That’s how it is. Yle reported that even after the closure of Kaukas PK1, there is still an overcapacity of 800 thousand tons in Europe. Given this outlook, the next machine to be shut down will then be decided upon.
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Could someone more familiar with the industry outline the effects of the closure on the entire integrated mill? The paper mill has used the pulp mill’s product (plus, of course, the groundwood mill). Will the pulp mill operate at the same pace as before, i.e., can the portion of pulp previously used by the paper mill be dried into bales and sold as pulp globally, or does the machine’s closure also mean a drop in the pulp mill’s volume? And the most important question: What is the impact of this potential drop in volume on the profitability of the entire integrated mill?
Quickly thinking with common sense, Kaukas’s future can still withstand the closure of that paper mill, but if the pulp mill starts to be seen as unprofitable, the future of the entire integrated mill is at risk. As it provides raw material for both the biofuel and chemical plants.
After this, only the research institute and the sawmill would remain. The last one to leave turns off the lights.
Edit: Also located in the integrated mill area is Kaukaan Voima, which is a joint venture of Lappeenrannan Energia and Pohjolan Voima. It has produced steam for the paper mill and other production, and “incidentally” heated the city. Already with the closure of a previous machine, the power plant’s production was found to have become radically less profitable because its capacity is far too large for one machine plus merely district heating production. Now that one machine is also being removed. It seems that district heating production will also cease at the same time.
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That closure of the last paper machine certainly doesn’t improve the situation of the entire integrated mill. There are always overhead costs at a production site, and now they are paid from reduced sales. Similarly, the value added decreases, as previously at least some of the pulp was used in their own mill. The Kaukas site won’t collapse because of this, but within 5-10 years, the current pulp mill will reach the end of its life cycle. Is there a business case to renew it or not? Then it could become a serious situation. I’m not an industry expert, though.
Pine oil is already being brought to the biodiesel plant from elsewhere as raw material, at least according to UPM’s website. I believe it will survive, even if the pulp mill were to go.
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What is the likely impact of the shutdown of the paper mill and thus mechanical pulp production on wood consumption? Currently, Kaukas has used a total of approximately 5 million cubic meters per year. This is, of course, divided among the pulp mill, the sawmill, and mechanical pulp. If 10% had gone to mechanical pulp, then the impact on the total consumption of pulpwood and thus on the price is negligible. Especially since SE Oulu absorbs significantly more wood, once the new board machine is eventually sold to full capacity.
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Forest industry analyst Antti has prepared a new company report on UPM right after Q2. 
The overall picture of UPM’s Q2 report was subdued, and the short-term outlook remains challenging, even though the company is actively taking measures to support its earnings performance. We slightly lowered our forecasts on top of the cuts we made in advance. The stock is not cheap in the short term, which, combined with the subdued earnings outlook, weighs down the return expectation. Therefore, we lower our recommendation for UPM to Reduce (previously Add) and our target price to EUR 24.00 (previously EUR 25.00).
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Investors in forest companies are now being tested. Results for many are at rock bottom, Spinnova, which developed entirely new products from wood material, is bankrupt, and the outlook is in a thick fog. Here are a few fragmented observations:
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@Antti_Viljakainen no longer calls UPM, which posted a razor-thin result, a sector favorite; instead, an “add” recommendation has been given to Stora Enso. This is in line with Swedish analysts, who predict even a third of “upside potential” for SE. Koskisen isn’t doing too badly either, and in Sweden, SCA just posted quite impressive figures.
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Recent estimates refer to some kind of recovery next year. However, “this coming autumn,” “next year,” etc., have been repeated for how many years now, and there are no full guarantees of an impending upturn in the sector. A regrettable aspect of the outlook is also that much depends on global developments, where figures like Trump, Putin, etc., are the big decision-makers😡. Visibility and predictability are thus ±0. On the other hand, if and when a recovery comes, it could be swift and surprising.
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A piquant addition to the trade war is the 50% tariff on Brazilian products to the USA. Does this open up an opportunity for Finnish and Uruguayan production? Or does it also mean a flood of Brazilian pulp production into the European and Chinese markets, ruining prices permanently?
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In UPM, paper production is melting away at such a rate that Leuna’s new bioproducts will not be able to replace it for years. In UPM, revenue has stagnated for the past 10 years, but will it become an even shrinking company, at least in the short term? Cf. the company’s, especially the previous CEO’s, grandiose growth speeches…
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Next year’s dividends are ? The impact of Stora Enso’s forest plot spin-off on shareholders’ portfolios?
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All in all, these seem to be the toughest times for the industry since the early 2000s. But even in this situation, quite a few companies in the sector are capable of positive results and have been trimmed into top condition. Analysts are now racing to lower target prices, but trading is active on the stock exchange, and today, it seems, the share prices of all Finnish and Swedish
companies are firmly in positive territory. Will this turn around?
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In situations like this (in hazy prospects), in my opinion, it measures how much confidence an investor has in the management’s competence to navigate through challenging times.
I personally hoped to have acquired more umppi closer to 20€, but it seems I will wait for autumn regarding this matter.
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Good observations! However, let’s correct that Spinnova is not bankrupt, even though Suzano’s withdrawal from cooperation was a severe setback.
SCA indeed reported acceptable numbers today given the circumstances. SCA’s EBITDA improved by 8% in Q2.
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I have personally increased the weight of forest companies in my portfolio to a record high now. Fortunately, I did this a little before the results. Now we are clearly at the bottom of the cycle. In my opinion, this is an excellent opportunity to double the money in the next 3-5 years. Especially Stora Enso, where one can play a balance sheet game. As a bullish signal on top of this is analysts turning pessimistic and painting a picture of “expensive valuation”. The only pity is that analysts always make the same mistake of making forecasts with a ruler.
A good example of this has been, for instance, Neste, where Inderes seemed to sell them out of their model portfolio right at the global bottoms (and missed over 100% share price increase).
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The golden age of forest companies operating in the Nordic countries will not return unless raw timber is again obtained from Russia. I don’t believe that will happen in the coming years.
Of course, a change in the economic situation would always improve results, but production volume in Finland cannot significantly grow from the current level, as raw timber is insufficient and already too expensive. Therefore, profit improvement would only come through an increase in product prices, meaning not in full.
That’s why my favorite among forest companies would be UPM, which is least dependent on the Nordic countries.
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I myself have never owned forest companies before and have avoided owning them. Only this spring did I start steadily adding UPM to my portfolio. I’d rather pay €23-24/share than €35. There’s no real view as to whether we are at the bottom of the cycle or if things will continue to worsen from here.
On average, it’s worth trying to buy low and sell high. Time will tell what happens to us forest company owners.
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The biodiesel plant is based on pine oil, which separates into black liquor during cooking and is then separated from it. The closure of the pulp mill automatically leads to the biodiesel plant stopping due to the depletion of raw material (pine oil).
For this reason, the pulp mill cannot be closed. That bio-UPM would then only be a memory of what it once was.
Relocating the biorefinery is no small matter, requiring a new environmental permit and a new location. There is hardly anything transferable from the existing facility. The amount of biodiesel is directly proportional to the amount of pine oil, meaning if the plant’s capacity decreases, the amount decreases proportionally.
In addition, wood species have a direct impact on the amount of pine oil, meaning the amount derived from softwood and hardwood affects the amount of pine oil.
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Totally agree. I bought 2000 more UPM yesterday for my portfolio precisely because we are now truly at the bottom of the cycle.
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It won’t collapse because of that, but there will be direct effects.
Drying capacity is at its limit, and the machinery is a mixed bag. If the production level is to be maintained, investment in a new drying machine is needed.
One could either build a new machine and scrap two existing ones.
Which would technically be the most sensible solution.
Well, the ripple effects are that if it’s not done, capacity will decrease, and in the same proportion, the amount of tall oil and the amount of biodiesel produced will decrease!
So, while waiting for investments, the rest of the process will remain in play, if capacity is not increased.
For which there is no possibility regarding raw material, and when considering the wood coming from Estonia.
In Estonia, there is already an ongoing investigation to increase domestic wood processing and restrict wood exports, which would have a direct impact on Finnish factories and Kaukas.
And these guys there are serious about building new facilities.
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How does Stora report the calculated stumpage price of wood taken from its own forest for its own processing?
How much revenue/profit does Stora get from its own wood per year?
What proportion of the wood used by Stora comes from its own forests?
What would Stora’s profit be if all the wood were purchased 100% from the market?
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How do others see the future of plywood? Is there any risk that UPM will close down one of its three plywood factories?
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Aren’t the plywood markets much healthier than those of the paper industry? Plywood is used in a variety of ways, both in the construction industry and, for example, in trucks, etc., meaning there will be demand for plywood in the future as well. Of course, there will certainly be competition between Pello, Savonlinna, and Joensuu, but the least efficient ones have already disappeared from the market, such as the factories in Suolahti and Säynätsalo.
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Tall oil can be bought and is bought from other pulp mills as well. I don’t know what proportion comes from the Kaukas pulp mill, but biodiesel will not collapse due to the pulp mill’s closure.
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As I understand it, Stora sells wood to other segments at market prices. Sales revenue and profit are reported in the Forest segment.
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The majority of the pine oil comes from Kaukas and some probably from Kymi.
In addition, some of the electricity and other necessary energy comes through the Kaukas pulp mill.
At least the biorefinery ramps its production up and down according to the pulp mill.
Currently, that pine oil has been a side stream of pulp production, which is further refined into diesel.
When raw material and electricity start to be bought from outside, the margin always drops.
That biorefinery can be left there, but profitability will be difficult
or production needs to start increasing.
Overall, even now as an integrated entity, the factory’s energy balance wastes excess heat.
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