UPDATE 2-UPM warns of more weakness in European paper
* Gives stable outlook for energy, pulp and label
* Proposes unchanged annual dividend
* Shares down 5.4 pct, Stora Enso down 3.3 pct (Adds background, analyst comment)
By Jussi Rosendahl
HELSINKI, Jan 31 (Reuters) - The world's largest graphic paper maker UPM-Kymmene said weaker demand and prices for paper in Europe would likely hurt its profit this year, after reporting a smaller-than-expected core profit in 2012.
The Finnish company said weaker publication paper prices and lower delivery volumes were expected to hurt margins of its European paper business in the first half of the year compared to the second half of 2012.
Recession in Europe plus a structural shift to online media from printed newspapers and magazines has hit demand for paper.
UPM, along with main rival Stora Enso and smaller competitors, has tried for years to support paper prices by shutting production capacity, but the cuts have been outpaced by falling demand.
UPM has announced plans to cut its paper production by further 850,000 tonnes, or 6.6 percent.
The company had already said earlier this month that fourth-quarter core operating profit fell 6 percent to 138 million euros ($187 million), hit by losses at its paper unit.
UPM published full details of its annual results on Thursday, but did not provide estimates for group operating profit as it has done in the past.
"One is required to make some interpretations here," Markku Jarvinen, analyst from Evli brokerage said.
"They seem to be guiding for some softness in the paper business, although it is clear that European demand is seen falling and it is usual that the unit's first-half volumes are lower than in the second half of the year."
The group's shares fell 5.4 percent to 9.00 euros by 1345 GMT. Stora Enso fell 3.3 percent to 5.20 euros.
Analysts found some bright spots, including the company's dividend of 0.6 euros per share, unchanged from a year ago.
"Of course, there is the risk that the paper business would go really, really bad in a short period of time," said Cheuvreux analyst Mikael Jafs. "But this is a stock that gives you a dividend yield of 6.6 percent, and a company that generates cash flow of a billion euros per year. To me, this is important."
UPM was also more upbeat about its growth businesses such as energy, pulp and labels, saying the outlook was stable.
But the company still has to cope with the problem of paper industry overcapacity in Europe, which analysts have estimated at about 15 percent. They say the industry needs to close more mills to put a floor under prices.
On Thursday, UPM criticised rivals for contributing to the fall in paper prices. Analysts say some UPM customers have responded to its efforts to cut output and bolster prices by turning to cheaper sources.
"The imbalance of demand and supply in the European graphic paper markets is tempting some to short-sighted activity," Chief Executive Jussi Pesonen said. "The margins are squeezed to levels which are unsustainable in light of the industry cost structures."
Annual European deliveries of graphic paper grades such as newsprint, magazine paper and office papers, were about 17 percent lower last year than in 2006.
($1 = 0.7370 euros) (Reporting by Jussi Rosendahl. Editing by Jane Merriman)
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