK 1.6 billion upgrade and Kappa Kraftliner has ordered a new power boiler for its Pitea mill from Kvaerner Power. Stora Enso is also rebuilding a boiler at the Hylte newsprint mill as part of a EUR 40 million investment.

As Arwidson pointed out though, such investments are all part of a longer term trend. "We are constantly working on increasing our energy efficiency and we are one of the biggest producers and users of bioenergy in Sweden," said Arwidson.

Indeed, as the federation pointed out:

* total fuel consumption in the industry has remained broadly unchanged since the 1970s, despite the fact that pulp and paper production has doubled

* oil consumption has been slashed by 65% since 1980, mainly being replaced by biofuels such as bark and spent liquor

* the generation of bio-fuel based electricity is likely to increase at a rate of 5.0-6.5 TWh per year.

GREEN SIGNAL

As well as making economic sense, efficiency investments such as these dovetail rather well with Sweden's environmental priorities. As is evident from the figures on environmental investment (see figure on opposite page), the country's mills have spent freely in a bid to protect and secure their image as one of the most environmentally advanced players in the global pulp and paper market. The SFIF believes that they are now among the most sustainable industries in the world.

In fact, over 60% of the country's forests are certified to FSC or PEFC standards and more forestland is being added to that percentage each day. But the environmental impulse does not stop there.

The country has one of the highest collection rates for recovered paper (RP) in Europe, using some 75% of the RP to produce new paper products. Added to that, companies such as Tetra Pak have developed the infra-structure and technologies that have allowed the group to push recovery rates of their 'bricks' to impressive heights, recording a collection rate of 58% across the EU 15 in 2003.

"One of the strengths we see is that our companies really are leaders in terms of environmental matters and we're very proud to be among the leading countries when it comes to sustainability. I think it's a competitive advantage for us in many ways," Arwidson explains.

However, the industry does not always get things moving its way when it comes to environmental issues and the SFIF is currently in talks with the government over proposals to introduce new taxes that could dramatically increase transport costs.

"Transport has always been an issue for us given our geographic location on the edge of Europe, but now the government is proposing new taxes--a diesel tax and a kilometer tax," she said. "We have had discussions with the government to put forward our views as it affects everyone. The taxes have been delayed for the moment, but we still have to watch out for this."

STORMY WEATHER

Another area where the environment has certainly played a big part this year in Sweden is the weather. At the beginning of January, storms hit the country leading to some of the worst damage that plantation owners have seen in many decades. An estimated 75 million cubic meters ([m.sup.3]) of wood was felled, with central Sweden worst affected, and it was then a race against time to get the storm-damaged timber into storage before pests destroyed it.

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"The storm damage caused a lot of problems, although it was limited to specific regions," Arwidson explained. "It was mostly the central part of the country that was affected, but the good news is that we've already got out half of the 75 million m3 of wood that was hit and that is already in storage, so we're a lot further on than we had expected at this stage."

Inevitably though, the damage created disruptions along the supply chain and affected several of the main suppliers. As Sodra's CEO, Leif Broden, pointed out, "More than half [of the storm damaged wood] has now been processed. Emergency efforts are still required in order to save wood value in line with the original objectives. Timber transport capacity continues to be the bottleneck and will continue to be so well into next year.

Despite this setback, a weak European economy and what the group called "structural overcapacity of market pulp" during the first half of 2005, Sodra still managed to deliver positive financial results. According to the group, half-year figures show a SEK 451 million profit, with a return on capital employed of 9%. While lower than the 12% recorded in the same period last year, the results did indicate reasonably good ongoing profitability at the mill level, according to Broden.

The pulp group struggled somewhat to maintain higher prices over 2005, but going forward Sodra underlined its determination to secure $620/ton for bleached softwood kraft pulp with a market announcement to that effect at the end of August.

Elsewhere, the group also made headlines recently with an announcement that it was pulling out of a proposed BCTMP pulp mill project in South Africa. The Pulp United scheme set up with the NCT Forestry Cooperative of South Africa was abandoned by the Swedish group after initial cost estimates and an unfavorable Rand/$ exchange rate hit the project's feasibility. Of course, Sodra is still pushing forward with its power investments, but the group only anticipates the second half of 2005 to remain similar to the market conditions witnessed over the first six months.

On a brighter note, one of the country's other pulp producers celebrated the opening of a new CTMP line on October 5. King Carl XVI Gustaf of Sweden did the honors at the Utansjo mill in Angermanland as Rottneros unveiled its new 100,000 metric tons/yr production line. The SEK 280 million investment is the result of a restructuring program at Utansjo that began at the end of 2002. The line replaces an unprofitable magnefite pulp unit and takes the company's total CTMP capacity up to 220,000 metric tons/yr, significantly extending the group's total pulp output past its current 700,000 metric tons/yr level.

RESTRUCTURING TIME

Over at SCA, Sweden's big beast is going through a year best characterized as weak, but not disastrous. Net sales hit SEK 46.5 billion in the first six months of the year, compared to SEK 44.027 million over the same period in 2004, but profitability was down as net earnings came in at SEK 1.67 billion in the first half of 2005 against SEK 2.78 billion last year.

President and CEO Jan Astrom noted that within the tissue segment demand remains strong, but the consumer sector of the market in Europe is still being adversely affected by overcapacity. In the European packaging market, demand grew stronger during the second quarter, but the higher volumes did not offset lower prices in the corrugated board segment and new testliner capacity has created imbalances in the market.

Meanwhile, the tissue market in North America remains strong and price increases are offsetting the effects of higher energy costs. Growth in the segment comprising personal care products remains stable in Europe and several markets outside Europe continue to show favorable growth. And in publication papers, Astrom believes that the balance between supply and demand for publication paper has improved. The group also consolidated the operations of Munksjo in May this year as it snapped up the Nordic tissue operations of Munksjo and two small packaging companies.

However, the really big news from the group came at the end of August when SCA announced details of an extensive efficiency enhancement program. The plan involves phasing out 350,000 metric tons of testliner capacity and 100,000 metric tons of tissue, respectively 17% and 7% of the group's European capacity. The program is expected to yield annual savings of SEK 1.55 billion when complete early in 2007 with the loss of some 3500 jobs, mainly in Europe.

NEW LINE

Less dramatically, Stora Enso is exploring the possibility of selling its Grycksbo fine paper mill in Sweden as the Group focuses its coated fine paper business on multi-coated graphical grades. Grycksbo has three paper machines producing on-machine coated fine papers with a total annual capacity of 280,000 metric tons.

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However, the main news from Stora Enso regarding Sweden is its massive investment in a new 420,000 metric ton/yr SC machine at Kvarnsveden. The group recently signed a EUR 200 million loan agreement with the European Investment Bank in relation to the machine that is expected to start up at the end of this year.

Elsewhere, the Swedish pulp and paper industry is seeing a number of other developments, including:

* Holmen reporting more positive market conditions for newsprint and magazine grades as sales increase, but profitability is undermined by higher input costs for energy and raw materials, as well as unfavorable currency movements. The group also restructuring with some 200 job losses expected across the group

* Billerud's new CEO Per Lindberg noting that input costs are set to increase as the company is seeing profitability fall dramatically on last year. Unsurprisingly, the group's restructuring program is being speeded up with 450 jobs going

* M-Real downsizing 200 jobs in Sweden

* Korsnas is cutting 60-70 jobs and discontinuing the production of fluff pulp from May next year. The group will also have a new CEO from December when Peter Sandberg starts work

* Klippan's ongoing financial troubles produce new owners, closures and proposals for a deal with major creditors, notably Sodra and ABB.

Needless to say, these are just a few of the major developments taking place in Sweden, but as one consultant pointed out, "There is a painful transition process taking place in some cases. Obviously, there are quite a number of challenges that Swedish producers have to face up to if they want to stay profitable at a time when energy prices and raw material costs are rising fast. But even if you take into account all the restructuring, there are still major investments going into the country, for example on the energy side and Stora Enso's huge new SC machine. In my view, Sweden still has a very important place in the global pulp and paper industry and that is not going to change."

That is a view echoed by Arwidson. "I think if you look at the positive things, it is fair to say that we're quite a well-structured industry and the companies are in good shape," she concluded.

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

IN THIS ARTICLE, YOU WILL LEARN:

* How Sweden is being hit by rising energy and raw materials costs.

* Why power projects are attracting investment.

* How Sweden's pulp and paper companies are positioned for the future.

ADDITIONAL RESOURCES:

* "Europe 2005: It has to be better than 2004, hasn't it?" by Jim Kenny, Solutions!, January 2005. To access this article, type in the following product code in the search field on www.tappi.org:05JANSO30. Or call TAPPI Member Connection at 1 800 332-8686 (US); 1 800 446-9431 (Canada); [phone] (International).

* "Europe faces EUR 500 million power charge," by Jim Kenny, Solutions!, July 2004. Product Code: 04JULS036

* "Solutions! Company of the Year: SCA," Solutions!, June 2003. Product Code: 03JUNSO30

Germany         21%
Finland         15%
Sweden          12%
France          11%
Italy           10%
United Kingdom   6%
Spain            6%
Others          19%

Paper production in CEPI countries. Total CEPI production: 96 million
metric tons. Figure refers to 2004. Source: CEPI.

Note: Table made from pie chart.

Finland   33%
Sweden    31%
Norway     6%
France     6%
Germany    6%
Portugal   5%
Austria    4%
Others     9%

Pulp production in CEPI countries. Total CEPI production: 39 million
metric tons. Figure refers to 2004. Source: CEPI.

Note: Table made from pie chart.