Business News
Stora Enso Interim Review January-March 2008
Friday 25. April 2008 - Unsatisfactory Quarter - Benefits of Corrective Actions to Show in Second Half
Message from CEO Jouko Karvinen:
“In the first quarter of 2008 we continued to face the same challenges as in the last quarter of 2007: continuing year-on-year increases in wood costs and the strong euro. Wood Products accounted for more than half of the decline in our earnings due to deteriorating demand and prices for wood products, as well as inventory write-downs. Wood costs continued to increase year-on-year, with the latest increases entirely in pulpwood prices, which put particular pressure on the Consumer Board and Fine Paper segments. The drop in Newsprint earnings was due to sales price declines and unfavourable currency impacts.
“The results are clearly unsatisfactory, but they also show that the restructuring plans announced in the third quarter of 2007 that we are rapidly completing were absolutely necessary to reverse the downward trend as fast as we ever can. We are committed to compensating for the 2.5% to 3% expected inflation in total unit costs for the full year 2008. We now foresee our wood costs levelling off toward the end of the second quarter, partly due to reduction in imported wood purchases through reductions in pulp and paper capacity. This means that nearly half of our forecast full-year cost inflation has already occurred in the first quarter of 2008. As the compensating action plans of the business areas will have their greatest positive impact in the second half of 2008, we are as prepared as we can be for the uncertainties of the coming quarters.
“In the next few months we plan to curtail pulp production at our Sunila and Enocell mills to keep down marginal wood costs and optimise our earnings. We also plan further curtailments of production at our Finnish sawmills due to high log prices. It goes without saying that a long-awaited solution on Russian duties is now more urgent than ever before, even though we do have a clear plan for how to reduce capacity and operate if the duties are imposed in full. In the short term, we are deeply concerned about the low level of activity in the domestic wood markets in Finland – in a market situation where wood prices in Finland are already on a high level in a European comparison. The industry needs the domestic wood now, at a cost that allows reasonable returns on the end products – not in a year.
“Our short-term market outlook has not changed essentially since February. However, the uncertainty beyond the present quarter has further increased due to macroeconomic concerns. Most of the deterioration in the cash flow in the first quarter was due to a one-time change in the timing of payment of Finnish pension contributions and payments in relation to restructuring programmes. Nevertheless, because of the weak cash flow and uncertainty in the market outlook, we have decided to reduce our capital investment expenditure for 2008 from EUR 900 million to EUR 700-750 million.
“Our programme to support the employees affected by our restructuring measures in Finland and Sweden continues. Summa Mill has been closed, and Kemijärvi Mill will be closed down by the end of April as previously announced. The overall programme to help the 1 485 people affected has resulted in new job opportunities and other solutions for about 850 employees thus far. Unfortunately, there are significant differences in the number of potential job-creating initiatives between the locations, with the greatest interest in Summa and Norrsundet, and relatively little in Kemijärvi. This obviously makes it even more important for the Kemijärvi employees that the Anaika business proposal is successful.”
Near-term Market Outlook
In Europe demand for newsprint is likely to weaken slightly. However, following significant capacity reductions in the industry, the market is expected to remain firm with prices similar to the first quarter of 2008.
Demand for magazine paper is forecast to grow, but more slowly than in the same quarter of last year owing to increasing macroeconomic uncertainties and their effect on advertising. Nevertheless, the market should remain firm as supply has decreased. The outlook for prices is cautiously favourable for non-contractual business. Fine paper demand is expected to remain unchanged compared with the second quarter of 2007, subject to normal slowing towards the summer. Slight price improvements are anticipated in the second quarter of 2008.
Demand for consumer board is predicted to remain generally similar to a year ago and the previous quarter. Some price increases to partly offset the unfavourable currency impacts are foreseen.
Demand for industrial packaging is forecast to remain generally good, with a slight temporary softening in the market for recycled-fibre-based (RCP) containerboard. Prices are expected to remain stable, with some softening in RCP-based containerboard prices.
For wood products additional supply pressure due to recent storms in Central Europe has aggravated the oversupply situation and prices remain under pressure. During the second quarter of 2008 there should be improvement in demand due to a seasonal upswing in construction activity.
In Latin America demand for coated magazine paper is expected to remain firm and further price increases are anticipated.
In China the outlook for fine paper demand and prices remains positive. The launch of SC grades into the Chinese market has gone well and customer interest is rapidly growing. Prices are forecast to rise.