Finnish Paper Makers Flounder as Wood Shortage Looms

Will this piece of news affect the already rising price of paper in Malaysia?

HELSINKI (AFP) — Finland’s already struggling paper makers are bracing for a new crunch as soaring Russian export duties on wood threaten to laden one of the Nordic country’s most important sectors with a paralyzing raw material shortage.

Finnish paper makers Stora Enso and UPM-Kymmene, which rank among the leaders worldwide, both reported disastrous second quarter results this week as due to continued shrinking demand and sky-rocketing costs linked in part to neighboring Russia’s ever climbing tax on wood exports.

With their quarterly reports bathed in red as a backdrop, the companies that have already laid off nearly 10,000 people in Finland since 2004 hinted another round of job-cuts and factory closures could be on the horizon.

“We are preparing a … set of capacity reduction plans in case there is no concrete and cost-improving compromise on Russian duties soon,” Stora Enso chief executive Jouko Karvinen said in a statement.

Moscow has been ratcheting up its duties on timber since 2006, squeezing Finnish paper makers who have for years been dependent on cheap Russian wood to keep their mills running.

It has vowed to shock hike its wood export tax next year to 50 euros (78.4 dollars) per cubic meter from the current 15 euros.

If that happens, timber imports from Russia to Finland, which slumped 23 percent between 2006 and 2007 to just under 12 million cubic metres of raw wood, are expected to grind to a halt altogether.

“If forest owners did not sell wood, and imports from Russia ended, it would cause a catastrophe,” Prime Minister Matti Vanhanen warned reporters this week.

In an attempt to ward off disaster in the Finnish forestry sector, which accounts for about 16 percent of the Nordic country’s industrial production revenues, the government said it would temporarily slash taxes on domestic raw wood sales through 2010.

“This is an operation to secure jobs in the Finnish forestry industry,” Finance Minister Jyrki Katainen told reporters.

Although the tax break was no guarantee against lay-offs in the struggling paper sector, which employs more than 20,000 of Finland’s 5.2 million inhabitants, Helsinki said it wanted to ensure no one lost their job due to a lack of timber.

Traditionally, the forestry industry has been vital to the Finnish economy, and in 2007 the sector accounted for 19 percent of the country’s total exports, according to statistics from Finnish Customs.

In light of today’s dour financial climate, it is especially vital to avoid large-scale lay-offs in such an important sector, according to head of the Pellervo economic research institute, Paula Horne.

“Economic growth is slowing down now and the impact of capacity cuts (on local economies) will be greater,” she told AFP, pointing out that in parts of eastern Finland “the pulp and paper industry amounts to about 20 percent of the economy.”

While Finnish forestries welcomed the government tax cut, saying it should help ward off a shortage, some experts insisted it could not solve the industry’s long-term problems: overcapacity, increasing costs and weakening demand, which have kept a lid on prices.

“Drastic production cuts in Finland are likely and they are not dependent on wood imports,” Risto Seppaelae, a professor at the Finnish Forest Research Institute (Metla), told AFP.

The paper companies, he said, had taken a calculated risk when they began expanding their capacity at the end of the 1990s, encouraged by cheap Russian wood and increasing paper demand.

Seppaelae was also skeptical that the Finnish paper jobs could be saved in the long run, pointing out that many of the country’s mills were getting old and that it would make sense for companies to move more production to places where cheap wood is available, like South America.

While the ballooning Russian timber duties are aimed at helping transform the country’s forestry sector from a raw material exporter to a refiner and producer of consumer goods, some experts say Finland’s neighbour will also suffer from the industry shake-up.

“In northwestern Russia, the duty hikes are expected to create a situation where available fibre wood will exceed demand and prices will fall,” putting Russian jobs on the line, said Pekka Ollonqvist, who is part of a Finnish-Russian forestry research group at Metla.

Horne agreed.

“It is clear that Russia cannot in the next few years use all the wood that will not be exported to Finland,” she said

“This will have an impact in Russia’s local economies and employment.”