August 31, 2011 / 2:31 PM / 6 years ago

UPM boosts paper sector with more capacity cuts

HELSINKI (Reuters) - Paper group UPM-Kymmene UPM1V.HE said it would shut more mills than expected across Europe and cut 1,300 jobs, sparking a rally in forest sector shares on hopes the move would support paper prices and spur more consolidation.

The cuts follow the Finnish group’s acquisition of debt-laden Myllykoski and could help the industry better cope with overcapacity amid falling demand.

“This is an important move, especially now as the demand outlook has weakened,” Handelsbanken analyst Karri Rinta said. “It is better to close a bit more to be on the safe side, and get ready for worse.”

UPM, the world’s top graphic paper maker, said on Wednesday it would cut 1.2 million tonnes of annual magazine paper capacity in Finland, France and Germany, plus 110,000 tonnes of newsprint capacity in Germany.

Analysts had expected a cut of 1 million tonnes at most.

The plan could eliminate 9 percent of UPM’s overall paper capacity of 14 million tonnes, and more than 2 percent of Europe’s total capacity of around 51 million tonnes.

In the magazine paper grade, in which UPM has a clear lead in market share after its acquisition of Myllykoski closed a few weeks ago, the steps represent a 17 percent cut for the company and an 8 percent cut for the industry in Europe.

The measures include permanent mill closures at Kouvola in Finland and Albbruck in Germany, both previously owned by Myllykoski. It also aims to shut down a paper machine at Ettringen in Germany.

The company is also looking to sell Stracel mill in France with 280,000 tonnes to a non-competing buyer, and that figure is included in the sum of expected capacity cuts. UPM’s paper unit head Jyrki Ovaska told Reuters the mill could be closed if it could not be sold.

The mills are due to be closed by the end of this year.

MORE CONSOLIDATION

UPM said it expected annual synergy benefits from its acquisition of Myllykoski to total around 200 million euros ($289 million), up from its previous forecast of 100 million.

The news sent UPM shares up 8.8 percent by 1122 GMT, while Finnish rivals Stora Enso (STERV.HE) and M-real MRLBV.HE both rose more than 6 percent. Shares in Norwegian group Norske Skog (NSG.OL) jumped 8.8 percent, while those of Sweden’s Holmen (HOLMb.ST) rose 3.9 percent. UPM stock is still down about 30 percent this year, in line with the basic materials sector index

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Analysts said UPM’s plan also raised hopes of further consolidation by other industry players. Loss-making Norske Skog, which has heavy exposure to newsprint, is widely seen as a possible buyout target.

“The cost synergy scale is so significant here (UPM and Myllykoski), so I think it is likely that other companies think of consolidation ... This must speed up speculation around Norske Skog,” Rinta said.

UPM chief executive Jussi Pesonen said that even after its cuts, the industry needed to do more to deal with a shrinking paper market.

“With the planned actions, we would respond to the magazine paper overcapacity challenge for our own benefit,” he said. “However, this plan would not solve the cost challenges of the industry.”

WEAK DEMAND

Analysts said UPM’s closure plans would help support prices but not necessarily push them higher, given the weakness of demand. The price of coated magazine paper has already risen 6.5 percent this year.

CEO Pesonen told a conference call that paper demand is likely to be “more muted” than what he had expected only a month ago.

In addition to the permanent closures, UPM is looking to temporarily close a fine paper machine in Germany and streamline some Finnish operations.

The job cuts include 1,170 at UPM’s paper sites and 125 in its plywood business.

UPM, along with Stora Enso, has been leading the industry’s restructuring. It has already closed about 14 percent of its paper capacity since 2005.

($1 = 0.693 euro)

Additional reporting By Ritsuko Ando; Editing by Dan Lalor and Will Waterman

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