Forest industry recognizes restructuring need

HELSINKI (Reuters) - Consolidation looms in the struggling forest products industry given a need to slash excess capacity and create stronger companies, top global paper makers told the Reuters Paper Summit.

"Consolidation is inevitable," said Jussi Pesonen, chief executive of Finland's UPM-Kymmene (UPM1V.HE), the world's biggest magazine paper producer.

Mergers are key to restructuring, closing uncompetitive mills to remove overcapacity and restore prices to levels needed to offset rising costs, industry leaders said.

"The only reason for consolidation is to be able to close capacity. And that is needed, both on the paper and packaging side," SCA (SCAb.ST) Chief Executive Jan Johansson said.

A wave of consolidation in the industry in the 1990s, which created several of today's Nordic and North American giants, was not followed by the kind of restructuring needed to avoid the overcapacity woes hurting the industry.

"The need has been there for 10-15 years on the paper side. I would be surprised if nothing happens," Johansson said.

Overcapacity has kept a lid on paper prices for years, while increasing costs of wood and energy have eaten into paper makers' already low margins.

Internet use has reduced demand for newsprint, especially in the United States, and the rapidly worsening economy in North America and Europe could cut demand outlook.

NEW IMPETUS

This "perfect storm" of negative factors has given fresh impetus to consolidation talk, and some analysts say big changes could come before the end of this year.

But it is a difficult process complicated by a plunge in valuations of forest industry shares, many of which trade at below book values of the companies' assets.

Finnish fine paper maker M-real (MRLBV.HE) told the summit that paper prices on average were still around 20 percent below where they were 5-6 years ago, so consolidation was essential to help the sector regain pricing power.

"Consolidation is needed and we are working hard to support that process," Chief Executive Mikko Helander said. "I believe strongly that whatever is done, M-real can play an active role."

Bigger Finnish rival UPM-Kymmene also said it was ready to take part and determined to be an industry leader.

"I am always interested in new combinations which are adding to our shareholder value and improving our shareholder value," UPM's Pesonen said.

While agreeing on the broader trend, Norway's Norske Skog (NSG.OL), which is keen to restructure the magazine paper business, was more cautious about the pace of deals.

"There is a need for restructuring of the European paper business ... and we are open to do that," CEO Christian Rynning-Toennesen said.

"Talks and processes are going on in the industry, but that has been the case for a long time, so I don't think there is reason to believe that things are just around the corner," he said. "It may take a short time or a long time."

Moody's forest sector analyst Martin Kohlhase said tapping equity or debt markets to finance acquisitions would be challenging for the sector where earnings have suffered and cash flow is under pressure.

He noted there would still be room for joint ventures or asset swaps which would have little impact on firms' capital structure.

Consolidation could also be done the wrong way.

"If you take two big, bad companies, you end up with a huge bad company," SCA's Johansson said.

(Editing by Sue Thomas)