UPDATE 2-Stora Enso to cut more capacity as paper demand drops

Tue Feb 5, 2013 10:04am EST

* Q4 core operating profit 155 mln euros vs 162 mln forecast

* Plans to close paper machines, cut 600 jobs

* Shifts focus from paper to pulp and packaging (Adds details on paper demand, analysts' comments)

By Jussi Rosendahl

HELSINKI, Feb 4 (Reuters) - Paper manufacturer Stora Enso plans to cut more newsprint production capacity and 600 jobs to cope with falling demand for paper in Europe as readers increasingly turn to online media.

The Finnish company, which also makes pulp, packaging board and sawn timber, on Tuesday reported a lower-than-expected profit for the fourth quarter and forecast more weakness for the first three months of this year.

Stora said European demand for newsprint and coated magazine paper fell 9 percent last year as Europe's recession accelerated a shift online from printed newspapers and magazine.

Stora and rivals such as UPM-Kymmene have tried for years to bolster paper prices by reducing production capacity, but such cuts have so far been outpaced by the fall in demand. UPM last month announced a new plan to cut output.

Stora said on Tuesday it would shut two paper machines in Sweden, representing 3.4 percent of total European newsprint capacity, as part of its plan to cut annual costs by 54 million euros ($73 million). The company employed 28,000 people at the end of 2012.

Chief Executive Jouko Karvinen said the move would help prevent the paper business from burning through cash.

Credit Suisse analyst Lars Kjellberg, however, said the closures were not enough. Analysts have said more takeovers or bigger mill closures were needed to turn the industry around.

"For a heavy and capital-intensive industry like paper, it's very difficult to keep pace with market erosion. So far the industry is running behind the curve," he said.

STARK OUTLOOK

Stora said weakening paper sales and a poor outlook for its sawn timber business meant the group's first-quarter core operating profit would be about one-third lower than in the previous quarter.

"Paper's outlook is stark, the demand in Europe seems to be falling faster than it has been expected. The overcapacity remains, and recent closures have not helped paper price negotiations," said Henri Parkkinen, the head of research of Pohjola Markets.

The European paper industry is still seen having around 15 percent overcapacity in graphic paper grades. Demand in the region has fallen about 25 percent since 2007.

Stora said its fourth-quarter core operating profit rose 6 percent year-on-year to 155 million euros ($210 million), or 5.7 percent of sales, missing the average forecast of 162 million euros in a Reuters poll.

Paper contributed 45 percent of its full-year sales and 35 percent of profit.

The company, looking to shift its focus from paper to more profitable products such as pulp and packaging board, is currently building a $2 billion pulp mill in Uruguay together with Arauco, a unit of Chile's Copec.

It is also planning an integrated pulp and packaging board mill worth 1.6 billion euros to Guangxi, China.

($1 = 0.7376 euros) (Reporting By Jussi Rosendahl; Editing by Ritsuko Ando and Erica Billingham)