Europe 2005: it has to be better than 2004, hasn't it?
Among the big players, the mood of the day includes modest hopes for continued strength in terms of output and capacity utilization, with price rises featuring in the early part of 2005. But, as usual, there is no shortage of caveats concerning the financial performance of the big European paper groups over the course of the year.
For example, Europe's largest producer, Stora Enso, is predicting a near-term upward price trend across the board. Announcing its most recent quarterly results, management pointed to strong demand in Europe for publication papers (magazine grades, SC, and newsprint) and uncoated and coated fine papers.
As a result, the group fully expected to implement price increases in these segments in the short term, with more modest gains predicted for packaging grades. Losing 40,000 metric tons of production at Langerbrugge in Belgium due to refurbishment work should also help the cause, especially at a time when the group is taking some of the lowest levels of market related downtime in its recent history.
The group is also bullish on North America, where price rises are in the offing and a major profit enhancement program has helped re-establish some profitability.
Going into 2005 and beyond, Stora Enso has also set out both its medium and long-term strategies. Over the next decade, the company is predicting the strongest growth in fine papers in the mature markets of Western Europe and North America, as commercial print grows at around 4% compound annual growth rate (CAGR), compared with some 2% for magazines and less for newsprint. But it is emerging markets where the group looks to be concentrating its efforts, as recent forays into Eastern Europe (acquisition of 66% of Intercell's shares) and China (prospective joint venture with Shandong Huatai for a publication paper machine) clearly demonstrate. Plus, there is always the massive Veracel pulp project to come online in the middle of the year.
Of course, even among all the positives, there are caveats. According to Stora Enso, progress has been slow in certain areas, such as generating merger opportunities. As CEO Jukka Harmala complained, "We have been talking, but there have been no willing counterparts, at least not for the time being. There have been a good many examples where the demands from the other side have been too high financially, business strategy has not been fulfilled, or the asset quality not high enough. The way we are positioned financially would allow us to do something if all these criteria are met. Some small steps have been taken, e.g. the Intercell acquisition and hopefully something more concrete in China. What we want to achieve is a good geographical profile and, of course, competitiveness. I think our Brazilian efforts are fulfilling this approach, but we're really studying emerging markets."
Needless to say, the group is likely to be concentrating a lot of effort on Russia, South America and China for the near future.
ON THE UP
UPM'S President and CEO, Jussi Pesonen, is also bullish on price trends. As he noted, "The brisk increase in paper demand has continued. Order books are strong and the capacity utilization rate is very high. Because of low prices and cost pressures profitability was again unsatisfactory, but improved year-on-year. In Europe, UPM aims to substantially increase  contract prices for papers."
While general trends are positive, one of the group's first jobs of 2005 will be the permanent closure of the aging kraft pulp mill at Miramichi on January 31, resulting in the loss of 400 jobs at the New Brunswick facility. This follows a streamlining exercise at some of the company's Finnish sawmills that will reduce the workforce by 670. However, as the company points out, it is now operating more efficiently as a result.
Higher productivity combined with "substantial" price increases--assuming they materialize--will do much to help UPM's balance sheet. But several commentators believe that the company is already well placed for 2005.
As Lars Kjellberg at Credit Suisse pointed out, "If you look at newsprint, for example, the market is the tightest it's been for years from a European perspective, so I think a fairly substantial price increase is justified, especially when you look at how costs have risen."
Reinforcing the optimism for 2005 among the newsprint and publication paper producers, Norske Skog reported deliveries and operating profit well up on the previous year. According to CEO Jan Oksum, an improving world economy and growing advertising volumes are supporting strong consumption, while capacity expansion is limited. "Against that background, we expect a substantial increase in European prices for newsprint and magazine paper in 2005," he said. "Total production levels in Europe are now close to the levels reached in the peak year 2000. But prices are still low. That will change in ."
The year will also be notable for the startup of Norske Skog's second Chinese mill. The Heibei project is 50% owned by the Norwegian group through Pan Asia Paper and is on schedule to start up in the summer. Situated 280 km south of Beijing, it will be Norske Skog's second mill in China and the biggest newsprint machine in Asia.
Another company looking forward to 2005 is Sappi, which expects improved economic growth and higher advertising expenditure to help sustain strong demand. However, the group also anticipates some negative impacts from higher energy costs and currency effects, notably the U.S. dollar's strength against the South African Rand.
The coming year is also set to provide some interesting developments among Europe's other main players.
Hygiene represents around half of SCA's turnover while approximately 35% derives from packaging in one form or another, and the group is expanding its reach around the globe at a seemingly relentless pace. Among the latest to join the fold late last year was the small Italian company, Busta & Tema. At the same time, the group announced plans to expand in Hungary. Australia, Mexico and Malaysia were the locations for further acquisitions on the hygiene side. Of course, these are merely small steps in SCA's long march toward ever-greater scale and reach, and chances are that the company will follow a similar pattern in 2005.
Despite increasing sales, however, margin pressure has forced the group into embarking on a broad rationalization program that will see a workforce reduction of 1200 by the time it is completed toward the end of 2005. France and the Netherlands will be hardest hit as production is concentrated and/or moved to lower cost regions. For example, production of feminine hygiene products in Europe will be concentrated in Slovakia from this year. Whatever happens, the group will be prioritizing a boost in margins across all of its business areas this year.
Arguably the biggest news for the European paper industry in 2005 is the possible auction of Kappa Packaging. Reports indicate that Goldman Sachs has already been appointed as an adviser on the sale of Europe's third largest packaging group as the company's main financial backers--CVC Capital and Cinven--look to cash in on their investment. It is unclear exactly when a frontrunner will emerge, but any buyer will be picking up some large-scale strategic assets, as the Dutch group is valued at somewhere around the [euro] 3.2 billion mark.
Clearly, the chances are that Europe's packaging sector is likely to see at least some consolidation in 2005, but much of the chatter regarding volume and price trends is low-key, even if it is still relatively upbeat.
Jefferson Smurfit, for example, noted that while volumes had improved over the course of last year, any price increases would be coming from the lower end of the range that the company would like to see in place.
The new year also sees a new business grouping in the form of Mondi Packaging. The group is part of the Anglo American multinational and represents the transformation of the old Frantschach and Neusiedler companies into new Mondi branded corporate entities:
* Mondi Packaging-incorporating Frantschach-headed by Peter Oswald
* and Mondi Business Paper--incorporating Neusiedler--headed by Gunther Hassler.
The move should clear up some of the confusion traditionally found in Anglo American's highly complex corporate structures. As Oswald explained, "The consolidation of Frantschach and Mondi Packaging is a step forward that will greatly strengthen the competitiveness of the group. This integration makes so much sense, precisely because Mondi Packaging and Frantschach complement each other rather than overlap."
Of course, in a modern economy it's not enough just to deal with prices and supply and demand balances. Regulatory and public affairs are taking up more management time than ever and, as the European Union's legislative machine powers on, that means more work for the pulp and paper industry's trade associations.
Chief among these is CEPI (the Confederation of European Paper Industries), which represents Europe's national pulp and paper associations. According to Cepi's Managing Director Teresa Presas, this year is going to be a cracker as a new set of Commissioners takes its place and the confederation deals with a host of directives and initiatives that will affect the sector for years to come.
"2005 is certainly going to be a hectic year for CEPI," says Presas. "A new focus on competitiveness is emerging in the Commission agenda and we need to be proactive in that area. That means that on top of our existing work, such as helping to promote the sustainability credentials of the industry and pushing for recognition of the renewable nature of wood, we'll also be tackling issues raised by the proposed EU's chemicals legislation (REACH), as well as the Emissions Trading directive where we will be proposing sensible solutions to try to offset the power price increases that could result from that.
"On top of all that, we will be trying to minimize the bureaucratic impact of forthcoming legislation on illegal logging and preparing a new European Declaration on Recovered Paper," she continued. "Of course, these are just some of the issues on the agenda, so 2005 will definitely be busy."
Items such as REACH and the Emissions Trading Directive could have far-reaching impacts on red tape and energy costs for the industry as a whole, so it looks like 2005 could determine just how serious the legislators are about the so-called Lisbon Agenda, which set a target of making Europe's economy the most competitive in the world.
Overall, the consensus seems to be that this coming year is likely to be slightly better than 2004, but no-one is taking anything for granted. Boosting competitiveness by any means is likely to prove an ongoing preoccupation for European pulp and paper companies.
If the companies' forecasts and the market commentators are to be believed, price increases will come through early in 2005, but that will be coupled by rising costs as energy prices continue to make an impact.
On top of that, pulp producers could well aim to secure higher ground before a glut of new capacity hits the market in 2006; that effect will be magnified if--as some commentators are predicting--certain Canadian pulp mills bite the dust during the course of 2005. Recovered paper also looks like it could be heading north if demand around the globe stays as consistently strong as it has been recently.
WHAT YOU WILL LEARN:
* How European producers expect the market to develop.
* Why cost-cutting is likely to continue.
* "Currencies lift Europeans up the Solutions! Top 10 List," by Jim Kenny, Solutions!, June 2004. To access this article, enter the following Product Code in the search field on www.tappi.org: 04JUNSO45.
* "European expansion presents growth path for papermakers," by Jim Kenny, Solutions!, November 2004. Product Code: 04NOVS033.
* "Europe faces [euro] 500 million power charge," by Jim Kenny, Solutions!, July 2004. Product Code: 04JULSO36.
JIM KENNY, CONTRIBUTING EDITOR/EUROPE
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 +32 2 534 4960, or by email at email@example.com.
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|Publication:||Solutions - for People, Processes and Paper|
|Date:||Jan 1, 2005|
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