Book 1

Papermaking Science and Technology
a book series
covering the latest
technology and
future trends
Book 1
Economics of the Pulp

and Paper Industry
Second Edition
Totally updated version

Book editor
Magnus Diesen, M.Sc.(Tech.), Retired Executive Vice-President, Stora Enso
Oyj, Finland
Publisher
Finnish Paper Engineers’ Association/Paperi ja Puu Oy
Paperi ja Puu Oy
ISBN 978-952-5216-00-4 (the series)
ISBN 978-952-5216-23-3 (book 1)
Published by Finnish Paper Engineers’ Association/Paperi ja Puu Oy

(Paperi ja Puu Oy, PO BOX 155, FIN-00171 HELSINKI, FINLAND)
Copyright © 2007 by Paperi ja Puu Oy. All rights reserved.
Printed by Gummerus Oy, Jyväskylä, Finland 2007
Printed on G-Print 100 g/m2, sales: Papyrus

Foreword
PAPERMAKING SCIENCE AND TECHNOLOGY,

SECOND EDITION
Papermaking Science and Technology book series published by Finnish Paper

Engineers’ Association, TAPPI and Fapet Oy has been the largest and most compre-
hensive book series in the field of pulp and paper technology ever since its publishing
in 1998—2000. The original 19-part book series does not concentrate solely on the
production of pulp, board and paper or the technologies related to that, but covers the
entire chemical forest industry from raw materials and economics to printing and con-
verting of paper and board, process control, maintenance and environmental issues.
The books are used globally as course material on B.Sc. and M.Sc. level, in further
professional training and as hand books for professionals in industry and research
centres.
Updating of the book series has become necessary as it has been already 8 years
since the publication of the first volumes. Regarding the development of trends, EU
legislation and technology as well as the overall situation and changes in the field of
pulp and paper industry, a vast majority of the books will have to be completely rewrit-
ten. Most of the 19 original books will be updated. The first updated books will be
available in summer 2007.

Global forest industry cluster companies need professionals with ever better skills and
abilities. Together with forest industry cluster companies, Finnish Paper Engineers’
Association is strongly participating in the development of training and education in
the field of forest products technology. Updating of the Papermaking Science and
Technology book series can be seen as a concrete example of this.
Finnish Paper Engineers’ Association with its publishing company Paperi ja Puu Oy
wishes to warmly thank all those, who have personally contributed to the updating of
the book series as well as the companies who have supported the achievement finan-
cially.
Updating has been supported by:
- Metsäliitto Group
- Myllykoski Paper Oy
- Stora Enso Oyj
- UPM
- The Finnish Cultural Foundation

List of Contributors
Magnus Diesen, M.Sc.(Tech.), Retired Executive Vice-President, Stora Enso Oyj , Finland

Preface Magnus Diesen
The aim of this volume is to provide a global perspective of the pulp and paper
industry from a Nordic viewpoint, and to help the reader in:
- obtaining information on forest industry raw material resources, markets

and energy, as well as the worldwide structure and various strategies of the
industry,
- evaluating the economic consequences of decisions taken in a pulp or

paper mill,
- analysing and comparing the profitability and competitiveness of the pulp

and paper industry in different countries, and
- analysing alternative investments with different criteria and selecting the

best alternative in a given situation.
It is assumed that the reader will have a basic knowledge of the pulp and paper
industry.
This volume was written in 2006 and early 2007. Thus the sources of
information used and referred to contained data up to that time, in most cases
up to 2005, in some cases including 2006.
Pöyry Forest Industry Consulting Oy provided a major part of the data and
information for this book. My former employer, Stora Enso, encouraged and
supported me, and my former colleagues contributed valuable and well-
structured comments. I want to thank you all.
London, April 2007

Table of Contents
1. Main characteristics of the global pulp and paper industry.................................................9
2. Impact of the forest industry on the economies of Finland and Sweden...........................18
3. World paper markets............................................................................................................32
4. Fibre demand and outlook...................................................................................................54
5. Raw material resources – forests and wood supply .........................................................65
6. Raw material resources – recovered paper........................................................................80
7. Energy resources and consumption....................................................................................90
8. Structure of the global pulp and paper industry and main suppliers 2005-2006..............99
9. Financial valuation and analysis........................................................................................130
10. Investment decisions..........................................................................................................158
11. Economy of scale................................................................................................................175
12. Economy of integration......................................................................................................184
13. Currency exchange rates and risk management..............................................................192
14. Future strategies for the Nordic pulp and paper industry................................................207
Clossary..............................................................................................................................216
Converson factors...............................................................................................................220
Index . ...............................................................................................................................221
Book 1: Economics of the

Pulp and Paper Industry
Chapter 1
Main characteristics of the global pulp and paper industry
1 General..................................................................................................................................10
2 Typical features of the pulp and paper industry.................................................................11
2.1 Growth . .................................................................................................................................11
2.2 Technical development...........................................................................................................11
2.3 Globalisation...........................................................................................................................12
2.4 Cyclical nature of the pulp and paper industry . ......................................................................12
2.5 High investment rates.............................................................................................................13
3 Opportunities for the pulp and paper industry....................................................................14
4 Challenges to the pulp and paper industry.........................................................................15
Sources..................................................................................................................................17

Chapter 1
Main characteristics
of the global pulp
and paper industry
The main characteristics of world’s pulp and paper industry include growth in demand
for paper and board, rapid technical development making use of economy of scale, and
cyclicality due to fluctuating product prices.
The industry is based on a solid foundation: it uses a renewable raw material resource,
forests, its products can be recycled several times and its modern technology ensures a
minimal effluent load. Its main challenges are related to low profitability in Europe and
North America, the negative impact of electronic media and information technology on
demand for newsprint and printing and writing papers, and the future availability and
cost of wood.
1 General
Paper is an important commodity for mankind whose importance is steadily increas-
ing. World paper consumption reached 366 million tons in 2005. About 40 % of this
volume was used for communication (newsprint and printing and writing papers),
45 % for packaging (mainly liner, fluting and boxboards), and the remaining 15 % for
miscellaneous purposes (hygienic, health care and other specialised end uses).
The paper industry is large and growing. In Europe the total value of paper pro-
Figure 1.1 Paper industry employment pyramid
duction is about EUR 650 billion and the pulp and paper industry provides direct em-
ployment for more than 0.5 million
people.
The paper industry generates
Forest
wealth both through its growth and
Pulp / recycled paper
its unusually steep employment pyra-
Paper mid. Figure 1 shows the components
Distribution / warehousing of the pyramid.
Many other industrial seg-
Converting / packaging
ments participate in the employment
Printing / publishing pyramid, including transport, print-
ing industry, converting industry for
Figure 1. Paper employment pyramid. boxes, laminates, etc. Equipment
10 Book 1: Economics of the

manufacturers and chemical suppliers also participate. Consider, as an example, that

the top part of the pyramid is a pulp mill. A modern pulp mill employs about 300 peo-
ple. Taking into account its indirect influence on forestry, logging, transport, equipment
manufacture, chemicals etc., it has a significant direct multiplier effect.
2 Typical features of the pulp and paper industry
2.1 Growth
Total world production of paper has grown from less than 10 million tons in 1900 to 43
million tons in 1950 and further to 366 million tons in 2005. Since 1950, the average
annual growth has been 4 %.
The fact that the growth of demand has exceeded the growth of Gross
Domestic Production (GDP) by a factor of 1.5 has been the decisive driving force
behind this development. It has stimulated the use of new technology, while promot-
ing new investments and accelerating overall investment activity. This has contributed
to newer and more modern production facilities and closure of old, uncompetitive
mills and machines. This development has been particularly visible in China and Asia,
where strong economic growth has generated unprecedented growth of the pulp and
paper industry.
2.2 Technical development

There has been enormous technical progress. As an example, Table 1 shows the de-
velopment in the speed and width of newsprint machines.
Table 1. Speed and width development of new newsprint machines since 1900.
1900 1960 1995 2005

Max.speed (m/min) 200 800 1600 2000
Max. Width (m) 3 7 9.5 11
According to Table 1, the maximum width of paper machines will not exceed
the current width of 11 m in the near future. Paper machine operating speeds have
increased dramatically and will continue to do so. New pilot paper machines have a
maximum speed of 3000 m/min.
The width and speed development of paper machines producing other printing
paper grades has been very similar to that of newsprint machines.
Another measure of technical development is the water consumption in pulp
and paper production, as illustrated in Table 2.

Chapter 1
Table 2. Water consumption in pulp and paper production since 1970.
1970 1980 1990 2005

Pulp 120 80 30 15-20
Paper 80 50 20 10
The current low figure for pulp production is the estimated consumption of a
new pulp mill, after it has reached a normal production level.
Both biological oxygen demand (BOD) and suspended solids (SS) levels per ton
of output have decreased from 1980 to 2005 by about 90-95 %. New technologies
allow reuse of effluent in the process. This further diminishes fresh water demand and
brings pulp and paper mills one step closer to an effluent-free, closed-loop pulp and
paper production process.
Finally, there has been a dramatic increase in the use of recovered paper in the
past 35 years. The share of recovered paper has increased from about 20 % of the
world fibre furnish in 1970 to 50 % in 2005. As the share of fillers and other additives
has increased from 7 % to 15 % of the fibre furnish, the share of virgin wood pulp has
declined from more than 65 % to less than 40 % in 2005. This development would not
have been possible without dramatic developments in deinking technology and paper
machine wet-end chemistry.
2.3 Globalisation
The concentration of the pulp and paper industry has increased significantly. In
Europe, the share of the top 5 companies of total capacity has increased from 30 %
in 1997 to 40 % in 2005. In North America a similar development has occurred. As a
consequence of this change, the large companies have grown much faster than the
average- and small-size companies. The growth has predominantly taken place within
continents, but there has also been growth overseas. This provides interesting interna-
tional job and career opportunities for young professionals, particularly with the larger
pulp and paper industry groups.
The development in Europe since 1990 has been characterised by a strong
consolidation of the industry, primarily driven by Nordic producers. This has resulted
in a situation where the three largest European producers in most grades are Nordic-
owned. Exceptions are coated woodfree, tissue and cartonboards, but also in these at
least one Nordic producer belongs to the top three.
2.4 Cyclical nature of the pulp and paper industry

The pulp and paper industry is cyclical. The main reason is the fluctuations in prices of
end products – market pulp, newsprint, fine papers, board grades etc. Figure 2 shows
the real price (price adjusted for inflation) of chemical pulp in 1970-2006.

Figure 1.2 Real price of NBSKP and BHKP 1970-2006
Real 2005 USD/ t

1400
NBSKP
1200
1000
800
600
BHKP
400
200
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Figure 2. Real price of NBSKP and BHKP 1970-20061.
The profit figures of North American and European companies reflect the cycli-
cal nature of the pulp and paper industry.
The reasons for the cyclical nature of pulp and paper industry product prices
have been discussed, analysed and debated at great length. The main reasons seem
to be the following:
1. Volatility in the demand and supply balance: simultaneous new investment
decisions cause supply to increase rapidly, faster than demand.
2. Inventory speculation by customers: during expected rising price cycles,
customers purchase more than end users demand. This strengthens de-
mand and fuels the rising price trend even further. During declining price
trends, this mechanism is reversed, lowering demand and strengthening the
declining price trend.
Against this background, the pulp and paper industry and its customers both
obviously contribute to the cyclical nature of the industry. Economic fluctuations are
also a factor, but of lesser magnitude. During the past few years financial institutions
have started to provide financial derivatives as hedges against risks and fluctuations.
These instruments are becoming more widely used and are expected to mitigate the
effects of fluctuations. All in all, the cyclical nature of the pulp and paper industry is
likely to continue, despite all efforts to the contrary.
2.5 High investment rates

The pulp and paper industry has a characteristically high level of investment rates,
making the industry exceptionally capital-intensive. This is accentuated by the fact
that the capital turnover of most companies is around 1.

Chapter 1
The main reasons for the high investment rates have been the following:
1. Until recently, the market growth of many paper grades has been rapid at
3-4 % per year. This has forced companies that have wanted to maintain or
increase their market shares in these rapidly growing grades to invest heav-
ily in order to maintain their position.
2. As indicated in Section 2.2 technical development in the pulp and paper
industry has been fast. This has resulted in new, well-designed mills and
machines, with competitive advantages in terms of manufacturing costs
and quality. The utilisation of economy of scale has further contributed to
improved competitiveness, driving investments in many instances.
3 Opportunities for the pulp and paper industry

Paper has certain inherent characteristics. Although much debated and not always
clearly agreed upon, these characteristics govern its success as a product. They will
contribute to its growing demand for many years to come.
The characteristics are the following:
1. Paper is made from a renewable raw material – wood.
2. Pulp and paper contribute to the growth and management of forests, reduc-
ing the carbon dioxide (CO2) content in the atmosphere, and thus, global
warming.
3. Paper can be recycled at least 5 to 7 times. This reduces the need for waste
disposal, since used paper returns to the manufacturing cycle.
4. Modern pulp and paper manufacturing processes are so energy-efficient that
the production of fine paper integrated with pulp manufacture requires prac-
tically no outside energy input. In addition, the development of pulp mills in
the direction of wood refineries, producing – in addition to pulp – also elec-
tricity, chemicals and transport fuels, provides an interesting opportunity for
the pulp and paper industry.
On the basis of the above facts, one can ask whether there is any other in-
dustrial product that uses a renewable resource, without outside energy and can be
recycled 5-7 times? The answer to this question lays a solid foundation on which the
paper industry can continue to thrive and develop.
Another positive aspect favouring paper is its growth potential. World paper
consumption is estimated to grow from 366 million tons in 2005 to 494 million tons
in 2020. This corresponds to an annual growth of 2.1 % per year. Demand should be
particularly strong in China and Asia, where population and industrial growth will be
strong.
Further development in paper quality through resource reduction, better print-
ability properties, more recycling, closed-loop effluent-free mills etc., are all areas
where progress can be made to improve the competitiveness of paper and to safe-
guard its future as an appreciated and versatile industrial product.

4 Challenges to the pulp and paper industry

In 2006, the paper industry faced the following main challenges:
1. Low profitability
2. Impact of electronic media and information technology on paper demand
3. Poor public image of forest utilisation, combined with wood shortages and
rising wood costs
The following discussion highlights some aspects of the above issues:

1. One of the main challenges to the pulp and paper industry during the past
5 years has been its low and declining profitability. This has been caused
by declining product prices and increased prices for inputs such as labour,
raw materials and energy. To combat this trend, the industry in some cases
has tried to improve its capacity structure by investing in new and efficient
machinery. This has increased the production and in many cases caused
oversupply, which in turn has depressed prices and profitability.
Another path selected by some companies has been to curb investments
and close capacity to better meet declining demand. This strategy has been
selected in North America in particular. As a consequence of the low invest-
ment level, asset quality has deteriorated, contributing to lower competitive-
ness and declining profits.
The main challenge for the pulp and paper industry in the years to come is
to improve its profitability to an acceptable level.
2. The impact of electronic media and information technology on newsprint

and printing and writing paper consumption has become increasingly evi-
dent in recent years, especially in North America, where demand for both
newsprint and uncoated woodfree papers started to decline in 2000. In oth-
er printing and writing papers the consumption is still expected to increase,
although slower than earlier.
If the above trend will be duplicated in Europe and Japan with a time lag,
the production will have to be cut back in these regions as well.
Another issue is the impact of electronic media and information technology
on paper demand in emerging economies, most notably China and Asia. The
growth in 1990-2004 has been impressive. It appears likely that these areas will
still experience significant growth up to 2020. However, if the growth of demand
slows down, either because of lower economic growth or because of a frog’s
leap directly to electronic media and information technology, the local produc-
tion must find outlets elsewhere, which is bound to increase global competition.
3. Forestry and forest utilisation have been subject to considerable attention

by the public, environmentalists, consumers and industry. One problem
related to these issues is the fact that they are very difficult to define quan-
titatively. Therefore, the main arguments in these discussions are qualitative
aspects and opinions.

Chapter 1
A new aspect in the discussion is the concern over human-caused carbon

dioxide emissions and global warming. This has resulted in increased inter-
est in forests and forestry and in wood as a carbon dioxide-neutral biofuel.
As a consequence, it seems likely that both wood consumption and prices
will increase. For the pulp and paper industry, it is important that wood will
not get preferential tax treatment as fuel in comparison to its use as raw
material for the manufacturing industry.
As a whole, the forests used and tended by the global pulp and paper
industry are in good condition. Exceptions include certain pulp and paper
companies in Asia which still use rain forests as a source of raw material. It
should be noted that forests in overpopulated areas with no pulp and paper
industry are often in the greatest danger of permanent damage, in compari-
son to its use as raw material for the manufacturing industry.
Because of the above problems and uncertainties, a clearly defined, re-
sponsible forestry policy that considers all aspects of forest utilisation is es-
sential to the pulp and paper industry. Important parts of such a policy are
transparent information and open communication to the public.

Sources
1. Pöyry Forest Industry Consulting Oy, 2006

Chapter 2
Impact of the forest industry on the economies of Finland and Sweden
1 Finland...................................................................................................................................19
1.1 General...................................................................................................................................19
1.2 Past and present production....................................................................................................19
1.3 Exports . .................................................................................................................................20
1.4 Forest increment and drain ....................................................................................................22
1.5 Labour force and productivity..................................................................................................24
1.6 Investments............................................................................................................................25
1.7 Environment ..........................................................................................................................25
1.8 Profitability ............................................................................................................................26
1.9 Comparison to other countries ...............................................................................................26
2 Sweden ................................................................................................................................27
2.1 General . ................................................................................................................................27
2.2 Past and present production ..................................................................................................27
2.3 Exports ..................................................................................................................................28
2.4 Forest increment and drain ....................................................................................................28
2.5 Labour force and productivity . ...............................................................................................29
2.6 Investments ...........................................................................................................................30
2.7 Environment ..........................................................................................................................30
2.8 Comparison to other countries ...............................................................................................30
Sources..................................................................................................................................31

Impact of the forest

industry on the
economies of Finland
and Sweden
The forest industry is one of the cornerstones of the Finnish and Swedish economies. In both
countries, the industry employs directly close to 100 000 people, indirectly much more.
In Finland, the forest industry’s share of total exports is 24 %, the highest figure in the
world. In Sweden the corresponding figure is 13 %.
A number of industries such as automation, engineering, consulting and energy have
formed a cluster around the forest industry in the Nordic countries. The value of these
cluster industries’ products add to the export value in both countries and improve the
competitiveness of the local forest industry.
1 Finland
1.1 General
Finland’s economy has relied heavily on the forest industry (pulp and paper as well as
the mechanical wood working industry), more than the economies of any other coun-
try in the world. Although still important, its influence is gradually declining because
of the expansion of other industry sectors. Using its forests, Finland has been able
to build a national economy and standard of living that rank among the highest in the
world. GDP per capita in 2005 was USD 31 0001. This was about 25 % less than in
the United States, where GDP per capita was USD 41 0001.
1.2 Past and present production

The Finnish forest industry started developing at the end of the nineteenth century.
Two new inventions – the groundwood and sulphite pulping processes - were applied
on an industrial scale to utilise Finland’s resources of spruce. Sawmilling contributed
to the growth of the forest sector.
Table 1 shows the production volumes of main forest products since 1990, and
Table 2 the growth of paper and board production and products since 1990.

Chapter 2
Table 1. Forest industry production in Finland 1990, 2000 and 20042.
1990 2000 2004

Sawn timber and wood panels (1 000 m ) 3
8 665 15 050 15 360
Pulp (1 000 t) 8 452 11 920 12 614
Paper and board (1 000 t) 8 966 13 510 14 036
Note: 2004 selected due to strike in 2005.
Table 2. Paper and board production in Finland 1990, 2000 and 20042.
1990 2000 2004

Newsprint 1 429 1 394
Mechanical printing & writing papers 3 333 5 349 6 843
Woodfree printing & writing papers 1 349 3 005 3 181
Kraft paper 528 528 552
Board 1 889 2 751 2 858
Other papers Total 439 483 602
Total (1 000 t) 8 967 13 510 14 036
Note: 2004 selected due to strike in 2005
Newsprint 2004 included in mechanical printing and writing papers
Based on Table 2, the following conclusions can be drawn:

- Newsprint production remained stable up to 2000, but then started to de-
cline.
- The production of mechanical printing and writing papers grew rapidly up to
2000, but then stabilised. The same applies to woodfree papers.
1.3 Exports
A major part of the Finnish forest industry’s production has always been exported, and
imports of forest products are negligible compared with exports. Table 3 shows the
development of exports since 1990. Table 4 shows how the share of forest products
of total exports has developed.
Table 3. Export volumes of Finnish forest products 1990, 2000 and 20042.
1990 2000 2004

Sawn timber and wood panels (1 000 m ) 3
4 925 9 672 9 955
Pulp (1 000 t) 1 461 1 677 2 348
Paper and board (1 000 t) 8 024 12 403 13 134

Table 4. Export value of Finnish forest products 1990, 2000 and 20042.
million e
1990 2000 2004
Sawn timber and wood panels 384 639 688
Pulp 640 1 045 935
Paper nad board 4 552 9 219 8 189
Total forest industry 6 415 12 874 11 726
Total finnish exports 17 042 49 484 48 917
Forest industry share (%) 38 26 24
According to Tables 3
and 4, the share of forest
products exports of total
exports has declined from
38 % in 1990 to 24 % in
1994. During the past five
years, the relative share has
remained stable.
Although showing a
declining trend, the share
of forest products of total
exports is still significant. In
addition, there are a large Figure 1. Forest industry cluster in Finland2.
number of product groups
(Figure 1), such as machinery and equipment, automation and information technology,
consulting services, energy etc., which make use of know-how developed in co-op-
eration with the forest industry and together form a strong forest cluster. These for-
est-cluster products add value to forest industry exports and GDP, while improving the
country’s overall standard of living and competitiveness.
Table 5. Estimated share of imported materials of sales value in Finnish forest

products2.
Sales value Import input Net export value

Sawn timber 100 3-201) 80-97
Pulp 100 3-20 1)
80-97
Newsprint 100 3-5 95-97
Printing&Writing papers 100 10 90
Woodfree papers 100 10 90
Cartonboard 100 10 90
1) Depends on input of imported wood

Chapter 2
This fact gains in significance when using the net export value as a yardstick.
(The net export value is the value of exports minus that of imports). Most forest indus-
try products need a small amount of imported products in the manufacturing process,
as Table 5 shows.
In many engineering products for export such as paper machines, the input of
imports are significantly higher – approximately 35 %.
According to the above figures, roughly 30-35 % of Finland’s net export value
comes from products manufactured by the forest industry. This figure does not in-
clude any forest-cluster products.
1.4 Forest increment and drain

Finland’s total productive forest area is 20.7 million hectares. The average growing
stock of Finland’s forests is 90 m3/ha. In addition, there are 6 million ha of unproduc-
tive land, with just a few trees per hectare and slow or no growth. These unproductive
forest areas are not part of the 20.7 million ha mentioned above.
Since forests are an important natural resource, forestry research, legislation,
and management are given high priority. Forest inventories and updates are being
done continuously.
Finland’s forests are characterised by slow growth due to harsh climatic condi-
tions, a high utilisation ratio (usage/growth) and a limited number of wood species.
An area of 3.1 million ha of Finland’s forest area, including productive and un-
productive land, has been set aside for conservation purposes.
Because of the high utilisation in relation to overall growth, the potential to in-
crease removals from Finland’s forests is small.
Forest balance in Finland 1960-2005
Annual increment Total drain Fellings of industrial roundwood

mill. cum
100 100
80 80
60 60
40 40
20 20
0 0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 2. Forest balance in Finland 1960-20052.

The annual increment (growth), and total drain (total wood consumption), in-
cluding natural drain, has developed since 1960 as shown in Figure 2 The fol-
lowing conclusions can be drawn:
- The industrial consumption of domestic wood has grown from 32 million m3
in 1960 to 50-60 million m3 2000-2005.
- The total drain of wood has increased to 70 million m3/a during the past 5
years. The difference between total drain and industrial consumption con-
sists mostly of other uses, such as wood for fuel, sawmill residues, natural
drain, transport losses etc. This has declined from about 30 million m3 in
1960 to less than 20 million m3 per year at present.
- The total drain has been lower than the annual increment, except in the pe-
riod 1960-1964, when the balance was negative by about 4 million m3. This
indicates that the volume of wood in the forests has grown since then.
- The annual increment has grown steadily since 1965, reaching 85-90 million
m3 per year 2005. This leads to the conclusion that there is a growing vol-
ume of unused wood in the country’s forests, as the total annual drain has
been clearly below the annual growth.
Table 6 describes forest ownership in Finland in 2005. It shows the high per-
centage of private forest owners. The average forest holding in this category is 10 ha.
Because of the fragmented ownership structure there are 100 000 wood purchase
agreements annually between private forest owners and the industry.
Table 7 shows the sources of industrial wood in Finland in 1990-2004. The fol-
- The use of domestic wood has increased from 40-45 million m3/a in the
early 1990s to 55-60 million m3/a 10 years later.
- The use of imported wood has increased rapidly, from around 5 million m3/a
in the early 1990s to close to 20 million m3/a 10 years later.
- The share of imported wood was about 25 % in 2004-2005.
Table 6. Forest ownership in Finland Table 7. Industrial consumption of wood

20052. in Finland 1990, 2000 and 20042.
% (million m3)
Private 60 1990 2000 2004
Industry 9 Domestic wood 45 58 58
State and municipalities 26 Imported wood 6 13 17
Others 5 Total 51 71 75
Total 20.7 million hectares 100 Share of imported wood (%) 12 18 23

Chapter 2
Based on the facts in Figure 2 and Table 7, one could argue that the growth of
wood in excess of demand would allow the forest industry to expand its production
capacity, relying on the availability of domestic raw material. This conclusion seems
valid, particularly if the level of wood imports remains at the high level recorded in
2000-2005. However, several factors speak against a capacity expansion based on
domestic wood:
1. Concerns over forestry and forest protection are increasing. Protected for-
est areas that cannot be used as a source of raw material will continue to
increase from the present area of 3.1 million hectares.
2. Many forest owners are no longer so dependent on income from forest cut-
tings. The interest in harvesting has therefore declined. Taxation of forest
income adds to owners’ reluctance to cut forests and the notion that forest
growth will give better returns in the longer term.
3. Importing wood to Finland is a structural risk and weakness, accentuated
by certification requirements and the economic and political instability of
supplying countries. Since lower wood imports require a higher domestic
wood supply, the present positive wood balance could be considered a re-
serve for any curtailment of imports.
In practice and reality, wood availability has been critical, raising concern about
the possibilities of securing the wood supply without excess price increases. This has
resulted in increasing import volumes. The accepted opinion in the forest industry is
that expansion of capacity based on additional wood removals will no longer be pos-
sible. New production capacity should therefore use market pulp for higher value-
added products such as paper. If this opinion is correct, future expansions must be
made abroad, if the forest industry is to maintain its global market share. This will be
a significant change for both the Finnish forest industry and the national economy of
Finland. The country will slowly lose one of its key economic driving forces.
1.5 Labour force and productivity Table 8. Forest industry employment in

Table 8 shows development of the direct Finland 1990, 2000 and 20042.
labour force of the forest industry.
In 1990, the forest sector in 1990 2000 2004
Finland employed a total of 116 000 Wood industry 39 32 30
people. In 2004 this figure had declined Pulp and paper industry 46 38 36
to 86 000. Most of the decline took place Forestry 31 20 20
at the beginning of the 1990s. During this Total (1000 persons) 116 90 86
period the productivity per labour unit
has increased significantly.
Pulp and paper production totalled 17.4 million tons in 1990. In 2004 it was 26.7
million tons. If the productivity index per labour unit in 1990 was 100, in 2004 it was
202. This corresponds to an annual increase of 5.2 %.

1.6 Investments
Table 9. Fixed investments in Finland 1990, 2000 and 20042.
Million e
1990 2000 2004
Wood industry 252 279 167
Pulp and paper industry 1 267 698 639
Total forest industry 1 519 977 806
Total manufacturing 4 023 3 780 3 469
Domestic total investments in the forest industry in Finland since 1990 have de-
veloped as shown in Table 9 the following conclusions can be drawn:
1. Total investments have shown a fluctuating and slightly declining trend
since the early 1990s.
2. The share of forest industry investments of total investments in manufactur-
ing has declined from a level of 30-40 % in the early 1990s to 20-25 % in
2000-2005.
1.7 Environment
Table 10. Emissions of the pulp and paper industry in Finland 1990, 2000 and 20042.
1990 2004 Reduction (%)

Nitrogen (Tons) 4 100 2 500 39
Phosphorus (Tons) 640 180 73
Sulphur (Tons) 24 000 3 000 87
AOX-compound (Tons) 10 000 1 100 90
Fig 2.3 Production of the pulp and paper industry
in Finland and waste water load 1950-2005
Total suspended solids BOD7 Paper and board Chemical pulp
Effluent 1000 t/a Production mill. t/a
800 16
700 14
600 12
500 10
400 8
300 6
200 4
100 2
0 0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 3. Production of the pulp and paper industry in Finland and waste water load 1950-20052.

Chapter 2
Emissions and waste water loads have declined dramatically during the past
few decades, as shown in Table 10. and Figure 3. At the same time, the production
has almost tripled since 1970.
1.8 Profitability
Fig 2.4 Profitability of Finnish forest industry companies
Profit before tax, bill. EUR1)
bill. EUR
6
*) Return On Capital Employed, %
5 *)16.5
4
*)14.3
3
*)10.4
*)11.6
2 *)11.5
*)5.3
*)8.6 *)4.0 *)4.0
1
*)3.9
*)1.4
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1-6/06
1)Net sales – expenditure – planned depreciations + other other operating income – net financial expenses
Figure 4. Profitability of Finnish forest industry companies. Profit before tax.2
As shown in Figure 4, the profitability of the forest industry improved during the
latter half of the 1990s and peaked in 2000. It then started to decline rapidly and has
remained low ever since. This is a most alarming trend. If the profitability trend cannot
be reversed, the industry will begin to decay in the long run.
1.9 Comparison to other countries

The impact of the forest industry on the national economy is larger in Finland than in
any other country in the world, as indicated in Table 11. As a result, fluctuations and
cyclical changes in the forest industry’s income can have more serious consequences
in Finland than in other countries.
Table 11. Forest industry exports per capita and the share of total exports 2004.
(%) (e)
Finland 24 2 200
Sweden 13 1 300
Austria 8 800
Canada 10 750
Norway 2 300
Germany 3 250
France 2 200
USA 2 50

2 Sweden
2.1 General
The forest industry has been important for the Swedish economy as well. In addition,
Sweden has had other industries, most notably in the engineering sector, which have
generated one of the highest standards of living in the world. GDP per capita in 2005
was USD 30 0001. This was approximately 25 % less than the GDP per capita in the
United States, which was USD 410001.
2.2 Past and present production

Sweden’s forest industry started developing at the end of the 19th century, in a similar
way as the industry in Finland. Table 12 shows the production volumes of main forest
products since 1990. Table 13 shows the growth of paper and board production vol-
umes by product in 1990-2005.
Table 12. Forest industry production in Sweden 1990, 2000 and 20053.
1990 2000 2005

Sawn timber and wood panels (1 000 m3) 11 785 17 133 18 530
Pulp (1 000 t) 9 914 11 517 12 108
Paper and board (1 000 t) 8 426 10 786 11 736
Table 13. Development of paper and board production in Sweden1990, 2000 and
20053.
1990 2000 2005

Newsprint 2 273 2 542 2 572
Mechanical printing & writing papers 462 1 142 1 508
Woodfree printing & writing papers 1 193 1 695 1 611
Kraft paper 952 1 064 956
Board 2 896 3 666 4 385
Other papers 650 677 704
Total (1 000 tons) 8 426 10 786 11 736
Based on Table 13, the following conclusions can be drawn.

- Newsprint production has remained stable since 1990 at about
2.5 million t/a.
- The production of mechanical printing and writing papers has grown from
0.5 million t/a in 1990 to 1.5 million t/a by 2005.
- Production of woodfree papers has grown from 1.2 to 1.6 million t/a.
- Board production has grown from 3 to 4.4 million t/a.

Chapter 2
2.3 Exports
Table 14. Export volumes of Swedish forest products 1990, 2000 and 20053.
1990 2000 2005

Sawn timber and wood panels (1000 m3) 6 516 11 443 12 045
Pulp (1000 t) 2 747 3 066 3 468
Paper and board (1000 t) 6 516 8 937 10 114
A major part of the Swedish forest industry’s production has always been ex-
ported. Table 14 shows the development of exports since 1990.
Imports of forest products are small compared with exports. In 2005 the total
value of forest industry exports was SEK 105 billion (Table 15), corresponding to 11 %
of the total value of Sweden’s exports. The input value of imported raw materials etc
was SEK 26 billion. Thus, the net export value was SEK 79 billion.
Table 15. Export value of Swedish forest products 1990, 2000 and 20053.
1990 2000 2005

million SEK
Sawn timber and wood panels 11 029 19 843 21 633
Pulp 11 575 17 512 14 346
Paper and board 32 840 54 521 61 536
Total forest industry 59 962 100 011 104 995
Total swedish exports 971 000
Forest industry share (%) 11
2.4 Forest increment and drain

Sweden’s total productive forest area is 21.2 million ha. The average growing stock of
Sweden’s forests is120 m3/ha. Sweden’s and Finland’s forests are very similar, except
that better climatic conditions make the growth in Sweden’s forests slightly higher.
The potential to increase removals from Sweden’s forests are limited, although
somewhat better than in Finland. The annual increment (growth) in Sweden’s forests is
100 million m3/a. The total drain (total wood consumption), including natural drain, has
developed since 1990 as shown in Table 16.
Table 16. Forest balance in Sweden 1990, 2000 and 20043.
1990 2000 2004

million m3/a
Growth/Increment 95 97 99
Net fellings 64 76 82
Industrial consumption 54 69 72

Table 17. Forest ownership in Sweden 20053.
%
Private 51
Industry 24
State 18
Others 7
Total 20,7 million hectares 100
Table 17 shows the forest ownership structure in Sweden in 2005. It shows the
high percentage of privately owned forests (51 %) in Sweden. The forest industry’s
ownership of forests, at 24 %, is clearly higher than in Finland.
Table 18. Industrial wood consumption in Sweden 1990, 2000 and 20053.
1990 2000 2005

(million m3)
Domestic wood 50 55 62
Imported wood 5 13 12
Total 60 68 74
Share of imported wood (%) 8 19 16
Table 18 describes the sources of industrial wood in Sweden in 1990, 2000 and
2005. The following conclusions can be drawn:
- The use of domestic wood has increased from 50 million m3/a in the early
1990s to 60 million m3/a 15 years later.
- The use of imported wood has increased rapidly, from around 5 million m3/a
in the early 1990s to 10-12 million m3/a 15 years later.
- The share of imported wood of the total wood supply was 15-18 % in 2000-
2005.
- Half of the imports comes from the Baltic region. The rest is evenly divided
between Russia and other countries.
2.5 Labour force and productivity

Table 19. Forest sector employment in Sweden 1990, 2000 and 20053.
1990 2000 2005

Wood industry 51 36 35
Pulp and paper industry 60 41 34
Forestry 34 17 20
Total (1000 persons) 145 94 89
Table 19 shows the development of the direct labour force in the forest industry.

Chapter 2
In 1990, the forest sector in Sweden employed a total of 145 000 people. In
2005, this figure had declined to 89 000. Most of the decline took place during the
1990s. During this period, the productivity per labour unit has increased significantly.
Pulp and paper production in 1990 totalled 18.3 million t/a, in 2005 23.8 million t/a. If
the productivity index per labour unit in 1990 was 100, in 2005 it was 210. This cor-
responds to an annual increase of 5.1 %.
2.6 Investments
Table 20. Fixed investments in Sweden 1990, 2000 and 20053.
1990 2000 2005

Billion SEK
Wood industry 2.9 2.5 2.4
Pulp and paper industry 7.5 5.1 10.8
Total forest industry 11.2 8.4 13.9
Total manufacturing 45.4 58.1 64.1
Total domestic investments in the forest industry in Sweden since 1990 have
developed as shown in Table 20. The following conclusions can be drawn:
3. Total fixed investments in Sweden have fluctuated between SEK 5 and 14
billion/a, in other words, quite widely. During the past 10 years, investments
have varied in the range SEK 9-13 billion/a.
4. The share of forest industry investments of total investments in manufactur-
ing has been fairly stable at 20-25 %.
2.7 Environment
Table 21. Emissions of the pulp and paper industry in Sweden 2001 and 20053.
2001 2005
Nitrogen (Tons) 3014 3223
Phosphorus (Tons) 348 337
Sulphur (Tons) 4807 4335
AOX-compound (Tons) 653 569
Emissions and waste water loads in 2001 and 2005 are shown in Table 21. The
figures are roughly on the same level as in Finland.
2.8 Comparison to other countries

The forest industry has an important impact on the national economy of Sweden, as
can be seen in Table 11. Only in Finland the forest industry’s impact is larger.

Sources
1. International Monetary Fund, World Economic Outlook, September 2006.
2. Finnish Forest Industries Federation
3. Swedish Forest Industry Federation

Chapter 3
World paper markets
1 Introduction..........................................................................................................................33
2 Definitions.............................................................................................................................33
2.1 Bulk products ........................................................................................................................33
2.2 Speciality products.................................................................................................................34
2.3 Specification of main paper grades.........................................................................................35
3 Driving forces of demand.....................................................................................................35
4 Global paper demand...........................................................................................................38
5 Demand outlook for main paper grades..............................................................................40
6 International trade flows . ...................................................................................................44
7 Price trends 1990-2006........................................................................................................45
7.1 General...................................................................................................................................45
7.2 Newsprint and mechanical printing paper...............................................................................45
7.3 Woodfree printing and writing papers ....................................................................................46
7.4 Containerbord and cartonboard...............................................................................................47
7.5 Price stability 1995-2002 . .....................................................................................................48
8 Sales and marketing of paper..............................................................................................48
9 Criteria for establishing new capacity . ..............................................................................49
Sources/References................................................................................................................53

World paper markets
World paper markets

World paper and board consumption has increased from 260 million tons in 1995 to
366 million tons in 2005, i.e. by 3.3 %/a or 10 million t/a. The consumption is expected
to continue to grow to 494 million tons by 2020.
The fastest growing areas will be China and Asia, whereas growth in North America, Japan
and Europe will slow down and in some grades start to decline.
Prices of most grades have increased slower than inflation. This means that real prices have
declined, in many grades by about 1 %/a.
1 Introduction
Paper is an integral part of daily life in most parts of the world. World paper consump-
tion has grown from 43 million tons in 1950 to 359 million tons in 2004, (366 million
tons 2005) which equals a growth rate of 3.9 %, or 5.7 million tons a year. During
1995-2004, the consumption growth was 99 million tons or 10 million tons a year.
Since 1980, demand has declined only once, in the period 2001-2002.
The consumption growth has exceeded GDP growth since 1950 by a factor
of 1-1.5, depending on the time period and the region. Since 1995, the consumption
growth has been fastest in China, Asia and Latin America, where growth rates have
been clearly above average. In North America, growth has slowed down and turned
into a decline in some grades, most notably in newsprint and certain uncoated wood-
free segments. Consequently, demand no longer seems to be linked to GDP growth in
these grades.
2 Definitions
2.1 Bulk products

Typical features of bulk products include large market volumes and similar quality re-
quirements, making it possible for end users to use products of different suppliers.
The sales price is the single most important competitive factor for a bulk paper
producer. The producers that have the lowest manufacturing costs globally and a
large enough market share determine the sales price of bulk paper products during
balanced demand and supply conditions or in an oversupply situation. In such situ-
ations the price stabilises at an equal global level, taking into account the transport
costs to different regions. In oversupply situations, the price level tends to decrease to
the cash cost or close to the cash cost level of the lowest-cost producers.
During upswings in demand with a positive demand/supply balance – which is
usually temporary in the pulp and paper industry – supply and demand determine the

Chapter 3
price. The price has little or no correlation with manufacturing costs. A typical exam-
ple of this phenomenon can be found in the price behaviour of pulp. During the past
25 years there have been a few sharp price increases up to USD 800-1000/t, but after
only a few months, the price level has collapsed back to USD 400-600/t. One can
therefore conclude that the production of bulk grades is raw material- and production-
oriented. Development efforts often concentrate on increasing efficiency and lowering
costs of the manufacturing process.
2.2 Speciality products

Typical features of specialty products are small market volumes, variations in quality
requirements between end users, differences in product quality between suppliers and
variations in price levels between applications and users.
Significant factors affecting the competition, besides the price level of special-
ity products, include the quality level, delivery time, technical service and the general
reliability of the supplier.
Specialty products are higher value-added products commanding higher prices.
Their production is market-oriented, and research concentrates on improving perform-
ance and/or quality and service.
Many specialities have gradually become bulk products. This increases the im-
portance of price as a competitive factor. A typical paper grade that has experienced
this development is coated woodfree paper. Having been a speciality, it developed
into a bulk product around the mid-1980s. Today the vast majority of coated woodfree
papers are bulk products.
The borderline between bulk grades and specialities is not clear. Table 1 pro-
vides some examples of bulk grades and speciality items.
Vol 1, Chapter 3, Table 1 Examples of bulk and speciality products
Table 1. Examples of bulk and speciality items.
Chemical pulp
Bulk product
Corrugated raw material
Newsprint
SC, LWC, uncoated woodfree papers
Cartonboards
Coated woodfree papers, liquid packaging boards
OTC, thinprint, laminating papers
Cigarette paper, cigarette tipping paper, release paper,
Speciality cable paper

World paper markets
2.3 Specification of main paper grades

Table 2 summarises the most important paper grades, their furnish composition and
grammage range.
Table 2. Furnish composition and substance range of main paper grades.
Chemical pulp Mechanical Waste Minerals and

Basis
Quality SW HW pulp paper additives
weight, g/m2
% of total fibre
Newsprint (waste based) 40-45-52 0-50 50-100 <10
Newsprint (virgin fibre) 40-45-52 0-10 90-100 <5
Uncoated mechanical papers 50-56-60 10-25 75-90 15-30
Coated mechanical papers 40-56-80 30-40 60-70 30-35
Uncoated woodfree papers 50-80-140 20-50 50-80 20-30
Coated woodfree papers 90-100-150 30-60 40-70 20-30
Tissue 20-60
Liner
- kraftliner 115-250
- testliner 90-150 100
Fluting
- SC fluting 90-150
- wellenstoff 90-150 100
Sackpaper 50-100
Cartonboards
- folding boxboard 150-400 50-75 10-20
- white lined chip board 150-400 50-75 10-20
3 Driving forces of demand
Historically, the most important explanatory factor of paper and board demand growth
has been economic development, as measured in terms of GDP. Additional factors
have been population growth, industrial output, substitution trends, grammage devel-
opment, office technology and advertising expenditure.
These factors are still valid today, although their relative importance has changed over
the years. The forecasts in this book are based on a large number of factors, the most
important ones being the following:
1. Demographic development
The world’s population is estimated to grow from 6.4 billion in 2004 to 7.6
billion by 2020, i.e., by 1.1 %/a. The fastest-growing areas will be Africa, the

Chapter 3
rest of Asia and India. Eastern Europe and Japan will have negative growth.
Factors such as age structure, immigration (mainly from Latin America),
higher life expectancy, urbanisation, number of households, literacy rate
etc. have been considered.
2. GDP growth
World average GDP growth in the period 2004-2020 is estimated at 3.1 %/a,
with emerging markets (China, the rest of Asia, Eastern Europe and Latin
America) enjoying the highest growth rates (4-7 %/a). In North America,
Western Europe and Japan, growth is estimated at 2.7, 2.2 and 1.6 %/a,
respectively. Figure 1 illustrates the correlation between GDP and per capita
paper consumption. It is evident that consumption increases rapidly with
growing GDP in the lower (up to USD 15 000) GDP range, whereas satura-
tion of demand starts to set in at a GDP per capita of USD 30 000-35 000
and above.
3. Advertising
Advertising expenditure grows much faster than the economy in general.
The fastest-growing segments are on-line advertising, and cable and broad-
cast TV. Paper-based advertising media – newspapers, magazines, direct
mail and directories – have been losing market share in the competition
against electronic media. Figure 2 illustrates the development in the period
1994-2020. As illustrated in the figure, the share of paper-based advertis-
ing expenditure in Japan is much lower than in the United States or Europe.
The main reason for this is the high share of TV advertising in Japan.
Consumption, kg per capita

350
North America
2003 2010
Time series 2015
1980-2020 2020
300
1980
Japan Nordic countries
250
Rest of W. Europe
200
Australia/NZ
150
100
China
E. Europe 2003 world
50 cross-section
Latin America curve
0
0 10000 20000 30000 40000 50000 60000
GDP per capita, USD 2003 prices
Figure 1. GDP and Paper Consumption per Capita1.

World paper markets
80
70
60
50
1994
2004
-%-
40
2020 est.
30
20
10
0
USA Europe Japan
1
Figure 2. Share of paper based advertising expenditure
Vol 1 Chapter 1994-2004
3 Fig 2 (uusi versio 14.3) .
In recent years, internet advertising expenditures have grown by 15-40 %/a,

depending on the country and region. On the print side, the biggest gainer
is direct mail which is benefiting from the Do-Not-Call list restrictions on
telemarketers. The growth of advertising expenditure in the direct mail seg-
ment has been in the range of 5-15 %/a.
4. IT and e-media
The rapid development of electronic devices (radio, TV, PC, CD Rom, in-
ternet etc.) since 1950 has been a boon to the use of paper rather than a
threat. However, during the past 10 years, the burgeoning use of the internet
has reduced the demand for certain grades. For example in North America,
newsprint consumption peaked at 13.1 million tons in 1999, declining to
10.3 million tons in 2005.
Another example of competitors to print on paper is the Sony Reader,
launched in the autumn of 2006. It measures 7x5 inches and has 64 mega-
byte of memory, equalling around 80 normal books. Its batteries will power
the equivalent of 7 500 page turns. Rather than having an LCD screen, it
uses electronic ink and paper. Its initial price is USD 350. Thus, IT and e-
media might turn out to be a discontinuity factor for printing paper use and
demand in years to come.
5. Industrial production and packaging board demand

The formerly close relationship between industrial output and packaging
board demand has changed. Unlike in the past, industrial production no
longer explains changes in packaging board demand in many Western mar-
kets, and therefore its use as a demand predictor should be viewed criti-

Chapter 3
cally. In certain other areas, industrial output continues to be a reliable, and

in some countries a perfect, indicator.
One of the main reasons for the stagnating demand in industrialised coun-
tries is the globalisation of manufacturing industries. Packagers have relo-
cated their packaging operations from industrialised countries closer to their
clients in emerging low-cost regions, such as China, South-East Asia and
eastern Europe. This shift has resulted is a negative trend break in the West
and a positive one in rapidly industrialising countries.
6. Uncertainties
The forecasts presented here are based on the above factors and the best
estimates of their future development. However, there might be uncertain-
ties which might change the basis for the forecasts made. For example,
these could be a dramatic decline in growth in China, a shortage of and
thus a large increase in the price of oil etc. Thus, these forecasts should be
viewed as “no-surprise scenarios” and should be judged against the as-
sumptions made concerning the above driving forces.
4 Global paper demand

Figures 3 and 4 show the forecast growth rate of global paper demand for the period
2004-2020 by grade and region.
Demand growth, %/a

3,0
Coated woodfree Tissue Containerboards
Average 2.1%/a
2,5
Uncoated woodfree Cartonboards
2,0 Coated
mechanical
1,5 Newsprint
Uncoated
1,0 mechanical
0,5
Other
grades
0,0
Sack
paper
-0,5
0 20 40 60 80 100
Share of consumption in 2004, %
Figure 3. Long-term demand growth by product area through 20021.

World paper markets
Demand growth, %/a

6 India
Russia
5
China
Eastern
Europe
4 Middle East
Latin
America
3 Africa
Rest of
Asia
Average 2.1%/a
2
Oceania
1 Western Europe
North America
Japan
0
0 20 40 60 80 100
Figure 4. Long-term demand growth by region through 20201.
The following trends are apparent from the forecasts:

1. The growth should be fastest for tissue (2.9 %/a), coated woodfree paper
(2.7 %/a) and containerboard (2.6 %/a). Low growth rates are foreseen for
newsprint, uncoated mechanical paper and other grades (0-1.4 %/a).
2. Regional growth will be rapid in India, Russia, China and eastern Europe, at
4-6 %/a. North America and Japan will experience slow growth at less than
0.5 %/a.
Based on the above growth rates by grade and region, world paper demand will
develop as illustrated in Figure 5.
Million tons
500
Other
Forecast Latin America
400 Rest of Asia

Emerging
markets
CAGR
300 China 4.1%/a
Eastern Europe
Japan
200
Western Europe Mature

markets
100 CAGR
0.5%/a
North America
0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Figure 5. World demand for paper and paperboard 1980-20201.

Chapter 3
World demand increased from 170 million tons in 1980 to 359 million tons in
2004, i.e., by 7.5 million tons a year. It is noteworthy that during this 24-year period,
demand declined only once, i.e. in the period 2001-2002.
World paper demand is estimated to increase from 359 million tons in 2004 to
494 million tons by 2020, equalling a growth rate of 2.1 % or 8.2 million tons a year.
Table 3 shows the expected demand growth for main grades by volume 1990-
2020.
Table 3. Demand growth for main paper grades 1990, 2004 and 20201.
Growth 2004-
1990 2004 2020
2020 mil. tons
Newsprint 32.5 38 47 9
Uncoated mechanicals 12 14.5 16.8 2.3
Coated mechanicals 11 17.3 21.9 4,6
Uncoated woodfree 33 51 73 22
Coated woodfree 12.5 27 40 13
Tissue 14 24 40 16
Sack paper 5.5 5 4.7 -0.3
Containerboard 65 109 164 55
Cartonboard 26 39 56 17
Others 28.5 47.2 33.6
Total 240 359 494 135

1. In volume terms, containerboards will grow most, i.e., by 55 million tons in
the period 2004-2020, followed by uncoated woodfree papers with growth
of 22 million tons.
2. For uncoated and coated mechanical papers, a rather modest volume
growth is foreseen, i.e., 2.3 and 4.6 million tons, respectively.
5 Demand outlook for main paper grades

The market outlook and typical characteristics of the main grades are the following:
1. Newsprint
Newsprint is mainly used for newspapers, about 80 %, and almost ex-
clusively in reels. World demand in 2004 was 38.0 million tons. The main
consuming regions were North America (29 %), Western Europe (26 %) and
Asia (32 %).
Positive drivers of newsprint demand include population growth, increasing
literacy in developing countries, growth of free newspapers and coloured in-
serts. Negative drivers include new reading habits and leisure activities, and
on-line newspapers and broadband internet services, providing news and
information at any time via TV, laptop or mobile.

World paper markets
World newsprint demand is estimated to grow to 47 million t/a by 2020,

corresponding to an average growth rate of 1.4 %/a. Growth areas will be
eastern Europe, China and Latin America. Markets will mature in Western
Europe, Japan and Oceania. Newsprint consumption per capita will decline
in North America because of the negative drivers mentioned above.
The main quality characteristics of newsprint are stable quality and good
runnability. Recovered paper is the main furnish component in Europe.
2. Uncoated mechanical papers – mainly supercalendered (SC)

In Europe, SC paper is mainly used for magazines, in North America for ad-
vertising materials (inserts/flyers, catalogues). SC paper is supplied in reels.
World demand in 2004 was 14.5 million tons. The main consuming regions
were North America (45 %) and Western Europe (32 %).
Positive drivers of demand for uncoated mechanical paper include eco-
nomic growth and rising purchasing power, growth of inserts and flyers
as advertising media and the increasing number of households. Negative
drivers include stagnating population growth in Europe, on-line publishing,
decreasing circulations of general-interest magazines and rising postal fees.
World demand for uncoated mechanical paper is estimated to grow to 16.8
million tons by 2020, corresponding to an average growth rate of 1.2 %/a.
Stable quality, a smooth printing surface for four-colour printing and good
runnability are the most important quality characteristics. The most impor-
tant printing methods are offset and rotogravure printing.
3. Coated mechanical papers – mainly light-weight coated (LWC)

Coated mechanical papers are used for the same applications as SC pa-
pers and are also mainly supplied in reels. World demand in 2004 amounted
to 18 million tons. The main consuming regions were North America (34 %)
and Western Europe (42%).
The drivers of demand growth are basically the same as for SC papers.
World demand for coated mechanicals is estimated to increase to 21.9
million tons by 2020, corresponding to an average growth rate of 1.8 %/a.
High brightness and a good printing surface are important quality factors for
these papers. The printing methods are the same as for SC papers.
4. Uncoated woodfree papers

Uncoated woodfree grades consist of printing and copying paper (A4),
offset printing paper for books and brochures, continuous forms etc. World
demand in 2004 was 51 million tons. The main consuming regions were
North America (27 %), Western Europe (18 %) and China (20%).
Positive drivers of demand for uncoated woodfree papers are the increasing
literacy rate and school enrolment and increasing printer, fax and PC/copier
populations. Negative drivers include the stagnating population growth in
Europe, use of e-mail, electronic invoicing and replacement of computer forms.

Chapter 3
World demand for uncoated woodfree paper is estimated to grow to 73 mil-

lion t/a by 2020, corresponding to an average growth rate of 2.3 %/a. North
America has entered a phase of decline, while Japan and some Western
European countries are likely to follow. High brightness, stable quality and
good formation are the most important quality requirements. End users in
this market usually make their purchases from wholesale merchants.
5. Coated woodfree papers

Coated woodfree grades are used for high-quality four-colour printing of
books, brochures, advertising materials, magazines etc. Two-thirds of the
consumption is sheets and the remainder reels. World demand in 2004 was
27 million tons. The main consuming regions were North America (22 %),
Western Europe (28 %) and Japan (17 %).
Positive demand drivers are economic growth and increased business ac-
tivity in emerging markets, the increasing number of special-interest maga-
zines, and growth of digital printing and personalisation. Negative drivers
include competition from e-media, on-line publishing, volatility of advertis-
ing expenditures and cost-cutting measures in various end-use segments.
World demand is estimated to grow to 40 million t/a by 2020, correspond-
ing to an average growth rate of 2.7 %/a. Most of the production is sold by
wholesale merchants.
6. Tissue
Tissue is used for hygienic purposes such as toilet paper, napkins, kitchen
towels, facial tissues, handkerchiefs etc. World demand in 2004 was 24 mil-
lion t/a. The main consuming areas are North America (30 %) and Western
Europe (24 %).
The main driver of tissue paper demand is GDP growth. Because of cultural
and economic differences, there are large variations in per capita consump-
tion between regions. World demand is estimated to grow to 37 million t/a
by 2020, corresponding to an average growth rate of 2.9 %/a. The propor-
tion of recycled fibre in the furnish of tissue paper grades is high, globally
50-60 %.
7. Containerboards
Kraft and testliner are used for the same applications – the outer and inner
layers of corrugated board. Kraftliner is made from virgin fibre and testliner
from recycled fibre. Semichemical fluting (SC fluting) and Wellenstoff are
used for the middle layer of corrugated board. SC fluting is virgin board,
and Wellenstoff is based on recovered materials. World demand in 2004
was 109 million t/a. The main consuming areas were North America (29 %),
Western Europe (19 %) and China (15 %).
The consumption of containerboard used to correlate well with national
income. In recent years, relocation of manufacturing industries to emerg-

World paper markets
ing markets has blurred this relationship. Positive drivers of containerboard

demand include GDP growth and higher standards of living, growth of
industrial output, recyclability and self-service retail business. Negative driv-
ers include reduced packaging, increased use of plastics/shrink wraps and
negative legislation.
World demand for containerboard is estimated to grow to 164 million t/a by
2020, corresponding to an average growth rate of 2.7 %/a. Stable quality
and good strength properties are the main quality characteristics.
8. Sack paper
Sack paper is used for making sacks and bags. World demand in 2004 was
5 million tons. The main consuming areas were Asia including China (31 %),
Western Europe (18 %), North America (14 %) and Latin America (14 %).
The use of sack paper does not correlate with per capita GDP. The wide
variation in consumption is due to different end-use patterns.
Positive drivers of sack paper demand include economic growth and build-
ing activity, a high oil price leading to higher costs for plastics, and envi-
ronmental aspects favouring paper over plastics. Negative drivers are the
reduced use of grocery bags, plastic sacks and bulk deliveries/silos.
World demand is estimated to decline to 4.7 million t/a by 2020, corre-
sponding to an average decline of 0.5 %/a. Good strength properties and
suitable porosity are the main quality characteristics.
9. Cartonboards
Cartonboards are used for packaging boxes for food, beverages, cosmet-
ics, chemicals etc., usually consisting of two or more layers. The outer layer
is usually made of chemical pulp and the middle layers either of mechani-
cal pulp or recovered paper. When mechanical pulp is used, the product is
classified as folding boxboard (FBB). If the middle layer contains recycled fi-
bre, the product is white-lined chipboard (WLC). Both coated and uncoated
cartonboards are produced.
World demand in 2004 was 39 million tons. The main consuming regions
were North America (24 %), Western Europe (22 %) and China (21 %).
Positive drivers of cartonboard demand include convenience food, the in-
creasing importance of package display/advertising functions and intelligent
packaging. Negative drivers are the growth of concentrates, competing ma-
terials (plastics, flexible packaging) and microflutes (i.e., corrugated board
with a very thin flute in the middle). World demand is estimated to grow to
56 million t/a by 2020, corresponding to an average growth rate of 2.4 %/a.

Chapter 3
6 International trade flows

Table 4 summarises the trade flows, taking into account the exporting and importing
countries for the main paper grades.
Table 4. Main importing and exporting countries in 2004.
Exporter mil.t/a Importer mil.t/a

Newsprint Canada 7 USA 5.7
Sweden 2.2 UK 1.8
Russia 1.5 Germany 1.5
Uncoated mechanicals Canada 3.6 USA 4.5
Finland 2.4 Germany 0.9
Germany 0.8 UK 0.7
Coated mechanicals Finland 3.4 USA 1.6
Germany 1.8 Germany 1.2
Canada 0.9 France 1
Uncoated woodfree Indonesia 1.5 USA 1.5
Germany 1.2 Germany 1.4
Finland 1.2 UK 0.8
Coated woodfree Finland 1.8 Germany 1.1
Germany 1.7 UK 1.1
South Korea 1.1 USA 1.1
Containerboard USA 3 China 2.6
Sweden 1.8 Germany 1.6
Germany 1.8 Italy 1.2
Cartonboard Sweden 2 China 1.3
Finland 1.8 USA 0.8
USA 1.7 Germany 0.8
Based on Table 4, the main conclusions are:

1. The main trade flows are in newsprint, followed by uncoated and coated me-
chanical papers as well as containerboards.
2. In an overall comparison, trade flows in woodfree papers are smaller in vol-
ume.
Based on the above, newsprint is the most international/global grade due to its
high volumes of export and import. Against this background, the pricing of newsprint
on different continents is likely to be determined by international rather than regional
competition.

World paper markets
7 Price trends 1990-2006
7.1 General
The nominal price trends of most paper grades develop favourably due to inflation
and thus weakening currencies. To eliminate the effect of inflation from a nominal price
series and to obtain real prices, a deflating factor is used, for example the consumer
price index. The following analysis of the German forest industry is based on real 2006
monetary values.
7.2 Newsprint andNewsprint

Fig. 3.6 mechanical printing paper
and mechanical printing paper prices in
Germany 1990-2006
1200
Real LWC 60g offset
Real SC 56g roto
1100
Real News 45g
Nominal LWC 60g offset
1000 Nominal SC 56g roto
Nominal News 45g
900
800
EUR/t
700
600
500
400 Sources:
PPI, Low
German Consumer Price Index
300
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Figure 6. Newsprint and mechanical printing paper prices in Germany 1990-20062,3.
Based on Figure 6, the following conclusions can be drawn regarding the real price
development:
1. All three grades, newsprint, SC and LWC, have had a declining real price
trend since 1990. In terms of real prices, the decline has been roughly 1 %/a.
2. All three grades have hade a similar price development with simultaneous
fluctuations up and down. This has been caused, particularly in the case of
SC and LWC, by similar demand fluctuations and interchangeability be-
tween these two grades.
3. The price fluctuations have been large. For example in newsprint, nominal
prices went up from less than EUR 400/t in 1994 to EUR 650/t in 1996.
4. The real prices of SC and LWC in 2005 were at their lowest level ever.

Chapter 3
7.3 Woodfree printing and writing papers

Fig. 3.7 WFC sheet prices in Germany 1995-2006
(100 g/m2)
1400
1200
1000
800
nominal price
/t
real 2006 price

600
400
200
0
I
I
:I
:I
:I
:I
:I
:I
:I
:I
:I
:I
:I
:I
:II
:II
:II
:II
:II
:II
:II
:II
:II
:II
:II
95
96
97
98
99
00
01
02
03
04
05
06
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
20
20
20
20
20
20
20
19
19
19
19
19
20
20
20
20
20
20
Figure 7. Woodfree coated sheet prices in Germany 1995-2006 (100 g/m2)4.
Fig 3.8 A4 copy paper prices in Germany 1995-2006
1400
1200
1000
800
nominal price
/t
real 2006 price

600
400
200
0
I
I
I
19 :I
19 :I
19 :I
19 :I
20 :I
20 :I
20 :I
20 :I
20 :I
20 :I
:I
:II
:II
:II
:II
:II
:II
:II
:II
:II
:II
:II
:
95
96
97
98
99
00
01
02
03
04
05
06
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
20
20
20
20
20
20
20
19
Figure 8. A4 copy paper prices in Germany 1995-20064.

World paper markets
Based on Figures 7 and 8, the following conclusions can be drawn regarding the
prices in Germany in the period 1995-2006:
1. A 4 copy paper real prices have fluctuated between EUR 800 and EUR
1200/t. Prices peaked in 1995 and 2000-2002 at EUR 1200/t. The trend has
been downwards, particularly since 2000. In early 2006, prices were at their
lowest level, i.e., EUR 800-850/t.
2. Real prices of woodfree coated paper have also had a declining trend, par-
ticularly since 2000. Prices peaked in 1995 and 2000 at EUR 1 100/t.
7.4 Containerbord and cartonboard

Fig. 3.9 Containerboard and carton prices in germany 1986-2005
1200
1000
800
EUR/t, real (2006Q2)
600
400
Kraftliner (175 g), Germany, delivered

200
SC fluting (127 g), Germany, delivered
WLC (GD2), Germany, delivered
FBB (GC2), Germany, delivered
0
86 I
87 I
88 I
89 I
90 I
91 I
92 I
93 I
94 I
95 I
96 I
97 I
98 I
99 I
00 I
01 I
02 I
03 I
04 I
05 I
:II
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
19 :IV
20 :IV
20 :IV
20 :IV
20 :IV
20 :IV
20 :IV
20 :IV
19 6:I
19 7:I
19 8:I
19 9:I
19 0:I
19 1:I
19 2:I
19 3:I
19 4:I
19 5:I
19 6:I
19 7:I
19 8:I
19 9:I
20 0:I
20 1:I
20 2:I
20 3:I
20 4:I
20 5:I
06
8
0
19
Figure 9. Containerboard and cartonboard prices in Germany 1986-20054.
Based on Figure 9, the following conclusions can be drawn regarding prices in

Germany in the period 1986-2005:
1. Prices for containerboard and cartonboard have fluctuated simultaneously,
peaking in 1990, 1995 and 2002-2003. Partly this reflects peaks in industry
demand for different types of packages.
2. In cartonboards, FBB and WLC grades have, contrary to most other grades,
enjoyed increasing real prices since 1996, rising from EUR 800/t to EUR
1000/t for FBB and from EUR 500/t to EUR 600/t for WLC.
3. In containerboards, real prices of kraftliner and SC fluting have been rather
stable since 1996 at around EUR 400/t. The prices of both grades have fol-
lowed each other closely based on corrugating industry demand.

Chapter 3
7.5 Price stability 1995-2002

Figure 10 shows an attempt to analyse the price stability of certain grades using the
standard deviation of the mean market price as a proxy in certain grades.
1000 25 %
900
800 20 %
700
Standard Deviation (%)

600 15 %
Mean (/t)
Mean
500
Standard Deviation
400 10 %
300
200 5%
100
0 0%
Uncoated Fine Paper Coated Fine Paper LWC Newsprint NBSK Pulp
Figure 10. Mean and standard deviation of certain grades 1995-2002)1.
The following conclusions can be drawn based on Figure 10:

1. Newsprint has had the best price stability, with a standard deviation of the
mean price of about 7 %. Annual delivery contracts, which are common for
newsprint, are one contributing factor.
2. Chemical pulp has been the most volatile, with a standard deviation of more
than 20 %. As pulp is traded in US dollars, USD exchange rate variations
have contributed to the volatility.
3. Fine paper prices have also been more volatile than newsprint prices. This
is partly explained by the fact that chemical pulp is the main raw material of
these grades.
8 Sales and marketing of paper

Most of the paper produced in the world is sold directly to publishers, converters and
printers. Large companies have their own global marketing organisations. Smaller
companies also have their own sales organisations in key markets. However, these
companies often use sales agents in more distant markets, where sales volumes are
too small to justify the cost of maintaining a sales organisation. Agents typically sell
paper produced by several companies to achieve the necessary economy of scale.
Smaller quantities, mainly uncoated and coated woodfree papers, are sold
through merchants. In Europe roughly 75 % of woodfree sheets are sold through

World paper markets
merchants. In addition, some coated woodfree reels, corresponding to about 30 % of

total demand, is sold through merchants as well. The total volume sold through mer-
chants in Europe is close to 13 million t/a, of which 8 million t/a are woodfree papers.
Half of the merchant sales is indent, the other half stock sales. Indent means
that the paper is sold by the merchant but delivered directly from the paper mill to the
customer. Average order size is about 3 000 kg.
Stock sales means that the paper is ordered by the merchant and delivered
to the merchant’s warehouse. The merchant then sells the paper gradually in small
lots, averaging 400 kg, to various customers, most often small printers. The merchant
business differs significantly from pulp and paper production. The margins are small,
2-4 %, but asset turnover fast, 5-10. The three largest merchants in Europe in 2005
were PaperlinX (2.5 million t/a) Papyrus (1.8 million t/a) and Antalis (1.6 million t/a).
9 Criteria for establishing new capacity

On top of the strategic considerations involved, a key question facing the pulp and
paper industry when considering new production capacity is: Which grade or grades
can be produced profitably and competitively in a given region? Answering this ques-
tion correctly is mandatory for success.
The following factors should be considered and analysed to find the correct
answer:
1. Cost-competitiveness
2. Market size and growth potential
3. Quality and availability of raw material
4. Opportunities for further converting
5. Transport
6. Environmental aspects (permits, legislation etc.).
Cost-competitiveness can be analysed by calculating total manufacturing and

transport costs to a given region such as the Ruhr in Europe or Chicago in the United
States for a specific mill or paper machine and comparing these costs to those of
competitors. In bulk products in particular, the basic idea is to have lower costs than
the competition.
Product prices do not influence cost-competitiveness. This is a great advantage
as paper prices fluctuate a lot, as demonstrated in this chapter. Exchange rate vari-
ations are a factor of uncertainty, often the largest single one which can change the
cost-competitiveness drastically in either direction.
One can also analyse the cost-competitiveness of hypothetical new mills. In
such an analysis, a new modern mill of a specific design and size is located in dif-
ferent regions in order to compare the potential cost-competitiveness of the chosen
locations. Figure 11 shows an example (newsprint, new machine, 400 000 t/a) of this
kind of analysis.

Chapter 3
Estimated manufacturing costs of a hypothetical new newsprint paper

machine in 2006 is selected locations
EUR/mil.t 2006/Q3
350
Current market prices applied for both integrated and purchased chemical Other fixed costs
pulp as well as for recycled paper
300
Personnel
250
200
Other var. costs
150
100 WF/rec.fibre
50
0
Europe DIP USA DIP Canada TMP25/DIP 75%
Figure 11. Cost- competitiveness of newsprint, best mill per region1.
A model developed and refined by Pöyry1 also makes it possible to analyse the
cost-competitiveness of existing producers. With this model, the production costs of
individual mills or paper machines can be analysed reasonably accurately using pub-
lished information on mill or paper machine capacity, mill manning, recent investments
etc., and regional unit costs for raw materials, energy, labour etc. Figure 12 shows an
example (global bleached hardwood kraft pulp) of this analysis.
Relative costs in USD/ADmt, cost leader = 100

350
300
250
200
150
Manufacturing and distribution costs
100
50
0
0 5000 10000 15000 20000 25000
- Cumulative Capacity, 1000 t/a -
Figure 12. Cost competitiveness of existing BHKP market pulp mills1.

World paper markets
Market size and growth potential are important factors. In most bulk products,
the unit sizes for new investments have become so large (1 million t/a for a new pulp
mill and 400 000 t/a for a newsprint machine) that only large and growing markets can
absorb the new production without serious price disturbances.
The quality and availability of raw material are also important factors. The large
unit sizes mentioned above require huge amounts of raw materials at reasonable cost.
This means that transport distances and thus transport costs for raw materials tend to
increase. The quality of the available raw material is naturally important. Scandinavian
spruce has superior optical properties in mechanical pulp production for SC and LWC
papers. Birch is an excellent material for plywood manufacture and Scandinavian pine
for sawn timber. Eucalyptus is an excellent raw material for short-fibre chemical pulp
and woodfree papers, and central European recovered paper is ideal for newsprint
manufacture.
Opportunities for further converting are particularly important in a situation
where a shortage of raw materials limits the possibilities of expanding production
volumes. In these situations only higher value-added products made from an exist-
ing production base can generate growth. Benefits of integration are also possible.
By calculating the ratio of transport costs to sales prices or manufacturing costs, the
mill’s transport economy can be assessed. The cost disadvantage of remote produc-
ers in comparison to local producers is reduced if the products’ transportability is
good, as is the case with pulp or kraftliner.
Environmental and political criteria are decisive when considering new capac-
ity today. The time and effort required for obtaining necessary permits and the limits
for air, noise and water emission etc., are important cost factors. High environmental
standards, which can be expensive in the investment phase, may later prove to be an
advantage, helping to establish a positive image on main markets.
Table 5 summarises the suitability of certain grades from a Scandinavian per-
spective, in view of the above criteria. The data in Table 5 should be considered as
rough guidelines only.

Chapter 3
Table 5. Suitability of main forest industry products for manufacturing in

Scandinavia.
Availability and quality

Cost competitiveness
delivered to Europe
further investment
Opportunities for
of raw material
Environmental
assessment
Market size
and growth
Transport-
aspects
General
ability
Sawn goods - - + + + + Acceptable
Plywood + + ++ + + + Good
Particleboard - - - + - + Bad
Market pulp - + - ++ ++ - Acceptable
Newsprint* + - - - + + Acceptable
SC- and LWC-papers ++ + ++ - + + Good
Uncoated woodfree + + - - + + Acceptable
Coated woodfree + + - - + + Acceptable
Kraftliner - - - + ++ - Bad
Corrugated board* + + + + ++ Good
Cartonboards + + - + + + Good
Liquid packaging board ++ + - + + - Good
Tissue** + + ++ + + Good
* partly RC-based
** for local manufacture and delivery

World paper markets
Sources/References
2. Pulp and Paper International, Lower Index, 2006
3. German Consumer Price Index, 2006
4. Stora Enso Oyj, 2006

Chapter 4
Fibre demand and outlook
1 Introduction..........................................................................................................................55
2 Consumption trends.............................................................................................................56
3 Production trends.................................................................................................................58
4 Pulp industry structure.........................................................................................................59
5 Pricing ..................................................................................................................................62

Fibre demand and

outlook
World consumption of papermaking fibre has grown from 290 million tons in1995 to 371
million tons in 2005. The most important change in the raw material base has been the
rapidly increasing use of recycled fibre. In 2005 its share of the total fibre furnish was 50 %.
World demand for papermaking fibre is expected to increase to 504 million tons by 2020. At
the same time, the share of recycled fibre of the total furnish is expected to increase to 56 %.
1 Introduction
World consumption of papermaking fibre totalled 371 million tons in 2005. Based on
the demand estimates presented in Chapter 3 of this book, world demand for paper-
making fibre will increase to 504 million tons by 2020 (Table 1).
Table 1. Consumption of papermaking fibres 2005-2020.
2005 2020
Papermaking fibres
mil.tons % mil. tons %
Wood based raw materials 170 46 199 40
Recycled fibre 185 50 283 56
Non-wood fibres 16 4 22 4
Total 371 100 504 100
In addition to fibre, the paper industry consumes significant amounts of minerals

and chemicals. In 2005 the consumption of minerals and chemicals totalled 55 million
tons, equalling about 15 % of the total raw material consumption. The most important
change in the industry’s raw material consumption has been the rapidly increasing use
of recycled fibre. Its share has increased from about 28 % of the fibre furnish in 1980 to
50 % 25 years later. This increase has been much faster than anticipated 10-15 years
ago. The share of recycled fibre is estimated to increase to 56 % by 2020.
The pulp and paper industry has traditionally been located near raw material
resources. In North America and the Nordic countries, this generally meant close to
forests. Because of the increasing use of recycled fibre, new mills have been built near
recycled fibre sources, i.e., in densely populated areas with high standards of living
and high paper consumption per capita.

Chapter 4
Depending on the paper grade pro-
Total
duced, the availability and price of wood
100
100
100
100
100
100
100
100
raw material and recycled fibre are the key,
if not the most important, success factors.
Recovered
This is because fibre accounts for a large
paper
share of total manufacturing costs in most
62
23
12
63
77
72
54
56
paper grades (Table 2).
Table 2. Share of fibre costs of total
wood
Non-
2020
10
manufacturing costs of major
1
0
7
3
2
8
4
forest products.
Mechanical Chemical
Share of total manu-
pulp
Products
28
74
27
17
19
34
30
5
caturing costs %
Sawn goods 60-70
Chemical pulp 60-70
pulp
32
49
10
Newsprint (recycled based) 40-50
4
3
3
7
4
LWC 14-18
Manufacturing costs = total costs at mill excluding capital costs.
Table 3. Consumption of fibre material by paper grade 2003 and 2020.
Total
100
100
100
100
100
100
100
100
Based on Table 2, the share of fibre
costs is high in lower value-added prod-
ucts. Particularly in these products, low
Recovered
unit fibre costs are important for profitable

paper
51
17
53
69
65
46
48
9
production. In higher value-added prod-

ucts, such as light-weight coated (LWC)
grades or converted grades, the influence
wood
of wood costs is smaller and thus of lesser

Non-
2003
10
10
1
0
5
2
2
importance 4
Mechanical Chemical
2 Consumption trends
pulp
33
78
39
24
27
41
36
6
The most important factors influencing

fibre consumption trends are paper and
paperboard demand prospects and fur-
nish changes. Furnish changes are mainly
pulp
42
50
12
3
3
5
6
3
driven by production economics. Other

factors causing furnish changes are paper
quality requirements, pulp quality changes
Wood containing pr/wr
and the increasing use of minerals.

Wood free pr/wr
Containerboard
Paper grade
Cartonboards
Newsprint
Others
Tissue
Total

Million tons
600
Forecast
500
400
Recovered paper
300
200 Non-wood
Sulphite
Unbleached kraft
Bleached hardwood kraft

100
Bleached softwood kraft
Mechanical & semi-chemical

0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Figure 1. World consumption of papermaking fibre 1980-20201.
%
100
Forecast
80
60 Recovered paper
Non-wood
40 Sulphite
Unbleached kraft
Bleached hardwood kraft

20
Bleached softwood kraft
Mechanical & semi-chemical

0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Figure 2. Average papermaking fibre furnish in the World 1980-20201.
Recovered paper has gained ground and will continue to do so in all end uses,
as can be seen in Table 3, and in Figures 1 and 2.
Based on the above data, the following conclusions can be drawn:
- Recovered paper is the fastest-growing raw material.
- Growth of pulp demand will be fastest in China, eastern Europe and Russia
and the rest of Asia (Figure 3). North America and Japan will have zero
growth.

Chapter 4
The share of market pulp of total wood pulp consumption is expected to grow
from 31 % (49 million tons) in 2005 to 36 % (67 million tons) in 2020. The main rea-
sons behind this trend are new, large pulp mills close to fast-growing plantations, and
rapidly growing demand for paper in areas suffering from a shortage of local fibre.
Consumption growth, %/a

5
China
Eastern
Europe +
Russia
4
Rest of
Africa
Asia
Latin America
3
Average 2.0%/a
2
Oceania
Western Europe
1
North America Japan

0
-1
0 20 40 60 80 100
Figure 3. Long-term pulp demand growth by region through 20201.
3 Production trends
North 2005
America 2020
Western
Europe
Eastern
Europe
Japan
China
Rest of
Asia
Latin
America
Rest of
Mechanical/semi-chemical Chemical Non-wood pulps RP
0 20 40 60 80 100 120 140 160

Million tons
Figure 4. Changes in pulp production and recovered paper collection1.

Figure 4 illustrates the changes in pulp production and recovered paper collection in
2005-2020. The following comments can be made:
- The production of wood pulps will decline in North America and Japan. In
North America this decline is caused by mill closures and in Canada by a
shortage of wood.
- The above development will cause a drop in exports from North America.
- Large production increases will take place in Latin America, Eastern Europe
and South-East Asia.
4 Pulp industry structure

The largest pulp producing companies in the world are International Paper (12.9 mil-
lion t/a), Stora Enso (12.1 million t/a) and Weyerhaeuser (7 million t/a). The leading five
companies account for 24 % of the total wood pulp capacity in the world (Figure 5).
Most producers, including the largest ones, are regional rather than internation-
al. Very few ones have pulping operations outside their home regions.
Aracruz
Weyerhaeuser
Stora Enso
Arauco
Tembec
Södra
APRIL
Ilim Pulp
International Paper
Canfor
Georgia-Pacific
Mercer International
West Fraser
Sappi
Botnia
Chemical
ENCE
Mechanical/semi-chemical
Votorantim Group
Fluff
Bowater
Dissolving
Cenibra
DIP
CMPC
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5

Million tons
Figure 5. Top 20 market pulp producing companies1.

Chapter 4
C(5), %
100
1997
2006
80
60
40
20
0
North America Western Europe World
C(5) = combined share of top five firms of total capacity (including fluff pulp, excluding dissolving pulp)
Figure 6. Industry concentration in market BSKP1.
C(5), %
100
1997
2006
80
60
40
20
0
North America Western Europe Asia Latin America World
C(5) = combined share of top five firms of total capacity (excluding dissolving pulp)
Figure 7. Industry concentration in market BHKP1.
Figures 6 and 7 illustrate the concentration of BSKP and BHKP capacity meas-
ured by the top five companies’ share of market pulp capacity. The conclusions are:
- The concentration has increased during 1997-2006 in all regions, but glo-
bally the concentration level is still low at about 35 % in 2006.
- Although the concentration level e.g. in Western Europe, Asia and Latin
America is as high as 70-80 %, the global figure is more relevant. This is be-
cause pulp is a global commodity with significant intercontinental trade flows.

Weighted average mill capacity, 1 000 t/a

800
Weighted average STRONG
technical age 19 years
700
Russia
Chile
600
USA
New Zealand Finland Germany
500
Sweden
Bubble size reflects the market
Canada Weighted
400 Norway average BSKP capacity
capacity
(including export captive pulp)
Argentina 445 000 t/a
300 Austria
France
Japan
200
China
100
WEAK
0
30 25 20 15 10 5 0
Technical age, years
Figure 8. Global producers of market BSKP by country1.
Weighted average mill capacity, 1 000 t/a

1800
Weighted average STRONG
1600
Indonesia
1400
1200 Brazil
Weighted China
1000 average
Bubble size reflects the market
capacity
815 000 t/a BSKP capacity
800 Russia Sweden Finland
South Africa (including export captive pulp)
Japan
600
Chile
USA
400 Canada
France
200 Spain
Portugal
WEAK
0
30 25 20 15 10 5 0
Technical age, years
Figure 9. Global producers of market BHKP by country1.
Figures 8 and 9 illustrate the asset quality of BSKP and BHKP producers by
country. The y-axis denotes the average mill size per region, the x-axis the mills’ techni-
cal age. The technical age takes into account the start-up year (=the physical age) as
well as modernisations/rebuilds and their size carried out since the start-up. For ex-
ample, the technical age of a 20-year-old pulp mill that has recently undergone a large
modernisation (e.g. a new recovery boiler or digester department), might have been
reduced from 20 years (without the rebuild) to perhaps 10 years (with the rebuild).

Chapter 4
Based on Figures 8 and 9, the following conclusions can be drawn:

- The average capacity of BSKP mills is 445 000 t/a, and their average techni-
cal age 19 years.
- The most modern mills with the lowest technical age are found in Germany,
Chile and Finland. The oldest ones are found in Japan, Russia and Canada.
- The largest BSKP mills are found in Russia (650 000 t/a) and Chile (600 000 t/a).
- The average capacity of BHKP mills is 815 000 t/a, and their average tech-
nical age 15 years.
- The largest and most modern mills are found in Indonesia, Brazil and China
(1 mill only)
5 Pricing
Figure 10 illustrates the real price development (real price = all figures are in 2006 US
dollars) of BSKP and BHKP in the period 1970-2006. The following conclusions can
be drawn:
- The real price of pulp has declined at a rate of about 1 %/a since 1970,
from USD 900/t to USD 600/t.
- There have been significant fluctuations in prices during this 35-year period.
Peaks were recorded in 1975 (USD 1200-1300/t), 1989 (USD 1100-1200/t)
and 1995 (USD 1200/t). The lowest prices were recorded in 1985 (USD 500-
600/t), 1994 (USD 450-500/t) and 2002 (USD 500-550/t).
Based on Figure 11, there has been a clear break in recovered paper prices
in the early 1990s. The main reason for this was the discontinuation of subsidies to
municipal waste collection allocated in the 1980s. The increased demand for recov-
ered paper at domestic and overseas mills made the subsidies unnecessary. Since the
1990s, the price trend has been rising due to increasing demand for recovered paper
and rising marginal costs of collection.

Real 2005 USD/t

1400
1200
NBSKP
1000
800
600
400 BHKP
200
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Prices CIF North Atlantic/North Sea port.

Deflator used for real prices US WPI.
Figure 10. Real price of NBSKP and BHKP 1970-20061.
Real 2005 EUR/t

250
Mixed news
Mini oil crisis
OCC Pulp price hike Millennium boom
Fear of fibre shortage Pulp price hike
200
150
End of subsidies
100
50
Strong dollar & consequent
demand pull from China
0
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Real prices for ONP/OMG and OCC in Germany, delivered to end user
Figure 11. Recovered paper prices in Germany 1987-20061.

Chapter 4
Sources/References

Chapter 5
Raw material resources – forests and wood supply
1 Introduction..........................................................................................................................66
2 Forest area ...........................................................................................................................66
3 Forest harvest and use of wood...........................................................................................68
4 Certification .........................................................................................................................68
5 Wood supply..........................................................................................................................69
5.1 Terminology............................................................................................................................69
5.2 Europe . .................................................................................................................................69
5.3 Canada . .................................................................................................................................71
5.4 United States..........................................................................................................................72
5.5 Other areas.............................................................................................................................73
6 Plantations ...........................................................................................................................73
6.1 South America........................................................................................................................74
6.2 Asia and Oceania....................................................................................................................75
7 Wood costs . .........................................................................................................................76
7.1 Definitions..............................................................................................................................76
7.2 Regional average costs...........................................................................................................76

Chapter 5
Raw material
resources – forests
and wood supply
About 30 % or close to 4 billion hectares of the world’s land area is covered by forests.
Forests are an important carbon sink. The growing stock, including soil, contains more
carbon than the entire atmosphere.
Forest land area is growing in Europe but declining in other regions. The net decline is
8 million ha/a. The total annual harvest is 3.5 billion m3. More than half of this is used
as fuelwood. The pulp and paper industry consumes 545 million m3/a, which corresponds
to 16 % of the total harvest. The importance of plantations for the global wood supply is
growing.
1 Introduction
About 30 % (close to 4 billion hectares) of the world’s land area is covered by forests.
This fact alone shows the importance of this resource for mankind. In addition to pro-
viding raw material for mechanical wood industry products for construction purposes,
and for pulp and paper for printing and packaging, forests are an important energy
source as well as a carbon sink. About 7-9 % of the world’s energy consumption is
satisfied by wood, in some developing countries more than 80 %.
The total growing stock of the world’s forests is estimated at 434 billion m3,
which represents a carbon store of 283 gigatonnes (Gt). If the ecosystem of the for-
ests and the soil are included, the carbon store is 638 Gt, which is more than the car-
bon stored in the atmosphere.
Excluding wood-processing, around 10 million people are employed in forest
management and conservation.
2 Forest area
The total forest area in the world in 2005 was close to 4 billion ha. Table 1 summarises
the data by region in 1990 and 2005, including net changes.

Table 1. Estimated global forest area 1990 and 20051
1990 2005 Change

mil ha mil ha mil ha
Africa 699 635 -64
Asia 584 571 -13
Europe 989 1 001 12
North and Central America 710 705 -5
Oceania 211 206 -5
South America 890 831 -59
World 4 077 3 952 -125

1. The two regions with the largest forest areas are Europe (1001 million ha)
and South America (831 million ha).
2. The forest area is declining in all regions, except Europe.
3. In 1990-2005, the world’s forest area declined by more than 8 million ha/a
The alarming decline in the forest area is caused by deforestation due to con-
version of forests for agricultural land. At the same time, forest plantations and natural
expansion of forests have significantly reduced the net loss.
Mankind and the forest industry must ensure that the forest resources of the
world are not depleted. A vital, flourishing industry requires a vital, flourishing forest to
survive.
The role of forest plantations is growing. Theoretically, 50 million ha of high-yield
industrial plantations could fill the world’s fibre needs. This is less than 1.5 % of the
total global forest area. Although theoretical, this example shows that the combination
of managed natural forests and high-yield plantations is the key to successful long-
term forest management.

Chapter 5
3 Forest harvest and use of wood

Figure 1 describes theuse
Fig 5.1 Global global use of wood. The following conclusions can be drawn:
of wood
Forest Harvest
Roundwood
3.460 billion m3
Fuelwood
1.770 billion m3
Industrial Wood
1.690 billion m3
USD 127 billion
Other Saw and Veneer Logs Pulpwood (round and chips)

150 million m3 995 million m3 545 million m3
Sawnwood Wood-based Panels Wood+Non-w. Pulp

416 million m3 210 million m3 173+16 million tons
USD 94 billion USD 72 billion USD 83 + 6 billion
Residues Recycled Fibre Paper and Paperboard

177 million tons 360 million tons
USD 21 billion USD 276 billion
Mechanical
Forest Products Pulp and Paper
Industries Industries
Values based mainly on export equivalents
Figure 1. Global use of wood 20042.
1. The total annual harvest in 2004 was 3 460 billion m3.

2. More than half of the annual harvest was used for fuel wood; 80 % of the
fuel wood was used by developing countries.
3. 28 % (995 million m3) was consumed by the mechanical wood products in-
dustry for sawn timber and wood-based panels.
4. 16 % (545 million m3) was consumed by the pulp and paper industry.
The most important factors relating to the availability and cost of wood by main
region are:
1. Overall growing stock
2. Balance between net annual increment and harvest
3. Use of pulpwood compared with other uses of wood
4. Wood trade flows
5. Wood costs
4 Certification
The catalyst for certification has been the desire to protect tropical forests from
unsustainable use. A forest certificate is a document supplied by a neutral party. It
proves that the wood originates from forests that are managed with sustainable and
sound forest management practices. Today, there are more than 50 different certifica-
tion systems.

The two most important certification systems are PEFC (Program for the
Endorsement of Forest Certification Schemes) and FSC (Forest Stewardship Council).
PEFC is the umbrella organisation for more than 30 national certification systems. In
Europe, close to half of the forests are certified. Two-thirds of these certificates are
based on systems belonging to the PEFC.
5 Wood supply
5.1 Terminology
There is a certain confusion in the terminology regarding wood supply and harvesting
of wood.
In this book the following terms and expressions are used.
1. Growth = gross volume increase of all wood in the forest through

growth. In some countries “annual increment” is used instead.
2. Total drain = gross removals; this includes all man-made removals plus
removals caused by nature. In some countries “gross fellings” are used.
3. Removals = total drain minus wood material left in the forest (such as
tops, branches, losses in harvesting etc).
4. Industrial consumption = removals minus transport losses, fuel wood usage
etc.
Because of differences in terminology there are inaccuracies between countries
when comparing wood supply figures.
5.2 Europe
Table 2 summarises the most important data concerning forest land, growing stock
and removals in the most important countries.
Table 2. Forest area, growing stock and removals in certain countries in Europe3.
Country Land Area Forest area Growing Total drain Industrial

(mill. ha) (mill. ha) stock (mill. m3/a) consumption
(mill m3/a) (mill.m3/a)
Finland 30.4 20.7 1 867 72.5 54.2
Sweden 41.1 21.2 2 567 85.4 67.3
Germany 34.9 10.1 2 820 89 54.5
France 55 14.5 2 836 92.3 35
Austria 8.2 3.4 1 037 27.3 16.5
Spain 49.9 10.5 487 28.6 16.3
Portugal 9.2 1.9 188 12.9 9.7
UK 24.2 2.1 293 14.6 8.1
Russia 1 688.9 525.2 60 922 742 174

Chapter 5
Finland
Finland’s total productive forest area is 20.7 million hectares. The average
growing stock of Finland’s forests is 90 m3/ha. In addition, there is 6 million
ha of unproductive forest land with only a few trees per hectare and slow or
no growth. These areas are not part of the 20.7 million ha of productive for-
est land mentioned above.
Since forests are an important natural resource, forestry research, legisla-
tion and management are given high priority. Forest inventories and updates
are done continuously. Finland’s forests are characterised by slow growth
due to harsh climactic conditions, a high utilisation ratio (usage/growth) and
a limited number of wood species. An area of 3.1 million ha of Finland’s
total forest area, including productive and unproductive land, has been set
aside for conservation purposes. Because of the high utilisation in relation
to overall growth, the potential to increase removals from Finland’s forests is
small.
Sweden
Sweden’s total productive forest area is 21.2 million hectares. The average
growing stock is 120 m3/ha. Sweden’s and Finland’s forests are similar, with
the exception that the growth in Sweden is slightly higher because of the
more favourable climate.
The potential to increase removals in Sweden are limited, although some-
what better than in Finland.
Russia
Russia has huge forest areas and forest resources. Theoretically, the poten-
tial to increase the harvest is enormous. Half of the world’s softwood grow-
ing stock is in Russia. A significant part of the unutilised harvest potential is
currently inaccessible. Hence, the real potential is much lower.
The forests in the eastern Asian part of Russia are of interest to China, the
neighbour in the east.
Other European countries

The forests in other European countries are characterised by their high aver-
age age and growing stock per hectare, because thinning and cutting vol-
umes have been quite low for many years. Softwood species are common
due to past reforestation practices. This is particularly true for Germany,
where almost all forests had been cut by about 1850. At the end of the nine-
teenth century, an active reforestation programme began, using predomi-
nantly spruce for economic reasons, although in climate terms Germany is
part of the hardwood zone.
England has practised active reforestation since World War I. Sitka spruce is
the most widely planted tree species because of its suitability for mechani-
cal pulp.

The wood supply in Europe could be increased from its present level, but
reforestation practices, institutional factors and environmental concerns are
likely to prevent this.
Use of wood as fuel is rising rapidly in many European countries, particular-
ly in Germany. This trend will increase the competition for wood and lower
its availability for traditional uses.
5.3 Canada
Until the late 1970s, Canada’s forest resources were considered to be practically
unlimited. This resulted in limited interest in developing forest practices and collect-
ing reliable data on forest inventories, growth, reforestation etc. The expansion of the
country’s forest industry was considered secure, with a high-quality, low-cost wood
supply.
In the early 1980s, the situation changed dramatically and the neglect of refor-
estation during the past decades suddenly became evident. The Net Allowable Cut
(NAC) defining the maximum drain of wood from a given region using sustainable for-
estry was drastically lowered in most regions.
Provincial governments own most of Canada’s forests. In British Columbia,
the province owns 95% of productive forest land. In the central and eastern parts of
Canada, provincial ownership varies between 80 and 90%. Because so much forest
is owned by the provinces, it is common practice in Canada for the forest industry to
acquire concessions to use the wood in a certain region for industrial processing. For
this reason, the provincial authorities have had a significant influence on forestry, re-
forestation requirements etc.
Table 3 shows Canada’s forest resources by region.
Table 3. Canadian forest resources by region2.
Land area Nonreserved Net allowable Harvest

(million ha) Stocked cuts million m3/a
Forest Area million m3/a
(million ha)
Atlantic Provinces 49 17 22 21
Quebec and Ontario 221 109 86 68
Prairies (Alberta, 176 56 42 32
Saskatchewan and Manitoba)
British Columbia 92 46 83 87
Nortwestern Territories (incl. 353 33
Nunavut and Yukon)
TOTAL 891 261 233 208

Chapter 5
British Columbia has large forest resources consisting almost exclusively of

softwood (pine). This has led to the establishment of a large sawmilling and chemical
pulp industry. A typical practice in the sawmilling industry is to use only high-quality,
large-diameter logs. As a result, chips from sawmills have been the sole source of raw
material for the pulp industry. For this reason, many pulp mills have not built a wood-
yard at all but relied on chip deliveries from nearby sawmills.
Spruce dominates the forests in eastern Canada. Combined with an abundant
supply of cheap hydroelectric power, this has resulted in the establishment of a large
newsprint industry in this part of Canada.
In the western part of Canada, the harvesting potential is temporarily increasing
due to pine beetle infestation. In the long term the harvest potential is decreasing. In
the eastern part of Canada, the harvesting potential is stable or decreasing due to de-
pleted reserves of accessible mature stock resulting from insufficient past inputs into
forest management.
Large forest regions in Canada are remote and practically inaccessible for in-
dustrial use. With the new outlook on forest resources, this has lowered the expected
harvest in the future. Major changes in forest management and higher investment
levels in forestry are necessary to restore the sustainable harvest and increase the
potential supply.
5.4 United States

The total forest area of the United States is approximately 200 million ha. Table 4
shows the most important forest regions.
Table 4. US forest resources by region2.
Land area Production com- Growth Harvest

million ha mercial million m3/a million m3/a
forest area, mil-
lion ha
US North 167 64 153 95
US South 216 82 326 258
Rocky Mountains 300 29 58 18
Pacific Coast 232 29 133 74
TOTAL 916 204 671 444
According to the data in the table, the southern United States is the largest
commercially productive forest area in the country. Its forests consist of roughly equal
volumes of softwood and hardwood. In the long term, softwood plantations offer
potential for increased harvesting. The dominant softwood species (southern pine) is
used for sawn timber, chemical pulp and kraftliner manufacture. These industries have

grown rapidly in the southern United States. Wood species suitable for mechanical
pulp are not common in these forests. Therefore, industrial production of mechanical
printing paper or virgin-fibre newsprint is rare in the area.
Other important forest regions are the Pacific Coast, the US North and the
Rocky Mountains. Softwood species dominate, accounting for about 90 % in the
Pacific Coast forests. In the other regions, hardwood is common, accounting for
75 %. The softwood species in these parts of the United States are suitable for me-
chanical pulp, so newsprint and mechanical printing paper manufacture are common
in these regions.
Environmental considerations, such as protection of the spotted owl’s habi-
tats, curtailed the total wood supply in the early 1990s in the Pacific Coast region. An
increase in production capacity in this part of the country is therefore impossible in the
present situation. In the north-central and north-eastern regions, some supply poten-
tial based primarily on hardwood still exists.
It should be noted that the wood supply in the regions listed in Table 4 may vary
within wide limits. Thus, there are mills in each region that might suffer from a short-
age of supply within reasonable distance, although the aggregate wood balance looks
positive.
5.5 Other areas

Australia and New Zealand have some potential for increased removals based on ex-
isting and new plantations.
In South Africa, there is only limited potential for expansion of harvesting vol-
umes.
Asia and the Pacific Rim countries will continue to be the world’s largest wood-
deficit areas in the foreseeable future. Production of tropical logs will decrease, and
production of industrial wood, particularly hardwood for pulp manufacture will in-
crease, notably in Indonesia.
6 Plantations
The importance of plantations for the global wood supply is growing. Particularly in
countries with a warm climate and unutilised land, establishment of plantations has
grown. Two main factors lie behind this trend.
1. Establishment of plantations have proved to be financially attractive.
2. Plantations are an effective means to combat deforestation.
Subsidies and incentives of different kinds have decisively promoted planta-
tions. Important data describing plantations is given in Table 5.

Chapter 5
Table 5. Most important plantations in the world2.
Country Area Commercial Species Yield m3/ha/a

mill ha plantations, SW (%) HW (%) SW HW
mill ha
1. South America
Argentina 270 1,03 30 70 30 40*

Brazil 850 5 40 60 25 30-50**
Chile 76 2 80 20 20 30-35
Uruguay 176 0,7 20 80 30-40
2. Asia/Oceania
Australia 762 1,72 60 40 20
New Zealand 27 1,83 97 3 15-20
Indonesia 173 0,65 0-10 90-100 15-20
South China 982 5 80 20
3. North America
US South 220 81 48 52 5-10
* Figures refer to best practice
** Potential to go up to 70-80 in HW
Note: South China has 24 million hectares of plantations, of which 5 are considered fast growing
6.1 South America
South America has the world’s largest growing stock of hardwood, consisting mainly
of tropical forests.
For economic and environmental reasons, tropical forests cannot and should
not be used for industrial purposes.
Tropical forests have the following typical features:
- large variety of different wood species
- low growing stock per area
- inaccessibility due to remoteness from industrial infrastructure
- poor soil conditions that make it difficult to plant forests in denuded areas
- poor regeneration (when cut, tropical forests do not grow again due to soil
erosion during seasonal rains, or because other plants such as grasses take
over after the removal of trees).
The rebirth of tropical forests after removal is unlikely. Attempts to establish
planted forests in former tropical forest areas can be successful if well managed.
Considering these facts, any additional wood supply in South America should
come from planted forests. The potential to increase the supply through plantations is
significant. The countries in South America best suited for plantations are Brazil, Chile,
Argentina and Uruguay.

Brazil
Almost 90 % of the land area of Brazil, or 700 million ha, is forest land. Only
a small proportion will be used for industrial purposes. The planted forest
area is about 5 million ha of which 60 % is hardwood – mainly eucalyptus
– and 40 % softwood. Annual growth is estimated at 66 million m3/a for
hardwood (eucalyptus) and at 33 million m3/a for softwood.
Brazil still has a lot of potential to increase its wood supply from plantations
both by establishing new plantations or expanding old ones. In addition,
cloning will facilitate faster growth up to 70-80 m3/ha/a from 50 m3/ha/a at
present in the best areas.
Most of the eucalyptus is still used for charcoal production to supply the
steel industry. Its use for this purpose is declining.
Chile
Chile has about 2 million ha of planted forests, of which 80 % is softwood,
mostly Pinus radiata. The estimated growth of these forests is 25-30 mil-
lion m3. The softwood plantations in Chile are the best and most productive
in the world.
Argentina
Argentina has about 1 million ha of planted forests, of which 70 % is soft-
wood and 30 % hardwood.
Uruguay
Uruguay has about 0.7 million ha of planted forests, most of which is hard-
wood.
6.2 Asia and Oceania

Southern China
The total plantation area in southern China is 24 million hectares, of which
5 million hectares are considered to be fast-growing. 80 % of the area is
softwood. A shortage of suitable land is a major limitation to increased plan-
tation of wood, as agriculture has higher priority.
Australia
Australia has 1.72 million hectares of planted forests, of which 60 % is soft-
wood and 40 % hardwood.
New Zealand
New Zealand has 1.83 million hectares of planted forests. The plantations
are almost exclusively softwood (Pinus radiata). 70 % of the removals are
consumed domestically, 30 % is exported.

Chapter 5
Indonesia
Indonesia has 0.65 million hectares of planted forests. Almost all the wood
planted is hardwood.
The annual harvest of 70 million m3/a is twice the annual allowable cut
(AAC). In addition, the AAC is considered to be too high; the sustainable
level is estimated at 20-25 million m3/a. As a result, natural forests are over-
utilised, putting pressure on increasing planted areas.
Indonesia has 9 million ha of grassland which is theoretically available for
plantation development. However, unclear and changing legislation and
land disputes restrict land availability in practice.
7 Wood costs
7.1 Definitions
1. Measurement of wood
This book uses the following definitions for measuring wood:
- m3 sub = m3 solid under bark (excludes bark and top of tree)
- m3 sob = m3 solid over bark (includes bark and top of tree).
2. Costs of wood
Wood costs at a mill consist of stumpage, harvesting, transport, and admin-
istrative costs and overhead.
‑ Stumpage costs cover all costs to grow the trees, including profit and
taxes. In countries with private forests, the forest owner receives a
stumpage payment. In Canada, the stumpage payment goes to the
province as a part of concession rights.
- Harvesting costs include cutting, delimbing and transport to the road-
side for storing and further transport. The transport distance to the
roadside is normally less than 500 m.
- Transport costs include transport from roadside to mill, including
loading and unloading.
- Administrative costs and overhead include the costs of the organi-
sation covering wood procurement (e.g., planning of harvesting and
transport operations).
7.2 Regional average costs

Figure 2 (hardwood) and Figure 3 (softwood) illustrate the average wood costs at
mill for chemical pulp production in selected countries. It should be emphasised that
within a certain region/country there might be variations, sometimes quite large, due
to local circumstances.

40 Figure 5.2.
35
30
25
Overhead
€/m3 sob
Transport
20
Harvesting
Stumpage
15
1€ = 1,2 USD
1€ = 9,3 SEK
1€ = 1,4 CAD
10
0
Finlad (birch) Sweden (birch) Canada East (mixed hw) US South (mixed hw) Brazil (euca)
Figure 2. Hardwood pulpwood costs at mill 20062.
35 Figure 5.3.
30
25
20
Overhead
€/m3 sob
Transport
Harvesting
Stumpage
15
10
5 1 € = 1,2 USD
1 € = 9,3 SEK
1 € = 1,4 CAD
0
Finlad (pine) Sweden (pine) US North East (pine) US South (Southern Pine) Chile (Radiata)
Figure 3. Softwood pulpwood costs at mill 20062.

Chapter 5
The following observations can be made:

Hardwood
- Hardwood costs are lowest in Brazil (EUR 21/m3) and highest in
Sweden (EUR 34.8/m3). Assuming a consumption of 4 m3 of wood
per ton of pulp, this results in a manufacturing cost difference of EUR
55/ton of pulp, i.e., around 10 % of the price of pulp at the producer’s
mill.
- The break-up of the cost items shows big differences. Canada has
almost zero stumpage costs, but high harvesting and transport costs.
Brazil has low costs for all items. Stumpage is low due to fast growth
of wood, and transport and harvesting costs are low due to easy ter-
rain and efficient harvesting machines.
Softwood
Softwood costs are lowest in the US North East (EUR 20.8/m3) and
Chile (EUR 21.2/m3), and highest in Finland (EUR 32.6/m3). Assuming
a consumption of 6 m3 of wood per ton of pulp, this results in a pulp
manufacturing cost difference of EUR 70/ton of pulp.

Sources/References
1. Food and Agriculture Organisation of the United Nations (FAO, 2006)

Chapter 6
Raw material resources – recovered paper
1 Introduction..........................................................................................................................81
2 Definitions.............................................................................................................................81
3 Global recovery and supply..................................................................................................83
4. Trade flows............................................................................................................................86
5 Recovered paper prices........................................................................................................87
6 Recovered paper users and suppliers.................................................................................88
Sources..................................................................................................................................89

Raw material resources

– recovered paper
Recycled fibre has become the most important raw material for the pulp and paper industry.
In 2005, it accounted for 50 % of the total fibre furnish and its share is expected to increase
to 56 % by 2020.
In certain European countries and Japan the collection rate is already 70 % or above,
which starts to approach the practical maximum.
1 Introduction
Recycled fibre is an important raw material for the paper industry and its use is grow-
ing rapidly. In 1970, the share of recycled fibre in the global fibre furnish, excluding
mineral additives, was 20 %. In 2005, it had increased to 50 %. During this period, the
recovery and use of recycled paper grew much faster than expected 10-20 years ago.
The global recovery rate is expected to grow further to about 56 % by 2020.
In the 1960s and 1970s, recycled fibre was mainly used as a local substitute
for virgin fibre on old, small paper machines. Today, recycled fibre is also used on the
most modern paper machines. In many grades, such as newsprint, testliner (i.e., lin-
erboard based on recovered paper) and certain cartonboard grades it is the preferred
raw material because of its characteristics and/or economics. The driving forces be-
hind this development have been the following:
1. Attractive economics.
2. New technology in the areas of deinking, screening of impurities, fractiona-
tion, bleaching and web forming has promoted the use of recovered paper.
3. The growing need and determination to reduce volumes of solid waste for
landfill.
4. Increased consumer awareness of environmental issues and acceptance of
recycled products.
2 Definitions
Recycled fibre is divided into two main categories:
1. Pre-consumer waste refers to paper or board residues collected from con-
verters, printers, distributors, and transport organisations before the paper
or board has been consumed in its intended end-use.
2. Post-consumer waste includes paper or board consumed by various end
users collected from households, offices, retail trade etc.

Chapter 6
The recovery rate and utilisation rate are two key concepts used in making
comparisons of the relative importance of recycled fibre in different countries. The fol-
lowing equations provide the definitions of these concepts:
recycled fibre collection

Recovery rate of a given region (%) = 100 x ------------------------------------------ (1)
paper and board consumption
recycled fibre consumption

Utilisation rate of a given region (%) = 100 x ----------------------------------------- (2)
paper and board production
Calculations of the utilisation rate do not include fibre losses, which normally
are in the range 10-25 %.
The most common recycled paper grades are:

1. Old and over-issued newspapers and magazines, telephone directories etc.,
containing mainly mechanical pulp. Often used for deinking.
2. Old corrugated and solid container waste, kraft bags etc., containing mainly
unbleached sulphate pulp. Often called OCC.
3. Woodfree printing and writing papers, bleached board cuttings from con-
verters etc.
4. All other types, such as mixed paper and board. Often called mixed waste.

3 Global recovery and supply
Switzerland
Korea, Rep.
Belgium
Germany
Netherlands
Norway
Japan
Singapore
Taiwan
Sweden
United Kingdom
France
Bulgaria
Australia
Austria
Denmark
Spain
USA
Indonesia
Canada
Latvia
World average
Uruguay
Italy
Estonia
Hungary
0 10 20 30 40 50 60 70 80 90
Percent
Figure 1. Recovered paper collection rates in selected countries 20041.
Figure 1 shows the collection of recovered paper in selected countries. In 2004,

the global collection was 177 million tons, which represented a recovery rate of 50 %.
In Western Europe, Belgium, Germany and the Netherlands have the highest recovery
rates in the range 70-80 %. The United States and Canada have relatively low recov-
ery rates, at slightly more than 50 %.
Collection rate, %
80
North America
70 Western Europe
Eastern Europe
60 Asia
Latin America
50 Rest of the World
40
30
20
10
0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Figure 2. Recovered paper collection rates by region 1980-20201.

Chapter 6
Figure 2 shows the development of collection rates by region in the period

1980-2020.
1. The recovery rate has increased in all regions between 1980 and 2005. The
increase has been particularly steep in Western Europe since 1980, from
30-35 % to 65 %.
2. The increase is expected to continue in all regions from 2005 onwards.
In Western Europe, the recovery rate is expected to reach 75 %, in North
America 65 % by 2020.
Based on Figure 2 it can be noted that the growth of collection is slowing down
in Western Europe and North America. The main reasons for this are:
- Collection of marginal tonnages tends to be more expensive. At the same
time, the quality of additional quantities tends to deteriorate.
- Increased collection requires improvements in organisations, logistics/trans-
port and sorting.
It should be taken into account that the collection rates are biased upwards in
regions like North America and Western Europe, which import large amounts of dura-
ble/semi durable goods packed in boxes in the exporting country. These packaging
volumes are not included in paper consumption statistics. In a similar way, collection
rates tend to be biased downwards in countries with big export packaging industries,
such as China.
1990
North America 2005
2020
Western Europe
Eastern Europe
Japan
China
Rest of Asia
Latin America
Rest of the World
0 10 20 30 40 50 60 70 80
Million tons
Figure 3. Recovered paper collection for paper and paperboard production1.

Figure 3 shows the total collection of recovered paper by region in 1990, 2005
and 2020.
1. In North America and Western Europe, the collection will increase from
50 million tons in 2005 to close to 70 million tons by 2020.
2. The growth of collection will be highest in China and the rest of Asia, from
about 20 million tons in 2005 to close to 45 million tons by 2020 in both re-
gions.
3. Collection in Japan will grow only marginally due to the current high recov-
ery rate.
Global average
Cartonboards
Containerboards
Tissue
2020
2003
Wood free PR/WR
Wood containing PR/WR
Newsprint
Others
0 10 20 30 40 50 60 70 80 90
% of fiber furnish
Figure 4. Recovered paper share of fibre furnish in 2003 and 2020.
Figure 4 shows the world consumption of recovered paper by paper grade in

2003 and 2020.
1. The share of recovered paper will increase in all grades up to 2020.
2. In 2003, the share of recovered paper was highest in containerboard (69 %),
cartonboards (65 %), tissue (53 %) and newsprint (51 %).
3. In 2020, the share of recovered paper will still be highest in the above-men-
tioned grades, with 77 % in containerboard, 72 % in cartonboard, 63 % in
tissue and 62 % in newsprint.

Chapter 6
4. Trade flows
1990 2005
North America
2020
Nordic countries
Rest of W. Europe
Eastern Europe
Middle East
Japan
China
Rest of Asia
Latin America
Africa
Oceania
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25

Million t/a
Figure 5. Net trade in recovered paper 1990, 2005 and 20201.
Figure 5 shows the net trade in recovered paper in 1990, 2005 and 2020.
1. There were two main exporting regions in 2005, North America and Western
Europe, and two importing regions, China and the rest of Asia. This situation
is expected to continue through 2020.
2. The main trade flows in 2005 were from North America, Western Europe and
Japan to China/the rest of Asia, with 11, 7 and 4 million tons respectively.
These flows of material are significant and necessary to satisfy the rapidly
growing fibre needs in these regions.
3. Within Western Europe, there are significant intraregional trade flows in ex-
cess of 8 million tons on an aggregate level.

5 Recovered paper prices
Real 2005 EUR/t

250
Mixed news
Mini oil crisis
OCC Pulp price hike Millennium boom
Fear of fibre shortage Pulp price hike
200
150
End of subsidies
100
50
Strong dollar & consequent
demand pull from China
0
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Real prices for ONP/OMG and OCC in Germany, delivered to end user
Figure 6. Recovered paper prices in Germany 1987-20061.
Real 2005 USD/t

300
ONP #6
OCC
250
200
150
100
50
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Real prices for ONP #6 and OCC, FOB sellers’ dock in Chicago
Figure 7. Recovered paper prices in the USA 1980-20061.
Figures 6 and 7 show the prices of recovered paper in Germany and the United
States.
1. In both regions recovered paper prices declined in real terms until the early/
mid-1990s. Since then, there has been a increasing trend in both regions.

Chapter 6
2. Price fluctuations have been considerable in both regions. For example in

Germany, mixed news prices have fluctuated between EUR 50 and 160/t
since the mid-1990s. Both increases and decreases have been rapid and
violent. Peaks have only lasted for a short time.
Recovered paper prices fluctuate because of pulp and paper industry price cy-
cles. The inventory/utilisation ratio seems to correlate rather well with recovered paper
prices.
In the future, more recovered paper is expected to be used for energy produc-
tion, particularly low-grade segments. Together with the increasing demand for recov-
ered paper in China and the rest of Asia, this might lead to upward price pressure.
6 Recovered paper users and suppliers

Table 1. Main European suppliers and users of recovered paper.
Company Suppliers Company Users
Volume, mil.t/a Use, mil. t/a
SKG 2.5 SKG 5.4
SITA 2.4 SCA 4.2
Soulies 2.2 Norske 3.3
Remondis 1.8 UPM 2.9
Saica 1.8 StoraEnso 2.8
Table 1 shows the five largest suppliers and users of recovered paper in Europe.
Generally, it can be noted that many of the large users also have their own collection
organisations to secure the supply.

Sources

Chapter 7
Energy resources and consumption
1 Introduction..........................................................................................................................91
2 Global energy outlook...........................................................................................................91
3 Carbon dioxide emissions....................................................................................................93
4 Kyoto protocol.......................................................................................................................95
5 Electricity consumption of the pulp and paper industry.....................................................96
5.1 Paper . .................................................................................................................................96
5.2 Pulp . .................................................................................................................................96
Sources..................................................................................................................................98

Energy resources and

consumption
The world is facing twin energy-related threats: that of not having adequate supplies of
energy at affordable prices and that of environmental harm caused by consuming too much
of it.
The global primary energy supply increased from 6.0 GToe in 1973 to 11.1 GToe in 2004,
i.e. by 2 %/a. The share of CO2-emitting fuels – oil, coal and gas – was 80 %.
Global electricity generation was 17 450 TWh in 2004. This equals 1.5 GToe. Of this, the
pulp and paper industry consumed about 400 TWh or 2.3 %.
The CO2 content in the atmosphere at present is 383 ppm. The aim of the Kyoto Protocol
is to stabilise the CO2 content at 550 ppm or below. To achieve this, the signatory countries
have agreed to lower CO2 emissions by 5 % from the 1990 level in the period 2008-2012.
1 Introduction
The pulp and paper industry consumes large amounts of energy, both heat and elec-
tricity. Based on the production of pulp and paper in 2005, the world pulp and paper
industry’s consumption of electricity is about 400 TWh/a. This equals the total electric-
ity consumption in Denmark, Finland, Sweden and Norway combined.
The most energy-intensive grades, i.e., SC papers, consume about 2.5-3 MWh/t
of paper. Assuming 1 MWh is priced at EUR 40/MWh, electricity costs alone are EUR
100-120/t or about 15 % of the sales price. On the other hand, chemical pulp, the
second most important raw material after recovered paper in papermaking, generates
excess electricity when produced in a modern pulp mill.
2 Global energy outlook

Today’s world is facing twin energy-related threats: that of not having adequate and
secure supplies of energy at affordable prices and that of environmental harm caused
by consuming too much of it.
The global primary energy supply increased from 6.0 Gtoe in 1973 to 11.1 Gtoe
in 2004, i.e. by 2 %/a.

Chapter 7
Table 1. World primary energy supply in 20041.
World primary energy supply 2004

%
Oil 34
Coal 25
Gas 21
Nuclear 7
Hydro 2
Renewables 11
Total (11.1 Gtoe) 100
Table 1 illustrates the global primary energy supply in 2004. The following con-
clusions can be drawn:
1. The total primary energy supply in 2004 was 11.1 Gtoe.
2. The share of CO2-emitting fuels, i.e., oil, coal and gas was 80 %.
3. The share of renewable fuels, including hydropower, was 13 %.
4. The share of nuclear power was 7 %.
Primary energy is consumed in the form of heat and electricity, and fuels for
transport. In addition, a significant amount is lost in production processes, for exam-
ple in cooling, transfer and distribution.
Table 2. World total energy consumption in 20041.
World energy consumption 2004

%
Oil 42
Coal 8
Gas 16
Electricity 16
Renewables 14
Others 4
Total (7.6 Gtoe) 100
Table 2 illustrates the global consumption of energy. The difference between

primary supply and consumption consists of losses. The following conclusions can be
drawn:
1. The total energy consumption by end users in 2004 was 7.6 Gtoe.
2. Total losses were 11.1 – 7.6 = 3.5 Gtoe.
3. Losses corresponded to 32 % of the primary energy supply.

Table 3. World electicity generation by fuel in 20041.
World electricity generation by fuel 2004

%
Oil 7
Coal 40
Gas 20
Hydro 16
Nuclear 16
Others 1
Total (17 450 TWh) 100
Table 3 illustrates the shares of different fuels in electricity generation. The fol-
1. The total electricity generation was 17 450 TWh in 2004. This equals
1.5 Gtoe.
2. The share of fossil (CO2-emitting) fuels, i.e., oil, coal and gas was 66 %.
3. The remaining 34 % was divided between hydropower, nuclear power and
various forms of renewable energy.
4. Assuming that the forest industry consumes 400 TWh, its share of the glo-
bal electricity consumption is 2.3 %.
3 Carbon dioxide emissions

In 2004 global CO2 emissions from all fossil fuels totalled 26.6 Gt. During the past
400 000 years, the CO2 concentration in the atmosphere has fluctuated between 200
and 280 ppm. The most recent rise in the CO2 concentration started about 20 000
years ago, rising from about 200 ppm to 260-280 ppm during a period of 5000 years,
after which the concentration level remained stable for almost 15 000 years. However,
during the past 100 years, the CO2 concentration has increased steeply, today
amounting to 383 ppm.
Historically, there has been a strong correlation between global temperature and
the CO2 concentration in the atmosphere. The temperature is believed to have risen in
step with the CO2 level. This is the main argument for the concern that human activity
is causing increased emissions of CO2 into the atmosphere and thus global warming.

Chapter 7
Figure 1. Per capita emissions and population problem2.
Figure 1 illustrates CO2 emissions per capita. The following conclusions can be
drawn:
1. The United States and Canada have the highest CO2 emissions, about
5-5.5 tons of carbon per capita, followed by Russia, Japan and Western
Europe (2-3 tons of carbon per capita).
2. If CO2 emissions were calculated based on emissions per unit of GNP,
Russia and Eastern European countries would have the highest figures, at
about 1.5-2 kg CO2/unit of GNP, compared with 0.5-0.75 kg CO2/unit of
GNP for the United States and Canada.
In other words, it is clear that global warming and climate change is a global
problem requiring a global solution.

4 Kyoto protocol
The Kyoto protocol was adopted in 1997. Its objective is to stabilise the concentration
of greenhouse gases (GHG) at levels that would prevent human-induced interference
with the climate system. The Kyoto protocol entered into force on February 16, 2005.
Today, more than 150 countries have adopted it.
It should be noted that of the major countries in the world, the United States
and Australia have not ratified it.
The Kyoto protocol establishes legally binding limits for GHGs in industrial
countries. These have agreed initially to reduce GHG emissions to a level 5 % below
the 1990 level by 2012. Some countries need to reduce their emissions more, for ex-
ample the EU by 8 %, and some less; for example China has no obligation to reduce
its emissions. The long-term objective is to stabilise the CO2 concentration at a level
lower than 550 ppm.
To mitigate the costs of meeting GHG reduction targets, there are three mecha-
nisms available:
1. Emissions trading (ET)
ET enables parties to trade emission allowances. The aim is to improve the
flexibility and efficiency of cutting emissions. The prices for CO2 allowances
during the EU ET test period since 2005 have varied in the range EUR 2-30/
ton CO2.
2. Clean development mechanism (CDM)
The CDM enables industrialised countries to invest in emission reduction
projects in developing countries and to receive carbon reduction credits in
exchange.
3. Joint implementation (JI)
The same idea as in CDM except that one industrialised country invests in
an emission reduction or sink project in another industrialised country.
The Kyoto mechanisms are available to Kyoto signatories subject to their
own decisions. The EU has implemented an emissions trading scheme
(ETS) covering energy producers as well as certain energy-intensive indus-
tries. Today, the EU ETS covers 46 % of CO2 emissions in the EU.
As a consequence of the Kyoto protocol and ET, the following changes appear
likely:
1. The cost of using fossil fuels will rise because of the introduction of a price
on greenhouse gas emissions.
2. Power prices will be set on the basis of marginal production costs, including
the value of emissions on the market, which will result in increased prices.
3. Wood and recovered paper costs will rise because of competition from the
energy sector.

Chapter 7
5 Electricity consumption of the pulp and paper industry
5.1 Paper
Table 4. Electricity consumption on pulp and paper manufacturing1.
Electricity consumption in pulp and paper manufacturing

MWh/t
1. Pulp
Chemical pulp -0.2
BCTMP CSF 250 1.4-1.5
BCTMP CSF 120 2.5
2. Paper
Newsprint based on TMP 2.7-2.9
Newsprint based on recycled paper 0.6-0.8
SC 2.6-2.8
LWC 2-2.2
Uncoated woodfree 0.5-0.7
Coated woodfree 0.7-0.9
Cartonboard (WLC) 0.8-1
Table 4 illustrates the electricity consumption of modern paper machines and

pulp mills. The following conclusions can be drawn:
1. The electricity consumption is highest in SC papers, at about
2.5-3 MWh/ton of paper.
2. The electricity consumption is lowest in uncoated woodfree papers,
at about 0.6-0.8 MWh/ton of paper.
The technical development of paper machines has resulted in increased pro-

duction capacity due to wider machines and higher running speeds. At the same time,
productivity has improved through labour-saving solutions and greater automation in
the paper mill. On the other hand, efforts to improve the strength and printing proper-
ties of paper have increased the consumption of energy in papermaking. These trends
are expected to continue, so the industry’s electricity consumption is likely to go on
rising.
5.2 Pulp
Based on Table 4, a modern pulp mill generates about 200 kWh of excess electricity
per ton of bleached pulp, assuming that the bleaching chemicals are brought to the
mill from outside. If the bleaching chemicals are produced on site in integrated chemi-
cal plants, the output of excess electricity will be reduced by the electricity consump-
tion to produce these chemicals, amounting to about 100 kWh/ton of pulp.

Because of rising electricity prices and the interest in producing electricity,

chemicals and transport fuels with carbon dioxide-neutral biomass like wood, new
pulp mills are being developed in the direction of integrated wood bio-refineries. The
aim is to increase revenues from kraft pulping – in addition to those from electricity
generation – by extracting hemicelluloses and converting them into value added prod-
ucts such as ethanol, polymers etc. A flow diagram of one possible path of develop-
ment is shown in Figure 2.
Figure 2. Principle flow sheet of bio-refinery process3.
Based on Figure 2, it would be possible, with the same amount of chips (chip
volume 114), to produce either 57 units of pulp with the old process, or, with the new
process, the same amount of pulp in addition to 14 units of hemicellulose to be used
e.g. for ethanol production. In addition, with the new process, the digester load would
decrease from 114 to 100 and the recovery boiler load from 57 to 43 units, which is a
considerable reduction. This would allow increased production in existing pulp mills
or lower investment costs when building new ones, if the required bio-refinery invest-
ment is excluded from the comparison.
The development described above is still in the research phase but expected to
materialise in the next few years because of its great potential economic benefits.

Chapter 7
Sources
1. International Energy Agency, 2006
2. Carbon Trust, 2006

Chapter 8
Structure of the global pulp and paper industry and main suppliers 2005-2006
1 General................................................................................................................................100
2 Technical structure based on production capacity...........................................................104
2.1 Chemical pulp.......................................................................................................................104
2.2 Paper and board...................................................................................................................105
3 Production structure by grade and region .......................................................................110
4 Global paper machine asset quality 2005.........................................................................111
5 Average paper machine size vs. state-of-the-art machine size in North America and
Europe 2005........................................................................................................................112
6 Main suppliers and companies 2005.................................................................................112
6.1 Total paper and board...........................................................................................................112
6.2 Main suppliers by grade........................................................................................................113
7 Changing industrial structure............................................................................................117
7.1 General.................................................................................................................................117
7.2 Major mergers and acquisitions............................................................................................121
7.2.1 Global mergers and acquisitions activity ..............................................................................121
7.2.2 Driving forces for mergers and acquisitions in the pulp and paper industry...........................121
7.2.3 Mergers and acquisitions in the pulp and paper industry......................................................122
8 Characteristics of major pulp and paper industry companies.........................................124
8.1 General.................................................................................................................................124
8.2 Financial Results 1999-2005................................................................................................124
8.3 Investment behaviour and structural changes 1999-2005 . ..................................................126
Sources................................................................................................................................129

Chapter 8
Structure of the global

pulp and paper industry
and main suppliers
2005-2006
A typical feature of the global pulp and paper industry during the past 15 years has been
its consolidation into larger companies. The market share of the top 5 companies in Europe
and North America has exceeded 50 % in most grades. In comparison to most other
industries this is still low.
During the past 10 years, two new types of company have entered the industry, Chinese
companies and private equity companies.
The profitability of the pulp and paper industry in Europe, North America and Japan since
1999 has been low, with ROCE below 10 % in almost all companies. One consequence
of this has been high merger activity with more than 50 companies merged into eight new
entities since 1980.
1 General
The world production of paper and board in 2005 was about 366 million tons and that
of chemical pulp about 126 million tons. These volumes were produced by 7 700 pa-
per machines (excluding small paper machines in China) and 790 pulp mills, equalling
an average paper machine capacity of 45 000 t/a and an average pulp mill capacity of
250 000 t/a. The average capacities of modern pulp and paper mills with good econo-
mies of scale are obviously much higher. The small unit size illustrates the fragmented
character of the world’s pulp and paper industry.
The concentration of an industry is often measured in terms of the market
share of the top five producers (generally called “concentration 5”= C(5)). It is doubtful
whether this number correctly reflects the degree of concentration. There is a big dif-
ference if the two biggest ones have a share of, for example, 70 % and the remaining
three a share of 30%, compared with a situation where all five have 20 %. The market
shares of the two, possibly three, largest companies is likely to illustrate the degree of
concentration better than the “concentration 5” figure. However, as “concentration 5”
is common and widely used, it will also be used in this book.

The degree of concentration in an industry is also measured in terms of the

Herfindahl index. This concept is described in the following:
The Herfindahl index (H-index) was adopted by the US Department of Justice
1984 in the new merger guidelines. The theory behind the use H-index is that if one or
more companies have a high market share, this is of greater concern than the share of
the 4 largest companies. For example, if 5 companies have 20 % market share each,
the H-index is:
5 x (20)2 = 2000
If one company has 40 % market share and the remaining 4 companies 20 %

each, H-index is:
(40)2 + 4 x (20)2 = 3200
As a guideline, a H-index in excess of 2500 in Europe will be considered critical.

Fig 8.1
Revenue of Top 5 companies of global markets

Palladium/Platinum
Cellular phones
Motor vehicles
Aerospace & Defense
Aluminium
Securities
Copper
Cement
Pharmaceuticals
Commercial banks
Paper and board
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
As % of worldwide industry
Figure 1. Industrial concentration1,2.

Chapter 8
According to Figure 1, the top five pulp and paper industry companies in the
world accounted for less than 20 % of the total production in 2004. The correspond-
ing figures for other capital-intensive industries, such as automobiles, steel, and
chemicals, were above 50 %. The largest pulp and paper products company in the
world by production volume, Stora Enso, with an annual capacity of 16.5 million t/a,
accounted for less than 5 % of the total World production in 2005. Although the re-
gional concentration in the pulp and paper industry has increased steadily, as can be
seen in Figure 2, the same trend can also be seen in many other branches of industry.
Accordingly, the difference in concentration between the pulp and paper industry and
other industrial sectors has not decreased noticeably.
From Figure 2 it can be seen that in 2005 the concentration, measured in terms
of the market share of the top five companies, was highest in North America (almost
40%), followed by Western Europe (36 %).
C(5) %
60
1997
2005
40
20
0
North America Western Europe Asia Latin America World
C(5) = combined share of top five firms
Figure 2. Paper industry concentration 1997 and 20053.
Table1. Degree of concentration by grade in Europe and North America 20053,4.
Europe, % North America, %

Newsprint 65 70
SC 80 70
LWC 75 70
Uncoated woodfree 50 80
Coated woodfree 70 85
Containerboard 35 60
Cartonboard 50 60

Table 1 shows the concentration by grade in North America and Europe. It

clearly indicates that in almost all grades the top five companies have a market share
exceeding 50 % – in some grades 70-80%. The conclusion is that the pulp and paper
industry is regional (with global trade flows, as described in Chapter 3), as the con-
centration level globally is low but on regional/continental level fairly high. A further
conclusion might be that the top 5 must expand outside their home region, as the
concentration level will otherwise become too high locally (e.g. in Europe).
During the past 10 years particularly Asian, most notably Chinese companies,
have expanded rapidly. Examples of these include Asia Pulp and Paper Company
(capacity in 2005 7.2 million t/a), Nine Dragons Paper Industries (capacity in 2005 3.2
million t/a) and Shandong Chenming (capacity in 2005 2.5 million t/a).
A new aspect influencing the future structure of the pulp and paper industry
is the emergence of private equity companies who have acquired old companies or
individual mills. The first case was the acquisition of Riverwood paper company in the
United States in 1995 by Clayton, Dubilier&Rice. Other examples are:
Acquirer: Company Acquired:

CVC&Cinven Kappa Packaging
CVC Lecta
Madison&Dearborn Packaging Corporation of America
Madison&Dearborn Jefferson Smurfit
Madison&Dearborn Boise Cascade
Cerberus Mead Westvaco magazine papers
Apollo International Paper magazine papers
Figure 3 illustrates the turbulence in the ownership of the twenty largest pulp
and paper companies in the world since 1990. It can be noted that out of the ten
biggest companies in 1990 only three remain in 2005 under the same name, i.e.,
International Paper, Georgia Pacific and Weyerhaeuser. Another observation is that
the total capacity of the ten biggest companies increased from 45 million t/a in 1990
to 100 million t/a in 2005, equalling a growth rate of 5.5 %/a, i.e., more than twice the
global consumption growth rate.

Chapter 8
Industry Top 10 in 1990 Industry Top 10 in 2005
International Paper Stora Enso
Stone Container International Paper
Georgia-Pacific UPM-Kymmene
Jefferson Smurfit Georgia-Pacific
Champion International Oji
Weyerhaeuser Weyerhaeuser
Scott Paper Company Nippon Unipac
Stora Smurfit-Stone
James River Abitibi-Consolidated
Daishowa APP
0 2000 4000 6000 8000 10000 0 4000 8000 12000 16000 20000
1000 t/a 1000 t/a
Figure 3. Paper industry concentration 1990 and 20053.
Based on Figures 1-3 and Table 1 it can be concluded that the pulp and paper
industry is globally fragmented, lacks leadership and has experienced considerable
turbulence in the ownership of the top 10 companies during the past 15 years.
2 Technical structure based on production capacity
2.1 Chemical pulp

In 2005, the world production of chemical pulp amounted to about 126 million t/a,
produced by 789 pulp mills. Table 2 shows the capacity structure by region.
Table 2. Chemical wood pulp capacity structure by region in 2006 3,4.
Capacity NC RWE NA LA Asia World

1000 t/a Total*
Mills % cap Mills % cap Mills % cap Mills % cap Mills % cap Mills % cap
>500 26 55 8 14 47 39 12 59 24 48 129 44
101-500 44 41 52 76 165 59 26 32 66 42 392 51
51-100 9 2 14 7 13 1 13 5 27 6 95 4
26-50 8 1 7 2 8 13 2 26 3 85 2
0-25 2 11 1 2 26 1 30 1 88 1
Total 89 100 92 100 235 100 90 173 100 789 100
Total capacity 22.1 9.1 58.5 6.4 23 192.8
World Total includes other regions as well
NC = Nordic countries
RWE= Rest of Western Europe
NA = North America
LA = Latin America

The data in the table warrant the following conclusions:

1. The 129 largest pulp mills account for close to 50 % of the total global pro-
duction.
2. The capacity structure is most efficient in the Nordic countries and Latin
America, where mills with a capacity over 500 000 t/a account for more than
55 % and 59 %, respectively, of the total capacity. In the Nordic countries
there are 26 mills of this size, in Latin America 12.
3. The capacity structure appears to be weakest in the rest of Western Europe,
where 32 mills with a capacity below 100 000 t/a account for 10 % of the
total capacity.
2.2 Paper and board

Tables 3-8 show the capacity structure for newsprint, mechanical printing papers, un-
coated and coated woodfree papers, and containerboard by mill and machine. Table 3
presents a global summary.
Table 3. Global paper machine capacity structure 20063,4.
Papermachines 1 000 t/a Number of PM:s Total Capacity kt/a Share (%)
>500 13 7 640 2
401-500 27 11 985 3
301-400 97 34 493 9
201-300 312 77 497 21
101-200 677 100 514 27
51-100 865 63 647 17
26-50 1 052 32 294 10
0-25 4 654 41 196 11
Total
Capacity (milt/a) 7 697 376 266 100

Chapter 8
Table 4. Newsprint capacity structure 20063,4.
NC RWE NA LA Asia World*

Paper machines Number Capacity Number Capacity Number Capacity Number Capacity Number Capacity Number Capacity
1 000 t/a of PM:s (%) of PM:s (%) of PM:s (%) of PM:s (%) of PM:s (%) of PM:s (%)
>500 1 3 1 1
401-500 1 2 3 9 8 7
301-400 4 20 26 47 12 21 66 36
201-300 15 72 11 43 39 43 6 76 43 44 134 43
101-200 9 28 14 28 12 8 3 20 24 12 55 9
51-100 8 8 1 5 28 8 40 3
26-50 1 3 1 1 44 4 50 1
0-25
Total 25 100 40 100 78 100 11 100 155 100 354 100
Capacity 4.5 7 12.9 1 13.1 708 37.6
(milt/a)
* World includes others
RWE = Rest of Western Europe
NA = North America
LA=Latin America
Table 5. Mechanical printing papers capacity structure 20063,4.

>500
401-500 1 5 1 1
301-400 6 23 3 12 1 4 1 9 11 11
201-300 18 40 15 43 16 33 1 71 2 4 52 34
101-200 20 30 22 32 36 43 2 17 14 28 99 34
51-100 3 3 16 11 26 18 1 7 27 47 77 16
26-50 1 7 2 6 2 12 9 30 3
0-25 6 1 2 4 5 17 4 43 1
Total 49 100 69 100 87 100 8 100 73 100 313 100
Capacity (milt/a) 9.1 9.2 11 0.3 4.1 34.1
NA = North America
LA=Latin America

Table 6. Coated woodfree papers capacity structure 20063,4.

>500 1 26 2 15 2 11 5 11
401-500 2 42 1 4 3 5
301-400 1 5 2 14 1 2 4 5
201-300 10 27 6 33 1 17 12 24 29 24
101-200 3 21 26 42 16 43 1 17 35 37 81 38
51-100 1 3 12 10 8 8 6 53 30 15 61 13
26-50 3 6 4 1 3 2 3 13 16 4 29 3
0-25 1 1 1 1 1 49 3 52 1
Total 11 100 56 100 35 100 12 100 146 100 264 100
Capacity (milt/a) 21.1 8 4.5 0.6 11.6 27
NA = North America
LA=Latin America
Table 7. Uncoated woodfree papers capacity structure 20063,4.

>500 1 1 1
401-500 1 8 2 5 3 3
301-400 1 15 2 12 9 26 4 7 16 12
201-300 7 66 5 17 13 28 2 11 8 6 39 19
101-200 2 14 12 29 19 24 13 48 25 16 82 24
51-100 2 4 18 18 29 16 15 22 46 17 119 16
26-50 23 11 15 4 10 9 100 19 164 12
0-25 3 2 22 5 8 1 35 10 677 29 827 15
Total 15 100 84 100 93 100 75 100 862 100 1 251 100
Capacity (milt/a) 2.6 5.9 11.5 3.2 17.4 45.1
NA = North America
LA=Latin America

Chapter 8
Table 8. Containerboard capacity structure 20063,4.

>500 1 3 6 10 7 3
401-500 2 13 1 2 9 12 3 3 15 5
301-400 5 41 9 16 29 31 10 9 54 17
201-300 4 28 24 27 28 20 4 14 26 16 93 20
101-200 2 8 33 22 47 22 9 18 95 36 215 28
51-100 4 10 56 20 18 4 30 28 95 18 238 15
26-50 1 41 7 7 1 47 23 98 9 222 7
0-25 63 4 4 112 17 401 9 654 6
Total 18 100 228 100 148 100 202 100 728 100 1 498 100
Capacity (milt/a) 3.4 20.6 32.8 6.9 40.3 114,1
NA = North America
LA=Latin America
The data in Tables 3-8 lead to the following conclusions:

1. Of a total of almost 7 700 paper machines, about 5 700 have a capacity of
50 000 t/a, or less. These small machines account for 21 % of the world
capacity.
2. There are 449 machines with capacity over 200 000 t/a, accounting for
35 % of the world capacity.
3. In uncoated woodfree papers, a total of 1 110 machines with a capacity of
100 000 t/a, or less account for 43 % of the total capacity, which means
the smallest machines are found in this sector. Part of these machines most
likely make specialities and do not compete in bulk woodfree grades.
4. In containerboard, a total of 76 machines with a capacity over 300 000 t/a
account for 25 % of the capacity. In other words, the largest machines are
found in this sector.
An analysis by grade and region in 2006 is presented in the following:

1. Newsprint
According to Table 4, the capacity structure is strongest in the Nordic coun-
tries and the rest of Western Europe, where machines with a capacity over
200 000 t/a account for 72 % and 63 %, respectively, of the total regional
newsprint capacity. In the Nordic countries, there are 15 machines of this
size, in the rest of Western Europe also 15. In Asia, 72 machines with a ca-
pacity of less than 50 000 t/a account for 12 % of the region’s capacity.

2. Mechanical printing papers

According to Table 5, the capacity structure is strongest in the Nordic
countries, where machines with a capacity over 200 000 t/a (25 machines)
account for 68 % of the region’s capacity. Machines with a capacity of less
than 100 000 t/a (4 machines) account for only 3 % of the capacity. The
structure is clearly weaker in North America, where machines with capac-
ity over 200 000 t/a (17 machines) account for 37 %, and machines below
100 000 t/a (34 machines) for 20 % of the region’s capacity.
3. Coated woodfree papers

According to Table 6, the capacity structure is strongest in the Nordic coun-
tries, where machines with a capacity of more than 400 000 t/a (3 machines)
account for 66 % of the region’s capacity, and machines below 100 000 t/a
(5 machines) for only 10 % of the capacity.
North America and the rest of Western Europe have a rather similar capacity
structure. In Latin America only one machine has a capacity over 200 000 t/a,
whereas machines below 100 000 t/a (10 machines) account for 67 % of the
capacity.
4. Uncoated woodfree papers

According to Table 7, the capacity structure is clearly strongest in the
Nordic countries, where machines with a capacity over 200 000 t/a (8 ma-
chines) account for 81 % of the region’s capacity, and machines below
100 000 t/a (5 machines) for only 6 % of the capacity. In the rest of Western
Europe, there are a few large machines, but machines with a capacity below
100 000 t/a (63 machines) still account for 34 % of the capacity. In North
America, machines with a capacity below 100 000 t/a (52 machines) ac-
count for 21 % of the capacity. Many of the small machines in Europe and
North America make specialities rather than bulk woodfree papers.
It is noteworthy that in Latin America there are only two machines with capacity
over 200 000 t/a, accounting for 11 % of the capacity, but 60 machines below
100 000 t/a, accounting for 41 % of the capacity. Considering the fact that Latin
America has big and efficient pulp mills, as shown in Table 2, from a technical
viewpoint there would seem to be a good opportunities for expansion.
5. Containerboard
According to Table 8, the capacity structure is strongest in North America
and the Nordic countries, where machines with a capacity over 200 000 t/a
account for 73 % and 82 %, respectively, of the regional capacity. It is also
worth noting that North America is a large producer of containerboard, with
an annual output of 33 million tons. In Latin America and Asia, there are a
lot of small containerboard machines, 189 and 594 respectively, with capac-
ity of less than 100 000 t/a. These are in most cases serving local markets,
using recovered paper as raw material.

Chapter 8
3 Production structure by grade and region

Table 9 shows the regional production of paper and board in 1990 and 2004, and
Table 10 the production by grade.
Table 9. World regional production of paper 1990 and 20043,4.
1990 2004 Growth

mill.t mill.t 1990-2004
North America 88.7 104.4 15.7
Western Europe 61.9 94.6 32.7
Eastern Europe incl. CIS 15.7 14.4 -1.3
Middle East 1.5 3.3 1.8
Japan 28.1 30.9 2.8
China 13.8 49.7 35.9
Asia excl. Japan & China 13.8 37 23.2
Latin America 10.7 17 6.3
Africa 2.8 3.9 1.1
Oceania 2.8 3,9 1.1
Total 239.6 359.1 119.3
Table 10. World production by grade 1990 and 20043,4.
1990 2004 %
mill.t mill.t
Newsprint 33 39.2 10.9
Printing and writing papers 69.8 110.9 30.9
Industrial papers 136.8 209 58.2
Total 239.6 359.1 100
The following conclusions can be drawn from the data in the tables:
1. The total production increased from 240 million tons in 1990 to 359 million
tons in 2004, i.e. by 119 million tons.
2. Industrial paper and board accounted for most of the total production in
2004, i.e. for 209 million tons, or 58 %.
3. The biggest growth regions were China, Western Europe and Asia, with
production growth of 36, 33 and 23 million tons, respectively, in the period
1990-2004.
4. In 1990, North America and Western Europe accounted for 63 % of world
production, by 2004 their share had declined to 55 %.

4 Global paper machine asset quality 2005

In Section 2 a global comparison was presented based on the production capacity. A
complementary way to make a comparison between mills and machines is to use the
concept of asset quality. Asset quality includes, in addition to the size of the pulp mill
or paper machine, its technical age. The technical age takes into account the start-
up year (= physical age) as well as modernisations/rebuilds and their size carried out
since the start-up. For example, the technical age of a 20-year-old paper machine that
has recently undergone a large modernisation may have been reduced from 20 years
to perhaps 10 years. In this example, the technical age of the rebuilt machine means
that the paper machine, from a technical viewpoint, is as old or as modern as a 10-
year-old machine that has not been rebuilt.
Establishing the asset quality of a paper machine requires detailed knowledge
of its technical status (capacity, width, speed, technical design, descriptions and tim-
ing of any modernisations etc). Asset quality is often used to describe the effect of a
contemplated modernisation plan on a pulp mill or paper machine rebuild.
Total capacity 367 million tons

Weighted average PM capacity, 1 000 t/a 2005 Split by region 2005
300
North America
250 North America Western

Nordic Europe
Countries
200 China *)
China
Western Japan
Europe Weighted average
150 capacity 165 000 t/a
Japan
Nordic
Africa Countries
Other
100 Eastern
Europe Latin America
Graphic
Latin Eastern
50 America Europe Packaging
Weighted average Other Tissue
0
30 25 20 15 10 5 0 0 20 40 60 80 100 120
Technical age, years Capacity, million t/a
*) China data include identified, industrial scale machines only
Figure 4. Global paper machine asset quality comparison 20053.
Based on Figure 4, the following conclusions can be drawn:

1. Globally, the weighted average size of paper machines in 2005 was
165 000 t/a, and their weighted average technical age 18 years.
2. The machines with the lowest technical age (=most modern) were found
in China (approximately 10 years), followed by the Nordic countries (14-15
years) and Western Europe (16-17 years).
3. The machines with the highest technical age were found in Japan (22-23
years), eastern Europe and North America (21-22 years)

Chapter 8
5 Average paper machine size vs. state-of-the-art machine size in North America and
Europe 2005
Table 11. State of the art PM capacity vs. average PM size in North America and
Western Europe 20053,4.
State of the art Average PM capacity, t/a

PM capacity, t/a North America Western Europe
Newsprint 400 000 170 000 190 000
SC 420 000 110 000 150 000
LWC 400 000 150 000 190 000
Uncoated woodfree 400 000 85 000 45 000
Coated woodfree 500 000 140 000 130 000
Tissue 70 000 35 000 25 000
Sack paper - 140 000 75 000
Containerboard 600 000 225 000 100 000
Cartonboard 300 000 110 000 70 000

There is a significant gap between the capacity of modern, state-of-the-art
paper machines and average paper machine capacity in all grades, both in North
America and in Western Europe. This indicates that there is unused potential in econo-
mies of scale, if new capacity is being considered.
6 Main suppliers and companies 2005
6.1 Total paper and board

Figure 5 shows the 10 largest paper companies by production volume in 2005.
Stora Enso
International Paper
UPM
Georgia-Pacific
Oji
Weyerhaeuser
North America
Nippon Paper
Western Europe
Smurfit-Stone Eastern Europe

Latin America
Abitibi-Consolidated Asia
Asia Pulp & Paper Rest of the World
0 2000 4000 6000 8000 10000 12000 14000 16000 18000

Capacity, 1000 t/a
Figure 5. Leading paper companies in the World 20053.

As shown in Figure 5, the five largest suppliers are Stora Enso, International
Paper, UPM, Georgia Pacific and Oji. They have a combined capacity of 63 million t/a,
equalling a global market share of 17-18 %. As noted in Section 1, this figure is low in
comparison with other capital-intensive industries, indicating a low degree of concen-
tration and a lack of leadership.
6.2 Main suppliers by grade

Figures 6-13 show the 10 leading producers by grade. Table 12 shows the develop-
ment of global concentration in 1990-2005 by grade, including the market shares of
the top 5 producers.
Abitibi-Consolidated 1)
Norske Skog 1)
The global ranking

Stora Enso will change after
Norske Skog’s
Bowater full ownership in
PanAsia takes effect.
UPM
Nippon Paper
North America
Oji
Western Europe
Norske Skog Canada 2) Eastern Europe
Latin America
Kruger
Asia
Holmen Rest of the World
0 1000 2000 3000 4000 5000

Capacity, 1000 t/a
1) PanAsia included in Abitibi-Consolidated’s and Norske Skog’s capacity on a 50/50 basis.
Approval process for Norske Skog’s takeover of PanAsia.
2) Norske Skog owns 29.4% of Norske Skog Canada
Figure 6. Leading producers of newsprint 20053.
UPM
Stora Enso
Abitibi-Consolidated 1) Capacities will change

after Norske Skog’s
full ownership in
Myllykoski Corporation PanAsia takes effect
Norske Skog 1)
Holmen
North America
Bowater
Western Europe
SCA Eastern Europe
Latin America
Nippon Paper Group, Inc.
Asia
Irving Pulp & Paper Ltd. Rest of the World
0 500 1000 1500 2000 2500

Capacity, 1000 t/a
1) PanAsiaincluded in Abitibi-Consolidated and Norske Skog capacity on a 50/50 basis.
Approval process for Norske Skog’s takeover of PanAsia.
Figure 7. Leading producers of uncoated mechanical paper 20053.

Chapter 8
UPM
Stora Enso
Burgo Corporation
M-real
International Paper
Myllykoski Corporation
North America
Norske Skog
Western Europe
NewPage Corp. Eastern Europe

Latin America
Bowater
Asia
Oji Rest of the World
0 500 1000 1500 2000 2500 3000 3500 4000

Capacity, 1000 t/a
Figure 8. Leading producers of coated mechanical paper 20053.
International Paper
Weyerhaeuser
Domtar
Mondi
Asia Pulp & Paper
Stora Enso
North America
Nippon Paper Western Europe
Eastern Europe
UPM
Latin America
M-real Asia
Rest of the World
Boise Cascade
0 1000 2000 3000 4000 5000 6000

Capacity, 1000 t/a
Figure 9. Leading producers of uncoated woodfree paper 20053.

Sappi Limited
Stora Enso
Asia Pulp & Paper Co. Ltd.
UPM
M-real
Oji
North America
Lecta Group
Western Europe
Burgo Corporation Eastern Europe

Latin America
NewPage Corp. Asia
Nippon Paper Group, Inc. Rest of the World
0 500 1000 1500 2000 2500 3000 3500

Capacity, 1000 t/a
Figure 10. Leading producers of coated woodfree paper 20053.
Kimberly-Clark
Georgia-Pacific
SCA
Procter & Gamble
Kruger
Cascades
North America
Metsä Tissue Western Europe
Eastern Europe
Sofidel
Latin America
Tronchetti Asia
Rest of the World
Kartogroup
0 500 1000 1500 2000 2500 3000 3500 4000 4500

Capacity, 1000 t/a
Figure 11. Leading producers of tissue paper 20053.

Chapter 8
Smurfit-Stone
Weyerhaeuser
International Paper
Jefferson Smurfit
Georgia-Pacific
Temple-Inland
North America
Oji
Western Europe
SCA Eastern Europe
Latin America
Nine Dragons
Asia
Kappa Packaging Rest of the World
0 1000 2000 3000 4000 5000 6000 7000 8000

Capacity, 1000 t/a
Figure 12. Leading producers of containerboard 20053.
MeadWestvaco
Stora Enso
International Paper
Graphic Packaging
Mayr Melnhof
Rock Tenn
North America
Kappa Packaging
Western Europe
Reno De Medici Eastern Europe
Latin America
Cascades
Asia
APP*) Rest of the World
0 500 1000 1500 2000 2500 3000

Capacity, 1000 t/a
*) APP capacity excludes Ningbo APP (APP’s minority holding)
Figure 13. Leading producers of cartonboard 20053.

Table 12. Industry concentration – top 5 global market shares1990 and 20053,4.
1990 2005
% %
Newsprint 25 42
Uncoated mechanicals 42 55
Coated mechanicals 38 54
Uncoated woodfree 20 28
Coated woodfree 29 40
Tissue 45 50
Sack paper 28 30
Containerboard 20 20
Cartonboard 18 25
The following conclusions can be drawn from the data in the tables:
1. The market shares of the top 5 producers have increased in all grades be-
tween 1990 and 2005.
2. The concentration level is highest in tissue (50 %), coated mechanical pa-
pers (54 %) and uncoated mechanical papers (55 %).
3. The concentration level is lowest in containerboard (20 %), cartonboard
(25 %) and uncoated woodfree papers (28 %).
Based on Table 12 it is evident that, measured by the top 5 producers’ global

market shares by grade, the concentration (i.e. 50-55 %) is significantly higher than
the paper industry average, which is below 20 %. As seen in Figure 1, 50 % is not low
in comparison to other industries. This leads to the conclusion that the poor financial
performance of the pulp and paper industry is caused by other reasons than the level
of concentration alone.
7 Changing industrial structure
7.1 General
The pulp and paper industry has undergone significant structural changes during the
past two decades, and the pace of change seems to be increasing. The main reasons
for these changes are:
1. Low profitability
2. Fragmentation
3. New entrants
4. Ownership structure and subsidies

Chapter 8
These factors are analysed and explained in the following:

1. Table 13 shows the profitability measured in terms of return on capital em-
ployed (ROCE) of selected pulp and paper industry companies. Assuming
that the cost of capital for all companies has been 6-8 %, it is clear that only
Holmen has been able to create value for shareholders during 2000-2005.
Worse, most companies show a declining ROCE trend based on 2005 fig-
ures.
2. This disappointing development has put increasing pressure on companies
and their management to improve their performance.
Table 13. ROCE development for certain companies 1990—20054.
1999 2005
% %
International Paper 3.6 5.8
Norske Skog 6.3 2.3
StoraEnso 5.7 negative
UPM 7.3 2.5
Sappi 7.5 negative
Holmen 10.3 8.4
Mondi 7.4 7
3. Based on Figure 1, it is evident that the pulp and paper industry is globally
fragmented. Fragmentation (=leading producers have low market shares)
results in cut-throat competition, excess capacity being built on short-term
and unrealistic expectations and consequently low product prices and low
profitability. This appears to be true despite the higher degree of concentra-
tion by grade shown in Table 12.
4. During the past 10 years, totally new players have entered the market. Most
notably these are Chinese companies that have built modern production
capacity at an astonishing speed. In addition, private equity investors have
increasingly acquired existing companies or individual mills, as explained in
Section 1.
5. As a result of the Chinese expansion, the Asian market is now characterised
by a balanced demand/supply situation or even excess supply, having been
a significant importing area for a long time. This has further tightened the
competition in the traditional markets, Europe and North America, whose
exports to Asia have declined.
6. A characteristic feature of the Western European ownership structure is the
existence of family- or privately owned large companies. According to cur-
rent estimates, nine out of the 20 largest companies belong to this category.
In particular, the privately owned companies do not necessarily have as high

profitability requirements as publicly listed companies. This easily leads to

disturbances in the markets.
7. Another disturbing factor are public subsidies, for example to new projects.
These have been particularly evident in the former eastern-block countries.
The subsidies create overcapacity, which leads to unhealthy price develop-
ment and consequently lower profitability for all.
In order to combat the above-mentioned negative developments, the industry in

Europe and North America has taken the following steps:
1. Decreasing capital expenditure, so less new capacity is built.
2. Shutting down old capacity
3. Initiating cost-saving programmes
4. Consolidating the industry
As Figure 14 clearly shows, capital expenditure in Europe has declined from

11 % of sales in 1980-1990 to 9 % of sales in 1991-1997 and further to 6 % of sales
in 1998-2005. As a result, less new production capacity has been built. This in turn
should improve the demand/supply balance gradually.
Fig 8.14
“Decade of Growth” “Transition “Fight Against

Period” Overcapacity ”
As percent of sales ROCE
20% 20%
Capex to sales
18% 18%
ROCE
16% EBIT margin 16%
14% 14%
12% 12%
10% 10%
8% 8%
6% 6%
4% 4%
2% 2%
0% 0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Figure 14. Capital expenditure 1980-20044.
According to Figure 15, the industry in North America and Europe shut down a
significant amount of capacity in the period 1999-2004; in North America 334 ma-
chines (17 million t/a) and in Europe 423 machines (8 million t/a). New capacity has
been built mainly in China, (182 machines with a capacity of 15 million t/a) and in
Europe (87 machines with a capacity of 9 million t/a).

Chapter 8
[1000 tonnes]
20000
15000
10000
5000
22 182
35* 87 107 Shut Down Paper Machines
0 New Paper Machines
North America Latin America Europe China Rest of the world
-5000 334 84
376
221
-10000 423
-15000
-20000
*Number of New Paper Machines and Shut-down Machines
Figure 15. Closures and new paper machines 1999-20044.
Table 14 lists profitability improvement programmes initiated by certain compa-

nies to improve their financial performance. Some of these have been rather dramatic,
involving workforce reductions of up to 25 % without lowering the production.
Table 14. Profitability improvement programmes by certain large companies4.
Company Programme Timing Profit enhancement, Workforce

% of revenues reduction, %
Norske Skog 3 programmes 2000-2004 >10% 10-15
Stora Enso North America 2000-2005 >10% 25
International Paper several programmes 1997-2005 5-10% 15-20
M-real 2 programmes 2002-2006 5-10% 5-10*
UPM 2 programmes 1999-2005 2-5% not announced
Stora Enso Profit 2007 2005-2007 3% 7
SCA 2 programmes 2004-2008 2-5% 5-10
* reductions of 2nd programme not announced
As illustrated in Figure 2, the degree of consolidation, as represented by the

top 5 companies in the World, increased from 11 % to 17 % during the period 1997-
2005. The degree of consolidation is highest in North America with 40 %, followed by
Europe with 37 %. The consolidation process has been a result of a number of merg-
ers and acquisitions, which have changed the structure of the industry significantly.

7.2 Major mergers and acquisitions
7.2.1 Global mergers and acquisitions activity

Global mergers and acquisitions activity in all industries has increased globally since
2003 at a strong pace (Table 15) The total value of these deals in 2006 is estimated at
USD 3 200 billon. The main reason for this has been the desire to achieve economies
of scale across industries and regions, in combination with record fund-raising by
major private equity firms. One key driver has been the low cost of financing. A strik-
ing feature is the presence of private equity in five out of the ten largest mergers and
acquisitions deals in 2006.
Table 15. Global M&A activity 2003—20061.
2003 2004 2005 2006 estimate

Number of deals above 0,5 milj. USD 466 608 846 1 300
Total value bilj. USD 1 368 1 884 2 703 3 160
Avgerage per deal bilj. USD 2.9 3.1 3.2 2.4
The above development is likely to continue to have a strong impact on pulp

and paper industry mergers and acquisitions activity.
7.2.2 Driving forces for mergers and acquisitions in the pulp and paper industry
The most important driving forces for mergers and acquisitions are described briefly in
the following:
1. The desire to increase size and market share quickly without adding new
capacity. An additional factor has been the need to launch complementary
products to expand the existing product portfolio.
2. The desire to achieve synergies through economies of scale. Based on in-
formation on published mergers and acquisitions since 1995, synergies, as
expressed as a percentage of combined sales, have been between 1 and
6 %, the average being 2-3 %. Although some of these figures have been
inflated by over-optimism, capitalised synergy benefits can be significant.
For example 2 % capitalised synergy benefits for a deal involving combined
sales of EUR 5 billion equal EUR 0.5 billion.
3. The growing importance of recycled fibre as a raw material, especially for
newsprint. Recycled fibre is not only ecologically feasible but also cost-
competitive. Scandinavian producers have limited access to this raw
material domestically, so acquisition of Continental European companies
in densely populated regions has been a good way to gain access to this
resource.
4. The concentration of the customer base – particularly in newsprint and
magazine publishing – has caused buyers to grow enormously. International

Chapter 8
publishers want to buy large amounts of paper from a limited number of

suppliers. In addition, ensuring reliability of supplies is vital. Only large sup-
pliers with production in different countries can achieve this. The need to
supply large amounts of publication papers from different locations has fur-
ther promoted mergers and acquisitions in the paper industry.
5. The capability and interest of private equity investors to acquire pulp and
paper industry companies or individual mills, particularly during the past five
years. This capability has been strengthened by easy access to low-cost
capital.
7.2.3 Mergers and acquisitions in the pulp and paper industry

Based on Table 16, more than 50 companies in Europe and North America have been
consolidated into eight large entities.
Table 16. Consolidation of leading paper companies in Europe and North America
since 19904.
Europe
M-Real Norske Skog StoraEnso UPM
MD papier Papeteries de Golbey Tampella Chapelle Darblay
Kyro Bruck Veitsiluoto Rauma-Repola
Biberist Roto Holtzman Kymmene
UK Paper A/S Unioin Stora Blandin
SCA fine papers Klabin newsprint Feldmuhle Repap Enterprises
Holmen fine papers Fletcher Consolidated Papers Haindl (certain mills)
Zanders Pacifica Pentair
Haindl (certain mills) Niagara Wisconsin
Repap USA
North America
Abitibi Georgia- Pacific International Paper Weyerhaeuser
Stone Container Great Northern Nekoosa Aussedat Ray Dryden Mill
Consolidated Bathurst Domtar Gypsum Units Zanders MacMillan Bloedel
Rainy River Wisconsin Tissue Kwidzyn TJ International
Donahue Unisource Carter Holt Willamette Industries
Quono James River Federal Paper Board
Champion Newsprint Fort Howard Union Camp
Bowater Champion International
Shorewood Packaging

Nordic countries
At the beginning of the 1980s, there were more than 20 independent pulp
and paper industry companies in Finland. As a first step, four major com-
panies were formed through mergers, i.e., Enso (later Stora Enso), UPM-
Kymmene (later UPM), Metsä-Serla (later M-Real) and Myllykoski.
In Sweden, the development was similar to that in Finland. Through a
number of transactions, six major companies were formed: Stora, SCA,
MoDo, Holmen, Södra and Assi. Later on, MoDo and Assi were merged with
the remaining Swedish companies.
In Norway, practically all local companies were merged into Norske Skog by
the mid-1990s.
In the early 1990s, the above companies started to expand outside
Scandinavia. Stora acquired Felmuhle in Germany and Kymmene Chapelle
Darblay in France. Enso acquired Holtzman in Germany, while Metsä-Serla
acquired MD Papier in Germany and Biberist in Switzerland.
In the late 1990s and early 2000s, a number of significant transactions
reshaped the Nordic companies significantly. The first one was the merger
between Stora and Enso in 1998, followed by Stora Enso’s acquisition of
Consolidated Papers in 2000. Soon thereafter, UPM acquired Haindl togeth-
er with Norske Skog, and then M-Real acquired the fine paper units of SCA
and Holmen (previously MoDo assets).
As a result of the above transactions, the Nordic pulp and paper industry is
today consolidated into a few large companies which are world leaders in
their respective areas.
Continental Europe
In the late 1980s and early 1990s, there were several Western European
companies predominantly focusing on serving their domestic markets.
Examples include Arjomari, Wiggins Teape, KNP, Leykam, Cellulose des
Ardennes, Cellulose du Pin, Kappa and Burgo. Today, only Burgo remains
as an independent company. All others have been acquired either by com-
panies outside Continental Europe or by private equity companies.
North America
There has also been a lot of mergers and acquisitions activity in North
America during the past 10-15 years. IP, Abitibi, Georgia-Pacific and
Weyerhaeuser have been particularly active, as shown in Table 16.
It is interesting to note that IP, which until a few years ago was the largest
paper company in the World, in July 2005 announced a change of strategy.
It decided to spin off its magazine paper and liquid board assets, focusing
on uncoated woodfree papers, containerboard and packaging.
In 2006, Weyerhaeuser decided to divest its uncoated woofree paper assets
to a new entity owned by Weyerhaeuaser and Domtar.
In 2007 Bowater and Abitibi agreed to merge their newsprint operations.

Chapter 8
8 Characteristics of major pulp and paper industry companies
8.1 General
Table 17 shows the 15 largest pulp and paper industry companies in the Nordic coun-
tries (Finland and Sweden), the United States, Canada and Japan in 2005. The three
largest ones are StoraEnso (16.5 million t/a), International Paper (15.0 million t/a) and
UPM (12.3 million t/a).
Table 17. Global pulp and paper industry companies 2005.
Finland Sweden USA Canada Japan

M-Real Holmen Georgia Pacific Abitibi Oji
StoraEnso SCA International Paper Domtar Nippon
UPM Södra Mead Westvaco
Smurfit Stone
Weyerhaeuser
All of the top 15 companies have actively participated in mergers and acquisi-
tions during the past 10 years, as can be seen in Table 16.
8.2 Financial Results 1999-2005

Table 18 summarises the financial results in 1999-2005 of the companies listed in
Table 17 by country.
Table 18. Financial results of top global pulp and paper industry companies 1999-
20051,2.
Finland Sweden USA Canada Japan

EBITDA/Sales (%) 16 16 12 12 12
EBIT/Sales (%) 6 8 4 3 5
ROCE (%) 3.5 10.4 5.3 4.4 4.4
Capex/Sales (%) 7 8 4.3 5 6
Capex/Depreciation (%) 73 104 69 60 87
Asset Turnover 0.98 1.1 1.09 0.86 0.93
Note: EBIT and ROCE figures include write downs
The following comments can be made:

1. Sweden had by far the most profitable companies, with return on capital
employed (ROCE) above 10 %. In all other countries the profitability meas-
ured by ROCE was only 3-5 %.
2. Cash-flow measured by earnings before interest, taxes, depreciation and
amortisation (EBITDA) was highest in Finland at 18 %, followed by Sweden
and the United States with 16 %, and Canada and Japan with 12 %.

3. Earnings before interest and taxes (EBIT) were highest in Sweden at 8 %,

followed by Finland and the United States with 6 %, Japan with 5 % and
Canada with 3 %.
4. In terms of capex/depreciation or capex/sales, Swedish companies had the
highest figures, i.e., these companies had invested relatively most. Canada
had the lowest figures, i.e., the lowest investment rate.
5. Asset turnover was highest in Sweden and the United States (1.1), followed
by Finland (0.98), Japan (0.93) and Canada (0.86).
The above comments are briefly explained in the following:

1. Finnish and US companies made significant write-downs in 1999-2005,
causing their EBIT and ROCE figures to decline. In Finland, write-downs
totalled EUR 1.6 billion, in the United States USD 4.3 billion. These fig-
ures obviously have a big impact on financial results, with the exception of
EBITDA figures, which by definition remain unaffected. This explains the
high EBITDA figures in both Finland and the United States compared with
EBIT.
2. In Canada write-downs totalled CAD 0.2 billion. In Sweden and Japan there
were no write-downs.
3. When comparing the figures in Table 18, the different product structures
of the companies should be taken into account. For example International
Paper has a big merchant operation, which typically has low EBITDA and
EBIT figures, but high asset turnover (3-5). Half of Weyerhaeuser’s sales
comes from mechanical wood processing (sawmills and panel industry,
including merchant business), which typically has lower EBIT and capex
as well as capital employed requirements but higher asset turnover. These
facts should be taken into account in making comparisons between individ-
ual companies.
In addition to the above, the following general conclusions can be drawn based
on Table 18:
1. Sweden has had the most successful companies, with highest ROCE and
no write-downs. In addition, Swedish companies have maintained a high in-
vestment rate, indicating high asset quality and thus good competitiveness
in the future. On top of this, the companies have been able to maintain high
asset turnover, despite the high investment rate.
2. The good figures might have been supported by the Swedish currency
(SEK), which according to many industry analysts was under-valued during
1999-2005.
3. The big write-downs in Finland and the United States have lowered ROCE
figures considerably. When adding the write-downs to the reported EBIT
figures, the ROCE figure in Finland increases from 3.5 to 8.5 % and in the
United States from 5.3 to 8.4 %. When evaluating operational results only,
these figures might better illustrate the status of the companies compared.

Chapter 8
4. Canadian companies seem to be in a difficult position. All indicators are low.

In addition, the investment level has been low, indicating deteriorating asset
quality and competitiveness. Asset turnover is also low, which, in combina-
tion with deteriorating asset quality, represents a serious risk. This is be-
cause investments would be required to improve asset quality, while invest-
ments are difficult to make when asset turnover is low (=high capital load in
relation to sales).
It should be noted that the appreciation of the Canadian dollar in relation to

the US dollar has influenced the Canadian figures negatively, because most of the
Canadian production is exported to the United States.
8.3 Investment behaviour and structural changes 1999-2005

In addition to the volume of money invested (Table 18), it is important to analyse where
and how the money has been spent. One way to do this is to look at the number of
new paper machines installed during this period. This is shown in Table 19.
Table 19. Installation of new paper machines 2000—20053.
2000 2001 2002 2003 2004 2005 2000-2005

No. Cap.* No. Cap. No. Cap. No. Cap. No. Cap. No. Cap. No. Cap.
Finland
M-real
Stora Enso 1 400 1 260 1 420 3 1 080
UPM 1 450 1 450
Sweden
Holmen 1 330 1 300 2 630
SCA 1 240 1 100 3 121 5 461
USA
International Paper
Georgia-Pacific 2 123 1 60 1 55 1 73 5 311
MeadWestvaco
Smurfit-Stone
Weyerhaeuser 1 380 1 380
Canada
Abitibi
Domtar
Japan
Nippon 1 10 1 10
Oji 1 230 1 9 2 239
* Capacity (1 000 tonnes)

The following conclusions can be drawn:

1. The 15 top companies have installed 20 new paper machines, of which 9
tissue machines, 2 speciality machines and 9 bulk grade paper machines.
The total capacity addition has been 3.6 million t/a.
2. Swedish companies have invested most, installing 7 new machines, of
which 4 tissue machines.
3. US companies, despite their larger size, have invested in 6 machines only; 5
tissue machines and 1 bulk grade machine.
The structural changes made by the top 15 companies is another interesting
feature. One way to analyse this is to look at the number of shut down paper ma-
chines (Table 20).
Table 20. Shutdowns of old paper machines 2000-20053.
2000 2001 2002 2003 2004 2005 2000 - 2005

No. Cap.* No. Cap. No. Cap. No. Cap. No. Cap. No. Cap. No. Cap.
Finland
M-real 2 51 2 51
Stora Enso 2 85 2 160 4 300 1 140 1 130 10 815
UPM 1 75 2 157 1 100 2 20 6 352
Sweden
Holmen 1 215 1 215
SCA 6 73 1 90 1 15 2 44 3 115 13 337
USA
International Paper 6 39 14 1455 7 340 2 160 3 380 32 2 374
Georgia-Pacific 8 436 4 125 2 15 4 64 4 106 22 746
MeadWestvaco 2 58 4 42 3 158 1 115 10 373
Smurfit-Stone 2 117 3 410 1 40 3 353 2 435 11 1 355
Weyerhaeuser 3 475 5 465 3 362 1 270 12 1 572
Canada
Abitibi 3 239 4 415 3 478 5 645 3 434 18 2 211
Domtar 3 71 1 30 1 45 2 220 7 366
Japan
Nippon 5 83 2 71 7 365 3 182 2 72 19 773
Oji 5 101 4 144 6 175 4 100 3 87 2 145 24 752
* Capacity (1 000 tonnes)

Chapter 8
The following conclusions can be drawn:

1. A total 187 machines have been shut down, i.e., 30 machines a year. The
total shut down capacity was 12.3 million t/a. Thus, the top global compa-
nies have shut down about three times the new capacity installed.
2. Clearly, the US companies have shut down the highest number of ma-
chines, i.e., 87 machines with a total capacity of 6.4 million t/a. Thus, the
average machine size has been about 75 000 t/a.
3. Japanese companies have shut down 43 machines with a combined capac-
ity of 1.5 million t/a. The average machine size has been small, i.e., only
35 000t/a.
4. Canadian companies have shut down 25 machines with a total capacity of
2.5 million t/a. The average machine size has been 100 000 t/a. These num-
bers are likely to reflect the low profitability of the Canadian industry.
5. Finnish companies have shut down 18 machines with a total capacity of
1.2 million t/a. The average machine size has been 70 000 t/a.

Sources
1. Industrial sources
2. Company Annual Reports

Chapter 9
Financial valuation and analysis
1 Introduction and principles................................................................................................131

2 Definitions...........................................................................................................................132
3 Business performance ......................................................................................................137
4 Valuation.............................................................................................................................141
5 Factors affecting ROCE.......................................................................................................143
6 ROCE development in selected countries 1999-2005........................................................144
7 Investment behaviour in selected countries.....................................................................146
8 Management accounting....................................................................................................149
8.1 Definition .............................................................................................................................149
8.2 Analysis and examples..........................................................................................................149
9 Factors affecting production rate......................................................................................154
10 Evaluation of development investments............................................................................156
11 Distribution of economic information to the operating floor............................................157

Financial valuation
and analysis
To make financial reporting transparent and reliable for analysis and comparison, a set
of internationally applied rules have been developed. The most important ones are the
IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted
Accounting Principles).
The income statement and balance sheet serve as a basis for financial analysis. The income
statement describes the economic performance during a certain period, often a year. The
balance sheet shows the financial position at the beginning and end of a certain accounting
period.
Business performance can be judged by many indicators. The two most common ones are
return on capital employed (ROCE) and operating margin. ROCE indicates how effectively
the company’s resources are used. ROCE should exceed the company’s cost of capital. The
operating margin (EBIT/sales) indicates the company’s pricing power and cost control.
There are numerous indicators for company valuation. The most common one is the P/E
ratio (Price/Earnings ratio). It indicates how many years’ earnings are needed to recover the
share price.
1 Introduction and principles

Capital is committed to pulp and paper industry companies (as to any enterprises)
with the expectation that the company and its management will produce a reasonable
return on the committed capital. The return acts in two stages:
1. The company should earn a rate of return at least in excess of its cost of
capital.
2. The market value of the capital (most often measured as the company’s
share price on the market) reflects the above rate of return. In practice, this
means that a high rate of return should be reflected in a high share price on
the market in comparison to the book value of shares and vice versa, if the
return is low.
A large number of factors are used in financial analysis. The aim in this book
has been to select the most important factors relevant to the pulp and paper industry.
As there are many ways to define each factor, the guiding principle has been to keep it
simple, without going into too much detail.

Chapter 9
2 Definitions
1. General
The globalisation of financial markets during the past few decades has
made it necessary to develop a set of rules that are applied by all interna-
tional companies. This makes reporting transparent and reliable for analysis
and comparison.
The most important rules and regulations are:

1. International Financial Reporting Standards (IFRS)
IFRS are followed as of 2005 by all listed EU companies.
2. International Accounting Standards (IAS)

IAS were widely used before 2005, but have now been replaced by IFRS.
3. Generally Accepted Accounting Principles in the USA (US GAAP)

US GAAP are the accounting principles for listed and many private com-
panies in the United States. The current aim is to reconcile the differences
between IFRS and US GAAP.
4. Sarbanes-Oxley Act (SOX)

The purpose of the act was to restore public confidence in financial report-
ing after a number of accounting scandals (e.g. Enron). SOX defines man-
agement’s responsibility for establishing and maintaining internal controls.
A more detailed description of the above regulations is given in Table 1.

Table 1. International rules and regulations for financial reporting.
International Financial Reporting Standards (IFRS)

IFRS is a set of accounting standards defining how different transactions should be reported in companies’
financial statements. The target is to make reporting transparent for analysis and comparisons. All EU listed
companies are required to prepare their financial statements following IFRS from 2005. IFRS are approved by
International Accounting Standards Board (IASB), which has twelve full-time and two part-time members ap-
pointed by International Accounting Standards Committee (IASC) Foundation.
International Accounting Standards (IAS)
IAS was a set of standards issued during 1973 to 2000 until they were replaced by IFRS. All the existing stand-
ards are still called IAS and new ones, issued after 2001 are called IFRS standards.
Generally Accepted Accounting Principles in United States (US GAAP)
US GAAP are the accounting principles for listed and also many private companies in United States. The US GAAP
is not a written in law but is set by the professional body called Financial Accounting Standards Board (FASB).
The US Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by all listed
companies in United States. There are some differences between US GAAP and IFRS but the efforts are underway
to reconcile these two different accounting standards.
Sarbanes-Oxley Act (SOX)
The Public Company Accounting Reform and Investor Protection Act of 2002 is known as Sarbanes-Oxley Act
(or SOX) because of its main sponsors Senator Paul Sarbanes and Representative Michael G.Oxley. The SOX was
passed because of many accounting scandals (like Enron) in early 2000 which decreased the public trust in ac-
counting and financial controlling of the listed companies.
The purpose of the law is to build and restore confidence in public financial reporting. SOX defines management’s
responsibility for establishing and maintaining internal controls. Malpractices may result in personal criminal (as
well as civil) liability for the company officer concerned.
Impairment Test
The objective of the Impairment test is to ensure that a company’s assets value in it balance sheet (book value)
are not more than their recoverable amount. The recoverable amount is defined either by value in use methods
(like discounted cash flow models) or by market value if there are active markets for the specific assets. Value in
use method is more common in process industry.
If the book value of certain assets is higher than its recoverable amount, the assets must be written down to its
recoverable amount as an asset impairment which is reported under depreciations in Profit and Loss Statement.

Chapter 9
2. Income statement and balance sheet

The income statement and balance sheet are financial reports that all com-
panies produce. Stock listed companies publish audited reports for each
twelve-month period, usually a calendar year. In addition, these companies
publish unaudited reports on a quarterly basis.
Definitions of certain financial indicators and ratios are given in Table 2. An
example of an income statement and balance sheet of a pulp and paper
industry company is given in Table 3.
Table 2. Definitions of certain financial indicators and ratios.
EBITDA Gross profit Earnings before interest, taxes, depreciation and

amortizations
EBITD Gross profit Earnings before interest, taxes and depreciations
EBITDA/sales Gross margin
EBIT Operating profit Earnings before interest and taxes
EBIT/sales Operating margin
ROCE Return on capital employed EBIT/Capital employed
WACC Weighted average cost of capital Weighted average cost of equity and debt
ROE Return on equity Net income/equity + minority interests
Free cash flow Cash flow - capex EBITDA - tax +/- change in working capital
- capex
EPS Earnings per share Profit for the period / average number of shares
P/E ratio Price / Earning ratio Share price at stock echange / eranings per share
Price/book Share price at stock echange / shareholders
equity per share
Enterprise value Market value of shares + interest bearing net debt
Market Value Number of shares x share price at stock exchange
D/E ratio Debt / Equity ratio Interest bearing net liabilities / equity
Dividend yield Dividend per share as a percentage of share price
Simple yardsticks:
Net income EBIT - interest cots - taxes
Capital employed Operating capital - tax liabilities
ROCE EBIT / equity+interest bearing net
debt

Table 3. Example of income statement and balance sheet.
Income Statement Cash Flow Statement

Sales 100 EBIT 6
Cost of Goods Sold Depreciation 9
-11 Financial Income and Expenses -1
-52 Change in Working Capital 1
-22 Capital Expenditure -8
EBITDA 15 Acquisitions -3
Depreciation -9 Tax -1
EBIT 6 Dividends -3
Financial Income and Expenses -1 Repurchase of Shares -2
Profit before Tax 5 Increase of Loans 2
Tax 1 Balance 0
Net profit 4
Balance Sheet
Assets Liabilities
Fixed Assets 95 Equity 20
79 Retained Earnings 41
5 Net profit for the period 4
11 Long Term Liabilities 44
Current Assets Current Liabilities 22
14
20
2
131 131
The purpose of the income statement is to describe the economic performance and
operating results for a certain period, usually one year. The balance sheet shows the
financial position of the company at the beginning and end of a certain accounting
period, often at the end of a calendar year.
3. Sales
The flow of money into the company comes mainly from sales or trading
activities. Sales are calculated with the following formula: volume of goods
sold x unit price free delivered to a customer’s location (100 in Table 3).
4. Gross profit and gross margin

The gross profit is earnings before interest, taxes, depreciation and amor-
tisation of goodwill, EBITDA. If the company has no amortisation of good-
will (see explanation of goodwill under “depreciation”), EBITD is used. It
indicates how much money remains to cover necessary interest payments,

Chapter 9
taxes, capital expenditures, amortisation of debt and dividend payments to

shareholders, usually in this order.
The gross margin is EBITDA divided by sales (15 % in Table 3).
5. Operating profit and operating margin

The operating profit or EBIT is defined as earnings before interest and tax-
es. The operating margin is operating profit (EBIT) divided by sales (6 % in
Table 3). The operating margin is described in more detail in Section 3 under
the title “Operating margin”.
6. Depreciation
Depreciation is a cost that should cover the wear and tear of an investment
made earlier by allocating the investment costs over the useful economic
life of the assets (9 in Table 3). Depreciation is a bookkeeping transaction. It
is not a cash item. When a certain depreciation is made in the income state-
ment, a similar reduction is made in the balance sheet under fixed assets.
A matter conceptually related to depreciation is the write-down of assets. A

write-down to a correct level must be made, if the book value of assets in
the balance sheet is higher than the recoverable amount determined in an
impairment test (see Table 1). When a write-down is made in the balance
sheet, a similar reduction is made in the income statement under deprecia-
tion. Accordingly, EBIT will go down. As with depreciation, a write-down is
a non-cash item. If the company has acquired assets, for example a mill or
company, the difference between the acquisition price and the recoverable
amount (if any), determined in an impairment test, is called goodwill.
Theoretically, a company that wants to maintain its status quo, should be

able to reinvest a sum equal to the depreciation without increasing its debt
load. Loans to finance replacement investments weaken the financial posi-
tion of a company, since its indebtedness increases without a commensu-
rate increase in its earnings potential.
Depreciation rules and their application between countries and asset class-
es differ. This fact is important when comparing company EBIT figures from
different countries.
7. Investments
Investments or capital expenditure, capex, (8 in Table 3) fall into three differ-
ent categories:
(i) Replacement investments are necessary to maintain the production
capacity, efficiency and quality of operation in the short term, usually
1-5 years. Replacement investments do not usually increase sales
or lower costs. Thus, their profitability is zero, but as they increase

the capital employed, the ROCE of the unit decreases. Differentiating

between replacement investments and maintenance costs is difficult.
From a practical point of view, replacement investments and mainte-
nance costs are usually of the same nature. Drastic curtailment of the
replacement investment level usually causes maintenance costs to
increase.
(ii) Development investments improve the earnings potential and per-

formance of a mill, paper machine or pulp mill. Profitability as pay-
back is usually the most important decision-making criterion.
(iii) Strategic investments significantly improve the earnings capacity of

the entire company, change or strengthen its production structure
and strategic direction, or both. Because development and strategic
investments normally increase earnings, increasing the company’s li-
abilities (debt and/or equity) may partly finance them. Future earnings
then pay interest and amortisation.
3 Business performance
1. Return on capital employed (ROCE)
Concept
ROCE is an indicator of how effectively the resources are used within
the company. If ROCE exceeds the cost of capital, the company and
its management produce positive economic returns for shareholders.
ROCE is one of the most important, in many cases the most impor-
tant, performance indicator.
Definition
Operating profit
Return on capital employed, ROCE (%) = ----------------------------- (1)
Capital employed
Interpretation
The ROCE ratio can be decomposed into two components, i.e., oper-
ating margin and asset turnover, as follows (5.5 % in Table 3.)
EBIT Sales 6 100

= ---------- x --------------------------- = --------- x -------------- = 5.5 %
Sales Capital employed 100 131 - 22
The operating margin is an indication of pricing power/cost control,

whereas asset turnover indicates management’s ability to position the
company and assign capacity. Both components should be maxim-

Chapter 9
ised. When operating margins are low or declining, asset turnover

should be high or at least rising.
ROCE is also the starting point for many other valuation concepts
that are widely used today.
Economic return/economic value added

ROCE measures the company’s rate of return on capital employed.
The value of this return also depends on the cost of capital. The dif-
ference between a company’s ROCE and its weighted average cost
of capital (WACC) is the economic return. This can be positive or
negative. Multiplying the economic return by the capital employed
indicates the total value that has been generated for shareholders,
known as Economic Value Added (EVA)™.
The concept of WACC is explained in connection with the debt/equity
ratio.
Limitations/uncertainties
ROCE can be inflated by lowering the capital employed. This can take
place through write-offs and/or use of leased assets. In both cases,
the denominator, i.e. capital employed, should be adjusted upwards
in order to reflect the notional value of the assets concerned.
One key limitation of basic ROCE analysis is that it is limited to ac-
counting returns rather than economic returns. In particular, ROCE fails
to reflect the age of the assets. This can lead to distortion – increasing
the ROCE for companies with older, depreciated assets. Such compa-
nies may produce acceptable returns today, but future high investment
requirements to modernise assets might lower the return figures later.
2. Debt/equity ratio (D/E ratio)

Concept
The D/E ratio describes the capital provided by lenders (debt) com-
pared to the capital provided by owners (equity).
Definition
D/E ratio = net debt as a percentage of equity capital. Net debt is
debt less cash (66 – 2) = 64 (Table 3). Equity consists of shareholders
equity, retained earnings and net profit for the period (65 in Table 3).
Interpretation
The D/E ratio is the most commonly used measure of financial lever-
age. It indicates both financial risk and capital efficiency (the cost of
debt is usually lower than the cost of equity). Thus, a high D/E ratio
lowers the weighted average cost of capital (WACC) but at the same
time increases the risks. The D/E ratio in Table 2 is 64/65 = 0.98.

Cost of capital
A company’s cost of capital is defined as the weighted sum of its
cost of equity and debt (WACC=weighted average cost of capital).
The cost of debt is usually based on the long-term risk-free lend-
ing rate, i.e., the long-term government bond interest rate plus risk
premium. In 2006, risk-free interest rates were approximately 4.5 %,
and risk premiums approximately 1 % for high-quality companies.
Because interest is tax-deductible, the effective cost of debt is cal-
culated by deducting the taxation factor. This means that the cost is
reduced by the tax rate. If the tax rate is 30 %, the effective cost of
debt is 5.5 % - 0.3 x 5.5 % = 3.8 %.
The cost of equity involves three components: the risk-free rate of return (as
for debt), the equity risk premium and the systematic risk (often called beta).
The risk-free rate is usually taken as the yield of long-term govern-
ment bonds or long-term notes issued by the relevant central bank.
The equity risk premium is the difference between the risk-free inter-
est rate and the expected return of the average market portfolio after
tax. In 2006, this was approximately 4 % in Europe.
The beta factor describes the systematic risk of a specific industry
versus an aggregate industry average. Beta values above 1 mean that
the share is more volatile than the market on average. In the pulp and
paper industry, the beta factor typically varies between 0.9 and 1.1,
depending on the business and grades produced. The cost of equity
in the pulp and paper industry, assuming a risk-free rate of 4.5 %, is
therefore 4.5 %+(3.6 – 4.4) % = 8.1 – 8.9 %.
Based on Table 2, the WACC (after tax) is approximately 6.2 %, as-
suming a beta of 1.0.
3. Return on equity (ROE)

Concept
ROE describes the return on shareholders contributed capital (=
shareholders equity).
Definition
Profit before minority interests 4

ROE (%) = ----------------------------------------- = --------- = 6,2 % (2)
Equity + minority interests 65
Interpretation
ROE indicates the accounting returns to the shareholders. If return on
capital exceeds the cost of debt, ROE will rise with increasing lever-
age.

Chapter 9
4. Operating margin
Concept
The operating margin is a composite of pricing power and cost con-
trol. Of these two, pricing power is more important. Successful com-
panies sell products that customers want and they sell them on their
own terms.
Definition
The operating margin is operating profit divided by sales. In most
cases EBIT is synonymous with operating profit. Sometimes, some
distortion can take place, if EBIT includes the group’s share of profits
from associates, joint ventures etc., although these are not included
in consolidated sales.
The operating margin in Table 3 is 6 %.
Interpretation
The operating margin is generally used as a relative indicator or
benchmarking of a peer group. High margins indicate good position-
ing, pricing power and cost control. High margins are visible and nor-
mally valuations (=share price) reflect this.
Limitations/uncertainties
The largest uncertainties in operating margins arise from different de-
preciation rules in different countries as well as inconsistent deprecia-
tion rates. Another factor of uncertainty are exceptional credits, such
as gains on fixed asset sales that some companies include in report-
ed EBIT numbers.
5. Free cash flow

Concept
Free cash flow indicates how much money the company generates in
excess of its essential spending, in other words, that cash could be
withdrawn from the company without damaging its structure in the
short term.
Free cash flow is used for three purposes:
- repayment of debt
- repayment of interest
- payment of dividends
Definition
Free cash flow is defined as cash flow - total capital expenditure
(15 – 8) = 7 in Table 3.

A somewhat simplified definition of cash flow above is gross profit

– tax ± change in working capital, i.e.:
Free cash flow = cash flow – capital expenditure (3)
Cash flow = EBITDA – tax ± change in working capital (4)
In pulp and paper industry companies, working capital and its chang-
es represent large sums of money. Working capital has a cost element
in the form of interest costs and is also part of capital employed.
Thus, it is important to monitor it closely on all operative levels.
Interpretation
Free cash flow is analogous to an individual’s net salary less commit-
ted expenditure. Because all “must” expenditures have been de-
ducted, free cash flow indicates the discretionary spending power of
management. The company can reward shareholders with dividends
or share buy-backs (potentially all of the free cash flow could be re-
turned to shareholders and money lenders), reduce the risk and inter-
est costs by repaying debt or expand the business by raising capital
expenditure.
Based on the above, free cash flow is a good measure of financial
flexibility, and accordingly, a measure closely followed by industry
analysts.
Limitations
The main limitation of free cash flow is that it may give a too positive
signal in stagnating companies by reducing capital expenditure in the
short term to an unsustainably low level in the long term.
4 Valuation
1. Price/Earnings ratio (P/E ratio)
Concept
The P/E ratio is one of the most widely followed valuation measures.
It indicates how many years’ earnings per share it takes to recover
the share price.
Definition
P/E = Share price on the stock exchange divided by earnings per
share (EPS)
Profit for the period

EPS = ---------------------------------------------------- (5)
Average number of shares during period

Chapter 9
In the above definition regarding the denominator, the average

number of shares, some companies and analysts use the “fully di-
luted number of shares”. This means that the number of shares that
could have been issued, if all options, convertibles etc. were to be
exercised, have been added to the average number. The effect of this
lowers the P/E ratio.
Interpretation
P/E ratios are frequently used for benchmarking purposes within a
certain industry. A high P/E ratio, for example in excess of 20, indicates
a high value of shares in comparison to earnings. This is attributable to
investors’ belief in increased earnings in the future. A low P/E ratio, say,
below 10, indicates a low value of shares in comparison to earnings.
This is due to investors’ view of flat or lower earnings in the future.
Limitations
The most severe limitations of the EPS and P/E ratio are related to
definitions of earnings and particularly items that should or should not
be included. Inconsistencies relate e.g. to the following items:
- goodwill amortisation
- unfunded pension liabilities (particularly in Germany)
- expropriations of properties (unusual in the pulp and paper industry)
2. Price/book value
Concept
The price/book value indicates the valuation multiple that the market
applies to the company’s equity.
Definition
Current share price on stock market

Price/book = ------------------------------------------------------------------------- (6)
Book value per share or shareholders equity per share
Interpretation
The price /book ratio is a complementary to the P/E ratio. A high
price/book ratio implies high, expected rates of return on equity and
vice versa.
3. Dividend yield and total return to shareholders

Concept
The dividend yield represents actual cash payment to shareholders.
Total return to shareholders (TRS) is a combination of dividend yield and
capital appreciation (=share price appreciation) within a certain period.

Definition
Dividend yield = ordinary annualised dividend per share as a percent-
age of the share price on the stock market.
Interpretation
The dividend yield is a critical determinant of value (=share price) for
companies in mature industries like the pulp and paper industry.
4. Enterprise value/EBITDA
Concept
The enterprise value/EBITDA ratio indicates how many years’ gross
profit is required to recover the total value of the company.
Definition
EBITDA= gross profit (See Section 2)
The enterprise value is the market value of the company (share price
on the stock market multipled by the number of shares) plus net debt.
Interpretation
The enterprise value/EBITDA ratio is one of the most common figures
used to assess the value of a company at a specific time. When a
company acquisition is made, investors and analysts use this ratio to
judge whether the acquisition price is high, fair or low. A high ratio,
e.g. in excess of 10, is considered to be a high acquisition price. In
2005-2006, the ratios in the pulp and paper industry have normally
varied between 6 and 9 in acquisition projects.
5 Factors affecting ROCE

As described in Section 3, return on capital employed (ROCE) can be divided into 2
components, i.e. operating margin (=EBIT/sales) and asset turnover (=sales/capital
employed). The operative management of a mill/company can influence ROCE with
immediate effect, as indicated in Table 4.
Table 4. Effect on operative actions on ROCE.
Operating Profit Asset Turnover Total Effect

Increased product prices Increase Increase Srong Increase
Lower manufacturing costs Increase Small Increase
Increased production without investments Increase Increase Moderate Increase
Investments to increae production Increase Decrease Decrease in short term
Low Investments during many years Decrease Increase Small increase in short term
Decrease of working capital increase Small Increase

Chapter 9

1. Increased product prices are the most valuable driver to increase ROCE,
because they involve no increase in costs and thus have the greatest im-
pact. This is the main reason for investors and analysts to focus on product
price development when estimating future profits of a company.
Increased product prices are in most cases dependent on the market situa-
tion and thus to a large extent outside the control of the mill/company.
2. Lower manufacturing costs have a positive effect on the operating margin,
but in practice these are difficult to achieve and even more difficult to sus-
tain. The advantage with lower manufacturing costs is the fact that cost-
cutting measures are achieved through measures controlled by the mill/
company internally.
3. Increased production without investments. Both sales and costs go up with
a moderate positive effect on ROCE.
4. Investments to increase production should increase operating profit in order
to give a return on the investment. However, due to the higher amount of
capital employed and thus lower asset turnover, the impact on ROCE in the
short to medium term (1-5 years) often is negative. Later on, when capital
has been depreciated, the impact of the investment on ROCE turns positive,
5. A low investment level during many years tends to increase ROCE, as asset
turnover increases due to a decrease in capital employed. In the long term,
a too low investment level is risky, as it will lower the operating margin due
to lack of competitiveness (see Section 3).
6. A decrease in working capital increases asset turnover and thus improves
ROCE. It should also be noted that working capital effectively is in the
hands of the mill/company management, who thus has a tool to improve
ROCE. Often working capital is not given enough attention, as a high vol-
ume of working capital means an easy life. Good service due to high stock
levels generates few complaints from customers. Activity to reduce receiva-
bles – an unpleasant task for the sales force – is easy to postpone or ignore.
The reduction of working capital by lowering stocks and inventories and
receivables is an effective method to release capital for other purposes such
as profitable investments or simply to lower capital employed and increase
returns through high asset turnover.
6 ROCE development in selected countries 1999-2005

Using the figures of the 15 largest pulp and paper industry companies in the Nordic
countries, the United States, Canada and Japan (listed in Table 17 in Chapter 8), a
ROCE analysis has been performed based on the company EBIT margin (adding
write-downs) and asset turnover, as shown in the DuPont curve in Figure 1.

Average ROCE 1999-2005 and 2005 in Selected Countires (excl. non-recurring items)
25,0
20,0 ROCE 10%
15,0
EBIT / Sales
ROCE 5%
10,0
1999-2005 Avg
Finland
1999-2005 Avg Sweden
1999-2005 Avg 2005
Japan USA
ROCE 2.5% 1999-2005 Avg 2005
5,0 1999-2005 Avg
Canada
2005
2005
2005 (neg.)
0,0
0,50 0,55 0,60 0,65 0,70 0,75 0,80 0,85 0,90 0,95 1,00 1,05 1,10 1,15 1,20
Asset Turnover
Figure 1. Average ROCE in certain countries 1999-2005.
The following conclusions regarding the companies’ operating performance can

be drawn:
1. The EBIT margin and asset turnover have been highest in Sweden, at 8.2 %
and 1.1, respectively.
2. The average ROCE figures for the period in all countries have been disap-
pointingly low.
3. The 2005 figures indicate a worsening of ROCE in comparison to the 1999-
2005 average in Sweden, Finland and Canada. In Japan, it has improved by
almost 2 percentage points through higher EBIT margins.
All of the above figures are at an unacceptable level. Worse, the figures are
pointing further downwards to unsustainably low levels, Canada being in
the worst position.
Different depreciation rules in different countries as well as inconsistent
depreciation rates cause a small margin of error in comparing EBIT margins
in the above analysis. A larger difference comes from including or exclud-
ing write-offs or capital gains through asset sales, which many companies
have made during 1999-2005. Despite these uncertainties, Figure 1 clearly
indicates, that the major global pulp and paper industry companies have
had far too low profitability levels during 1999-2005, which is likely to result
in significant structural changes in years to come.

Chapter 9
7 Investment behaviour in selected countries

Figures 2-6 describe the EBITDA (as a proxy for cash flow), capex, dividend payout
and D/E ratio 1999-2005 in the Nordic countries (Finland and Sweden), the United
States, Canada and Japan for the companies examined in Section 6.
Development of financial indicators in Finland 1999-2005
30 % 2,50
25 %
2,00
20 %
1,50
% of sales
EBITDA:Sales
D/E ratio
Capex:Sales
15 %
Payout:Sales
DE/Ratio
1,00
10 %
0,50
5%
0% -
1999 2000 2001 2002 2003 2004 2005
Figure 2. Development of financial indicators in Finland 1999-2005.
Development of financial indicators in Sweden 1999-2005
30 % 2,50
25 %
2,00
20 %
1,50
% of sales
EBITDA:Sales
D/E ratio
Capex:Sales
15 %
Payout:Sales
DE/Ratio
1,00
10 %
0,50
5%
0% -
1999 2000 2001 2002 2003 2004 2005
Figure 3. Development of financial indicators in Sweden 1999-2005.

Development of Financial Indicators in USA 1999-2005
30 % 2,50
25 %
2,00
20 %
1,50
% of Sales
EBITDA:Sales
D/E Ratio
Capex:Sales
15 %
Payout:Sales
D/E Ratio
1,00
10 %
0,50
5%
0% -
1999 2000 2001 2002 2003 2004 2005
Figure 4. Development of financial indicators in USA 1999-2005.
Development of financial indicators in Canada 1999-2005
30 % 2,50
25 %
2,00
20 %
1,50
% of sales
EBITDA:Sales
D/E ratio
Capex:Sales
15 %
Payout:Sales
DE/Ratio
1,00
10 %
0,50
5%
0% -
1999 2000 2001 2002 2003 2004 2005
Figure 5. Development of financial indicators in Canada 1999-2005.

Chapter 9
Development of financial indicators in Japan 1999-2005
30 % 2,50
25 %
2,00
20 %
1,50
% of sales
EBITDA:Sales
D/E ratio
Capex:Sales
15 %
Payout:Sales
DE/Ratio
1,00
10 %
0,50
5%
0% -
1999 2000 2001 2002 2003 2004 2005
Figure 6. Development of financial indicators in Japan 1999-2005.
The following conclusions can be drawn based on Figures 2-6:

1. The annual capex/sales ratios have mostly been around 6-8 %/a in Finland
and Sweden, 6 %/a in Japan, 5-6 %/a in Canada and 4 %/a in the United
States. No clear change in this trend is visible, except in Canada, where
capex/sales seems to be declining.
2. The dividend payout/sales has been 4-5 %/a in Sweden, 3-4 %/a in
Finland, 1-2 %/a in the United States and Canada, and less than 1 %/a in
Japan.
3. There are big differences in balance sheet structures measured in terms of
the D/E ratio. Sweden has the strongest structure (=lowest D/E ratio) with
a D/E ratio of 0.4-0.6, followed by Finland with 0.6-0.8. The D/E ratio in
Canada has varied between 1.2 and 1.4, in the United States between 1.4
and 1.8 and in Japan between 1.7 and 2.0. The trends have been mixed. In
Japan and the United States, the trend seems to have been downwards for
the past 3-4 years.
In comparison to the figures recorded in the period 1980-2000 (Figure 14 in

Chapter 8), it can be concluded that the investment levels in the above countries have
declined from 10-12 %/a to 4-8 %/a since 1999.This means that less new capacity
has been built since 1999 in comparison to earlier years. In addition, it is likely that as-
set quality in companies with a 4 %/a capex/sales ratio is declining, indicating that the
industry’s competitiveness will decline in the future.

8 Management accounting
8.1 Definition
In analysing business performance or evaluating a business, the indicators described
in Sections 3 and 4 are most often used. The purpose of management accounting
(also called profitability accounting or profitability analysis) is to provide information
that helps to choose the best and most profitable alternative and plan in a given situ-
ation.
There are many situations and questions in a company, division or individual
mill to which answers are sought from management accounting. It is a difficult task
to construct a system that will provide correct answers to a vide variety of questions
quickly and easily in a transparent and simple way.
The following questions are often addressed to the management accounting

system:
1. How to allocate orders to individual mills within a division or to indi-
vidual paper machines within a single mill with several paper ma-
chines in order to maximise profits?
2. At what sales price level is it better to shut down a mill/paper ma-
chine rather than accept orders for manufacture?
3. At what sales price does an order achieve an acceptable ROCE level?
4. Is the calculated revenue increase for a contemplated investment
high enough to justify its implementation?
5. Is implementation of a planned change in the working practices of a
pulp or paper mill worthwhile and profitable?
The integration of different mills, such as a pulp mill with a paper mill, a
sawmill with a pulp mill etc., increases the complexity of management accounting
systems. Each production unit often has its own system. Although these systems give
correct answers and information for the unit they cover, the answers may be incorrect
for the whole integrate. This comment applies in particular to large international com-
panies that have production units in several countries producing the same grade.
8.2 Analysis and examples

Table 5 shows the cost structure of a 600 000 t/a chemical softwood pulp mill and
Table 6 the cost structure of a 500 000 t/a newsprint mill with two paper machines.
Both assume full production.

Chapter 9
Table 5. Cost structure of a 600 000 t/a soft wood chemical pulp mill at full
production.
1. Variable Costs %
Wood 31
Chemicals 7.9
Energy 0.7
Operating Material&Services 10.7
Total Variable Costs 50.3
2. Fixed Costs
Maintenance Materials 5.2
Personnel&Administartion 3.3
Others 5
Total Fixed Costs 13.5
3. Capital Costs 36.2
Total 100
Table 6. Cost structure of a 500 000 t/a newsprint mill with 2 paper machines at full
production.
1. Variable Costs
Wood and Waste Paper 23,8
Chemicals 6.7
Energy 13.2
Operating Material&Services 5.6
Total Variable Costs 49.3
2. Fixed Costs
Maintenance Materials 5.5
Personnel&Administartion 13.7
Others 4.3
Total Fixed Costs 23.5
3. Capital Costs 27.2
Total 100
Costs in the above examples fall into three categories:

1. Variable costs (= production-related costs)
2. Fixed costs
3. Capital costs
Variable costs depend entirely on production volumes. When production stops,

these costs are zero. Typical items are raw materials, chemicals, additives etc. Energy
costs such as heat and electricity are often production-related. This is not always cor-
rect, since heat and energy costs include a portion of fixed costs. In situations where
the heat and energy consumption varies widely from a predetermined level used as a
basis for cost calculations, it is particularly prone to inaccuracy.

Production volumes have no influence on fixed costs. Typical cost items are op-
erating and maintenance personnel costs directly related to the profit unit, and costs
of spare etc.
General costs usually form a group not directly attributable to a certain produc-
tion unit or paper machine. Typical general costs are mill management, administration,
safety, environment etc. Division or company overheads allocated to a specific mill
can also form part of this cost group.
Capital costs allocated to a mill are fixed. Common practice is to determine
the ROCE requirement based on capital allocated to the unit. A minimum ROCE level
should be the WACC of the unit, as a ROCE-level below WACC would give a negative
return.
A rule of thumb when considering the reliability of a management accounting
system is to use it for operative matters where changes contemplated or alternatives
compared are close to one another. More drastic measures for analysis, such as shut-
ting down a paper machine or mill, require greater caution when analysing the results
given by the management accounting system.
Example 1. Pulp-paper mill integrate.

A paper mill with one paper machine is integrated with a pulp mill and uses it
as its sole source of raw material. Both the paper mill and the pulp mill have their own
management accounting systems, and each forms, or is part of, a separate profit unit.
An agreement specifies that the paper mill will buy the pulp at market price. If the mills
are located on the same site, i.e. the pulp is pumped to the paper mill, the pulp price
is adjusted for drying costs.
Paper prices begin to decline due to overcapacity, and the paper mill reaches a
situation where sales prices fall below its variable costs. Accordingly, the paper mill’s
management decides to shut down the paper machine and wait for better-priced
orders. Now, the pulp mill must also stop, since its main customer has stopped using
pulp. This is unfortunate for the pulp mill, because the sales price paid by the paper
mill would have covered all its variable costs and some or all of its fixed costs, de-
pending on the pulp market situation. In this situation it is evident that the decision
is incorrect, because the losses accumulated will be larger when both mills are shut
down. Before making the decision to shut down the entire integrate (question 2 above)
a separate calculation should have considered the entire operation.
The above problem is less likely to occur in a case where the pulp and paper
mill management communicate daily, even if they do form separate profit units. If the
paper mill uses pulp produced by a pulp mill in another country, as is often the case
in international companies, the above situation is more likely to arise, despite the fact
that the same company owns both the paper and pulp mills.
Example 2. Input of energy costs

An example of the difficulties experienced in considering the correct input val-
ues in a mill’s management accounting system is the correct energy cost for heat and
electricity. Electricity unit costs contain a fixed amount per year that is often divided

Chapter 9
per anticipated annual consumption to make it a variable component. This method is

often practical and meaningful, since the fixed part is often relatively small compared
with the variable part. Allocation based on consumption is therefore easier. For heat or
steam, a similar situation arises, since the heat generation unit – a steam or recovery
boiler – has certain fixed capital and personnel costs that can be divided by the an-
ticipated total annual heat consumption. This makes the fixed portion of these costs
variable with easier allocation to the user e.g. for budgeting purposes.
However, if in the above cases the contemplated changes are drastic, such as a
shut-down of a production line, which would change the annual consumption of heat
and electricity dramatically, the budgeted costs will give a wrong, and in the above
example, a too low figure.
Example 3, Comparison of order profitability

Comparison of the profitability of different orders on a given paper machine is
an important task for the paper machine operating engineer, mill superintendent and
the sales force. All these people must know the profitability ranking of customers and
orders to select the best orders when order inflow is good. Long-term efforts can and
should also be directed toward customers whose orders give the highest profitabil-
ity to increase the volume of their orders further. It is equally important to eliminate or
to reduce the order inflow from customers whose orders give the lowest returns. All
these factors have a great impact on profitability. Table 7 shows an example of a prof-
itability calculation for an order.
Table 7. Profitability of a given order based on Table 6.
1. Sales income (currency unit/t) 105

2. Variable costs (currency unit/t) 49.3
3. Contribution margin (currency unit/t) 55.7
4. (Contribution margin x rate of production) currency unit/t x t/h
= 55.7 x 500 000/8400 = 55.7 x currency unit/h = 3315 currency unit/h
The orders that give the highest contribution per hour are the most profitable. It
should be noted that the selection criterion is the contribution per hour, not the contri-
bution per ton. If the contribution margin falls below zero, it is better to stop produc-
tion. This assumes that all fixed costs such as labour are time-related – the production
volume has no impact on them. In practice, this was the situation in most European
mills in the early 2000s. Although better than a zero margin, a low contribution margin
means heavy losses, because it is not possible to cover fixed and capital costs.
For an order to be profitable, the contribution per hour it generates should cover
all fixed and capital costs (capital costs = allocated capital x WACC) per hour.

It should be emphasised at this point that the profitability of an order is not the
only criterion to be used when assessing the value of an order. At least the following
additional factors should be taken into account:
1. A customer might order a portfolio of products with varying profitability. The
decision regarding one grade/order should not be taken alone but in con-
nection with the relationship and total value of that portfolio.
2. A low-profitability order might support other orders, e.g. to trim the ma-
chine.
3. Is there an opportunity to run other grades or orders instead, if a low-profit-
ability order is skipped?
In cases where the paper mill has more than one paper machine that can pro-
duce a certain order, the selection of the paper machine becomes more complicated.
The main rule is to maximise the mill’s total contribution per hour rather than that of a
single paper machine. The example in Table 8 illustrates this situation.
Table 8. Profitability calculation for a paper mill with 2 paper machines.
PM 1 PM 2 Total
Case 1 Gross profit per hour 100 130 230
Case 2 Gross profit per hour 50 130 180
If the order is split and produced on both PMs, the mill contribution per hour
is 230 (Case 1). If the order is decided to be produced on PM2 only, and at the same
time PM1 can run an order with 100 or higher contribution per hour, this is the right
decision. If, however, the question asked by management is on which PM the order
should be produced to get the highest margin, the situation in Case 2 may occur.
This example illustrates the importance of asking the right questions. In a mill
with many paper machines, one can calculate the optimum production programme
by comparing alternative production programmes for the whole mill and selecting the
optimum from these.
The size of the working capital requirement and its impact on interest costs for
a certain order or production programme often does not receive proper consideration
because of the difficulty in allocating it correctly. Interest on working capital is often
considered as a fixed cost for a production unit and is evenly distributed between
all orders. With modern management accounting systems, it is possible to allocate
the exact working capital requirement to each order, taking into account the storage
time of finished and semifinished products, which is particularly important for sheeted
products where payment times can vary in the range 10-150 days, etc. The impact
can be surprisingly large.

Chapter 9
9 Factors affecting production rate

The production rate of a paper machine naturally has a strong effect on production
costs and therefore on profitability. The production rate in tons per hour depends on
two factors:
1. Momentary production
The web width, operating speed and paper grammage determine the mo-
mentary production. The following general rules apply:
- When producing low-grammage papers, the paper machine’s drive or
wet end limits the production rate.
- When producing higher grammages, the drying capacity limits pro-
duction rate.
Sometimes the runnability limits the production, particularly for low gram-
mages. This means that the paper machine must run slower than the drive
or wet end capacity would allow in order to avoid frequent breaks or certain
specific quality problems.
If the wet end limits the maximum speed, the machine is said to be “wet-
end limited”. Typical reasons include the following:
- The wire section is too short and cannot remove enough water at
high speeds.
- The capacity of pumps, cleaners, or both, before the headbox is too
low.
- The headbox flows increase to levels which are too high to ensure ac-
ceptable formation of paper and stable cross-machine profiles.
If the drying section limits the speed of the paper machine, the machine is
said to be “dry-end limited”. This is the case with many board machines.
2. Efficiency of production
The efficiency of production is an important technical parameter on any
given paper machine. It effectively illustrates the technical success of op-
erations during a given period and allows making continuous comparisons
over a long period. It is also a useful tool when comparing the performance
of two different paper machines producing the same grade. Efficiency com-
parisons are common for machines making newsprint, SC paper, and LWC
paper. Efficiency comparisons for machines producing woodfree papers or
cartonboards are more uncertain, since the amount of reels vs. sheets, the
grammage range, average order size etc. adversely affect the accuracy of
such comparisons.
The following equation provides a definition of the efficiency of production:
Pn = h x Pm (7)

where Pn is saleable production (also called net production)

Pm is momentary production
h is total efficiency
Total efficiency has the following components:

h1 is operating efficiency. This is the efficiency of the paper machine after de-
ducting the time it is not running due to felt and wire changes, maintenance
work etc. For a newsprint or SC paper machine, h1 is approximately 94-
96 % as an annual average.
h2 is machine efficiency. This represents the time used for breaks, grade
changes etc. For a newsprint or SC paper machine, h2 is approximately
95 % as an annual average.
h3 is trim efficiency. This represents the width after the winder – the width sold
to customers – compared with the maximum width at the paper machine
reel-up. On a newsprint or SC paper machine, h3 is usually 99 % as an an-
nual average.
h4 is finishing efficiency. This represents the loss between the paper machine
reel-up and saleable production. On a newsprint or SC paper machine, h4 is
usually 95 % - annual average.
Total efficiency is the product of all these individual efficiencies, as Formula 8

shows.
h = h1 x h2 x h3 x h4 (8)
According to the above figures for a newsprint or SC paper machine, the total
efficiency would be
h = 0.95 x 0.95 x 0.99 x 0.95 = 0.85
This means an 85 % annual average.
The following factors should be taken into account when comparing the effi-
ciency figures of paper machines in different countries:
1. Efficiency figures are calculated on a daily, monthly, or annual basis. Longer
periods give lower figures.
2. The basis of momentary production can be the actual momentary produc-
tion or the maximum achievable momentary production. The latter can
lower the efficiency figures calculated, since it adds an additional efficiency
component of speed.

Chapter 9
3. Some mills run 365 days a year, and others 330-350 days a year due to
summer holidays, statutory holidays etc. Maintenance is often done during
such shut-downs. This improves the operating efficiency compared to those
mills running 365 days per year.
4. The uniformity of production – order size, length of production runs, reels
vs. sheets etc. – of different paper machines is difficult to define and com-
pare. It does have a strong impact on efficiency.
The operative mill and paper machine management should continuously

monitor the development of efficiency and its components. Management should set
targets and implement programmes to improve efficiency.
Paper mill and paper machine management personnel often have the task of
maintaining profitability with minimal price increases despite increased costs. The an-
swer to this problem is to raise the production rate through higher momentary produc-
tion or higher efficiency. In practice, both are usually applied.
An example of a typical situation is given in Table 9, where variable costs are
estimated to increase by 3 % and fixed costs by 4 % in (cost structure as in Table 6)
In this example, a production increase of 2.5 % or 12 500 tons is required to maintain
net profits on the previous year’s level.
Table 9. Annual production increase required to offset a 3 % increase in variable

costs and 4 % increase in fixed costs, assuming a 2 % increase in sales.
Base year
1. Income 105 currency/t
2. Variable costs 49.3 currency/t
3. Fixed costs 50.7 currency/t
4. Profit during base year 5 currency/t
Base year + 1
1. Income V x 1.02 x 105 = V x 107.10
2. Variable costs V x 1.03 x 49.3 = V x 50.78
3. Fixed costs 1.04 x 50.7 = 52.73
4. Profit during year 1 =5
(V x 107.10 - V x 50.78) - 52.73 = 5 V = 1.0250
VOLUME MUST ACCORDINGLY BE
INCREASED BY 2.5% i.e. 12 500 tons
10 Evaluation of development investments
To improve the profitability of a paper machine or mill, the management must consider
a variety of alternative measures to increase revenues or reduce costs. Management
accounting can determine the best alternative. Since management accounting prima-
rily provides solutions related to production planning, such as comparing the profit-
ability of different orders, care must be taken to avoid mistakes caused by applying

this method in a general way. Energy costs can be a particular stumbling block, as
described in Section 8.
As a rule of thumb, the pay-back time for development investments – addi-
tional new revenues or cost savings divided by the investment – should be less than
3-4 years for the investment to be considered as a serious option. This is because the
intended higher output rarely can be achieved because of complications and bottle-
necks elsewhere in the production line revealed by the new investment. Another factor
is that it might take longer than expected to reach the planned higher production.
Table 10 gives some rough guidelines for evaluating the feasibility of develop-
ment investments based on pay-back time.
Table 10. Profitability criteria for development investments.
Case Payback time (years) Implementation

1 Less than 1 year Good Investment, to be implemented as soon as posiible
2 1-2 Good investment, which could be implemented during next suitable
shutdown
3 2-4 Requires careful analysis before implementation
4 More than 4 years Usually questionable prposal
11 Distribution of economic information to the operating floor
Distribution of relevant economic information to the operating crew helps to improve

working motivation, production and product quality. The mill management can further
enhance this positive impact by arranging training and education to improve employ-
ees’ understanding of economic facts. For example the following issues are recom-
mended to be discussed:
1. How large are the financial losses caused by an unexpected shut-down
lasting one hour?
2. How much extra revenue results from lowering waste due to bad quality by
one percentage point?
3. How much extra revenue comes from increasing paper machine speed by
10 m/min?
4. How many complaints relate to the paper machine, and what are their con-
sequent costs?
5. How much can costs be reduced by increasing the filler content in the fur-
nish by one percentage point?
The mill management should select the subjects by carefully analysing the most
common and important questions that a specific production line encounters in its
daily operation. Receiving simple and clear solutions to the problems they are likely to
face, the operating crew members will have the knowledge and ability to act in an ap-
propriate manner and to achieve optimum results.

Chapter 10
Investment decisions
1 General................................................................................................................................159
2 Capital expenditure projects..............................................................................................160
2.1 Definition of investment categories.......................................................................................160
2.2 Capex planning process........................................................................................................160
2.3 Profitability and competitiveness criteria ..............................................................................162
2.4 Project implementation.........................................................................................................169
2.5 Criteria for selecting new equipment.....................................................................................169
3 Mergers and acquisitions (M&A).......................................................................................171
3.1 Features of M&A transactions...............................................................................................171
3.2 M&A processes.....................................................................................................................172
References...........................................................................................................................174

1 General
Major investment decisions can be divided into two main categories:

1. Capital expenditure (capex) projects
2. Mergers and acquisitions (M&A)
The pulp and paper industry uses both capex projects and mergers and acqui-
sitions to realise company strategies. In capex projects capacity is typically added.
The same applies to many mergers and acquisitions. However, mergers and acquisi-
tions include divestments as well, i.e. projects, in which capacity is reduced by selling
part of it to another company.
Typical of capex projects, particularly large ones, is their long lifespan of sev-
eral decades. A lack of flexibility in the production of a certain paper machine or
pulp mill is another typical characteristic. A major new capital investment is therefore
an irreversible step. The size of the investment also restricts moves in other direc-
tions, sometimes for many years. The planning phase and permit application proc-
ess preceeding the final decision usually takes a long time, in a new paper machine
project often 2-4 years. For these reasons, any large capex decision requires meticu-
lous preparation. Adequate resources are necessary for the planning phase, since the
costs of this phase are small, usually 1-2 % of the total expenditure.
Against this background, it is obvious that the positive impact of any large
capex project on the company finances take the time required for planning, construc-
tion and start-up. In small and medium-sized projects (e.g., a paper machine moderni-
sation), the total time is two or three years, and in a large project, such as a new paper
machine, more than five years.
Mergers and acquisitions differ from capex projects in several ways. The most
striking difference is in the duration of the project. Typically, the planning and nego-
tiations for mergers and acquisitions take less than six months. The impact on the
company’s profit and loss account as well as balance sheet starts on day 1 after the
closing of the deal. The quicker impact on company finances and structure is one of
the reasons for using mergers and acquisitions rather than capex projects.

Chapter 10
2 Capital expenditure projects
2.1 Definition of investment categories

Investments can be divided into three categories:
1. Strategic investments
2. Development investments
3. Replacement investments
Strategic investments aim to significantly expand production capacity (e.g.
by installing a new paper machine) or to start manufacturing of a new product. In
both cases, the purpose is either to strengthen the existing strategic direction of the
company or change it in the desired direction. Strategic investments are designed to
improve the earnings capacity and competitiveness of the company.
Typical of strategic investments are their large size and decision-making forum,
which always is the board of directors (BOD) representing the owners of the company.
Development investments improve the financial result by increasing the volume,
quality or efficiency of production. A paper machine modernisation typically falls into
this category. The decision-making forum for development investments is mostly the
BOD.
The purpose of replacement investments is to secure continued production and
to maintain the mill’s earnings capacity by replacing worn-out equipment. Typically,
replacement investments are unprofitable and as such comparable to maintenance
costs. The decision-maker is usually the head of the production unit, e.g., a paper or
pulp mill.
2.2 Capex planning process

The capex planning process can be divided into four phases:
1. Conceptual phase
2. Pre-feasibility study
3. Feasibility study
4. Investment decision and implementation
1. Conceptual phase
In the conceptual phase, ideas and discussion items are lightly formalised
and documented on an informal basis. At the end of the conceptual phase,
most ideas are in practice postponed or directly rejected. If an idea is felt to
have enough merits for further analysis, a pre-feasibility study will follow.
2. Pre-feasibility study
The purpose of the pre-feasibility study is to define the scope, costs and
profitability of the project with reasonable accuracy. For investment costs
this could mean an accuracy of +/- 10-15 %. Discussions are usually con-
ducted with main equipment suppliers in order to establish realistic targets
and best technology and to obtain indicative, non-binding quotations for
main machinery and equipment for cost estimates.

The pre-feasibility study includes, as a part of the above, the following

analyses:
1. Market study
The aim of the market study is to estimate future demand and price
development. A historical overview of these two factors usually forms
the starting point for the analysis. An attempt to estimate the future
supply is made based on on-going investment decisions and prob-
able new projects, expected shut-downs of existing mills and paper
machines, and the estimated total capacity increase through minor
investments and improvements. These minor investments are often
ignored, though they often increase capacity by 1-2 % a year. A sup-
ply estimate of this kind is reasonably accurate for a period of two to
three years, which is a short time considering that construction of a
new paper machine or pulp mill takes 18-20 months from investment
decision to completion.
2. Raw material availability and costs

The availability, quality and price of raw material are important con-
siderations for any new project. These aspects must therefore be reli-
ably verified. Availability consists of two elements:
- verification that the required volume of raw material such as wood,
recycled fibre, or both, does exist
- verification that the necessary infrastructure and supply organisa-
tion exists and can supply the required raw material
3. Cost competitiveness and profitability

To assess these aspects, a general mill design, including basic design
data of main machinery, is necessary. This provides information for
the preliminary investment budget and manufacturing cost estimate.
A preliminary idea of the profitability of the project results from com-
paring estimated manufacturing costs with estimated sales revenues.
The time required for a pre-feasibility study varies depending on the
size of the project, the required accuracy etc. A rough guideline is 3-4
months for a small project and 5-8 months for a large project.
If the pre-feasibility justifies further analysis, it is followed by a feasi-
bility study.
3. Feasibility study
The purpose of the feasibility study is to further examine all aspects of plans
to a depth that allows a project implementation decision to be made. This
requires several items to be finalised, including the following:
1. The technical scope of the project (design data, volume of output,
selection of equipment, implementation method etc)
2. Investment budget (based on quotations from suppliers)

Chapter 10
3. Market analysis (including price estimates for the life-span of the

project)
4. Manning and organisation
5. Schedule, permits and financing plan
6. Profitability calculations and cost competitiveness analysis
In addition to the above, the feasibility study phase includes plans that are
detailed enough to facilitate quick start-up of project implementation, if the
project receives the green light.
The feasibility study must be sufficiently reliable to ensure that the invest-
ment and initial budget are accurate with a margin of error of plus or minus
1-3 %, depending on the size and scope of the project. The time required
for feasibility study in a paper mill project is normally 4-8 months. In some
countries, this phase can take 12-18 months due to time-consuming permit
application procedures.
4. Investment decision and implementation

If a go-ahead decision is made based on the feasibility study, the next step
is to order the main machinery with long delivery times. In a paper mill
project, this will be the paper machine, in a pulp mill project, the digesters,
recovery boiler, or both. Purchasing requires a substantial outlay of capital.
Stopping the project after this point is very expensive. Therefore, the invest-
ment decision is often called “point of no return”.
When the main machinery has been ordered detail engineering will start.
This includes all the activities necessary to transform the plans into reality.
For this reason, detail engineering is not part of the preparatory phase but
belongs to the implementation phase.
Having the feasibility study made to a level of detail that allows ordering the
main machinery immediately after the project has received the green light
is an important advantage. Detail engineering can then begin immediately
after the investment decision, allowing the implementation time to be mini-
mised.
2.3 Profitability and competitiveness criteria

1. Profitability
The most important factor in assessing the feasibility of a project is its prof-
itability in terms of the return on investment. The following equation shows
the relationship of these items:
Result
Return on capital = ---------------------------- (1)
Capital employed

The return on investment must be estimated before making an investment

decision. The key problem is that capital must be employed immediately
after making the investment decision. This usually occurs shortly after the
decision. The results only begin to materialise much later.
Cumulative cash flow of a new paper machine project
100
Cumulative cash flow (Million EUR)
0
-2 -1 0 1 2 3 4 5 6 7 8 9 10
-100
Pre-feasibility study
-200
Detail planning
-300
-400
Project IRR 14%
Investment Startup
-500 decision
Year
Figure 1. Cumulative cash flow of new paper machine project.
Figure 1 illustrates the cumulative cash flow in a typical paper machine

project. As the figure shows, the cumulative cash flow is at its lowest point
about one year after start-up. This is the time when all capital for the invest-
ment has been used and required working capital has been added to the
balance sheet. The production is usually still below maximum because of
normal run-in problems. If the production volume and/or product price is
lower than estimated, the financial position of the company gets strained.
This is particularly the case if the project is large in comparison to the in-
vesting entity.
A specific problem related to the different timing of outflow and inflow of
money is resolved by calculating the internal rate of return (IRR) of the an-
nual cash flows for a given number of years. The definition of IRR is the fol-
lowing:
IRR (%) = the discount rate that equates the present value of
the future stream of payments to the initial investment
Stream of payment = annual cash flows
Initial investment = total investment at time of investment decision

Chapter 10
The advantage of IRR profitability is that it illustrates return expectations

with a single figure, so that projects having different cash flows during the
duration of the project are easily comparable with this method.
In principle, the IRR of a project should be high enough to cover both return
on capital employed plus any risk factor. Both factors vary from country
to country and from one period to another. As a guideline, the IRR should
exceed the company WACC by 3-5 percentage points to cover all types of
risk attached to the project. In addition, small development projects usually
require an extra risk premium to cover the risks remaining in the old part of
the machinery.
Apart from ROCE and IRR, the impact on the company’s EPS and D/E ratio
should be analysed, specifically in large projects (ROCE, EPS and D/E are
explained in Chapter 9).
2. Sensitivity of profitability
Production Sales price Investment

35
30
25
20
15
IRR (%)
10
-5
-10
-15
-30 -20 -10 0 10 20 30
Change (%)
Figure 2. Sensitivity of profitability.
Figure 2 illustrates the sensitivity of a typical paper machine project to changes

in key factors. The following conclusions can be drawn:
1. The profitability is most sensitive to changes in sales price. Extreme
care should therefore be taken in analysing this aspect. Unfortunately,
unexpected market developments and cyclical factors usually make
sales price forecasts unreliable and should thus be taken into account
as an extra risk factor.

2. The profitability is least sensitive to changes in the investment cost.

This means that one should not make investment cost savings that
endanger the production or sales price. In addition, the company
itself has almost total control over the investment cost. With careful
planning, no unexpected increases or decreases in investment cost
should occur. The reliability of this factor is therefore diametrically op-
posite to that of the sales price.
3. Wood-paying capacity
When there is a scarcity of wood, calculating the wood-paying capac-
ity (WPC) of a project is a useful complement to profitability. If the scarcity
reaches a level where existing mills or machines must be shut down, the
WPC is often the decisive criterion used by a company in selecting which
mills to keep running, which to shut down.
The following equation gives the definition of WPC, using EUR as a sample
currency:
M - (V + P - R)
WPC = ------------------------ EUR/m3 (2)
W
where M is Sales income, EUR

V Manufacturing costs, EUR
P Capital costs, EUR
R Wood costs, EUR
W Wood consumption, m3
In general, the WPC increases with higher value-added products, unless the
capital factor, P, is very high.
To be able to calculate WPC and profitability in a new project, the sales
price needs to be known. As indicated earlier, the sales price is an uncertain
factor. Cyclical variations and long-term price developments are difficult to
predict with reasonable accuracy and reliability. In addition, different pulp
and paper products follow different patterns. In product comparisons, the
product’s cyclical phase will influence the profitability ranking. For most
bulk products, the real price – where real price = inflation-adjusted price – is
declining by 0.5-2.0 % per year. The speed of this trend depends on the
technological development strategy of market leaders and other factors that
add to future uncertainties.

Chapter 10
4. Cost competitiveness
For bulk products, good cost competitiveness (=low manufacturing costs) is
a key factor for success. The following two equations help in determining a
product’s cost competitiveness:
Sales price requirement = manufacturing cost + capital cost + distribution cost (3)
Cash cost requirement = variable manufacturing cost + distribution cost (4)
The concept of cost competitiveness includes the following features:

- No sales price estimates are necessary, in contrast to profitability and
wood-paying capacity analyses. This eliminates one factor of uncertainty.
- In cost competitiveness comparisons between different regions, future
exchange rate variations enter the picture. This is a factor of significant un-
certainty when analysing differences in cost competitiveness between conti-
nents (e.g., EUR versus USD, EUR versus CAD or EUR versus BRL). Since
the introduction of the euro, this factor of uncertainty has disappeared from
cost comparisons between euro countries.
- Cost competitiveness calculations are usually based on the present cost
and technology level. A prediction of the future development of these fac-
tors makes the calculation more accurate.
One can calculate cost competitiveness for new, hypothetical mills, using
state-of-the-art technology as in Figure 3, or for existing mills or paper machines as in
Figure 4.
- EUR/t 2006
450
Delivery (CIF to a sea

400 port in Western Europe)
350
Other fixed costs
300
250 Personnel
200
Other variable costs
150
100
Wood
50
0
a
h
e
le
t
sia
es
ric
ut
vi
op
hi
na
So
W
us
Af
C
ur
di
R
lE
a
h
SA
an
ad
ut
t ra
So
U
Sc
an
en
C
Figure 3. Cost competitiveness of BSKP market pulp, best mill in each region1.

700 - EUR/t 2006
600
500
Full costs (*
400
300
Manufacturing costs +
200 Delivery (CIF to a sea
port in Western
Full cost includes straight-line
Europe) depreciation and ROCE
100 requirement of 10,0%
0
0 5 000 10 000 15 000 20 000 25 000 30 000
- Cumulative capacity, 1 000 t/a -
Figure 4. Cost competitiveness of existing BHKP market pulp mills1.
The former analyses indicate the potential competitiveness of a region to pro-

duce a certain pulp or paper grade. The latter calculations indicate the present cost
level and structure of existing producers.
Cost competitiveness analysis is used for the following purposes and in the fol-
lowing context:
1. The lowest-cost producer is the price leader. If the market share of the price
leader is high enough, the producer can have a significant impact on overall
price development.
2. During recessions, when prices usually decline, the bottom can reach the
cash costs of the lowest-cost producer. Prices do not dip beyond this point.
3. The cost curve structure of existing producers indicates many interesting
factors that have an impact on the business climate. If the cost curve is
steep – i.e., the difference between the highest- and lowest-cost producer is
large – decreasing prices during recessions stop well ahead of the lowest-
cost producer’s price. The reason for this is that high-cost producers must
stop production when the market price dips below their cash cost level.
This helps to restore the market and price balance. If the cost curve is flat
– i.e., the difference between the highest- and lowest-cost producer is small
– recession prices decline rapidly but stop at the lowest cash cost level or
slightly above it.
It is obviously an advantage to participate as a low-cost producer in a busi-

ness where the cost curve is steep. This should theoretically make it possible to earn
money in all phases of the cycle. Pulp is a typical example, where South American
producers enjoy this situation.

Chapter 10
1 000 - EUR/t 2006

Manufacturing Costs
900
800
Market based pulp price
for integrated producers
700
600
500 Cost based pulp price

for integrated producers
400
300
Assumed pulp prices (CIF
200 in Western European sea
port):
100 BSKP: 554 EUR/ADt
BHKP: 515 EUR/AD/t
0
0 500 1 000 1 500 2 000 2 500 3 000 3 500
- Cumulative capacity, 1 000 t/a -
Figure 5. Cost competitiveness of European volume copy paper producers1.
Figure 5 shows the crucial importance of correct cost information in analysing

competitiveness. It illustrates the cost competitiveness of European volume produc-
ers of copy paper. According to the figure, with the cost-based pulp price (all costs
calculated from wood to paper), integrated producers have lower costs, i.e., better
cost competitiveness, than with the market-based price for pulp supplied to the paper
mills. If the market price of pulp declined further, the curves would move closer, and if
it declined enough, the paper mill would have lower costs with market pulp than with
integrated pulp. If, on the other hand, market pulp prices increased from the levels in
Figure 5, the opposite would happen, i.e. the gap between the curves would widen,
improving the cost competitiveness of integrated mills using cost-based pulp.
To illustrate this point, let us assume that the above situation is faced by a com-
pany that is contemplating a new paper or board mill and which has a surplus of pulp
sold as market pulp. Two alternatives exist:
1. New investment to use the company’s own pulp based on pulp manufactur-
ing costs (=integrate the pulp mill financially into the new investment)
2. New investment to use the company’s own pulp based on the market price
for pulp (= pulp mill to continue financially as an independent and separate
unit)
With expected reasonable market pulp prices, alternative 1 would have lower
manufacturing costs and thus better cost competitiveness for the contemplated paper
or board investment. But this would happen at the expense of the pulp mill’s profit-
ability, since if left alone, the pulp mill would have been able to sell its pulp at a higher
price in the market. The decision which option to choose depends primarily on the
company’s strategy vis-à-vis its core products.

2.4 Project implementation

The way in which the organisation intends to implement the project should be ana-
lysed early on in the planning phase, and the project implementation method should
be decided in the feasibility study stage, at the latest. In principle there are three
methods available:
1. EPCM (Engineering, Procurement and Construction Management)
EPCM means that the project is procured in several packages from many
different suppliers. This results in a large number of separate contracts and
supplier interfaces to be managed and controlled. The project owner is re-
sponsible for the project management.
EPCM is typically used when the project owner has a strong and experi-
enced project management organisation that is capable of managing the
project and combining the small parts into a complete project. The EPCM
method is used in all types of project, small and large. Most small/medium
sized modernisations are typically implemented with the EPCM method.
2. EPC (Engineering, Procurement and Construction)

EPC means procuring the project in large packages from a limited number
of suppliers. The packages consist of a complete delivery, including all nec-
essary equipment, engineering, procurement, training, commissioning etc.
For example a new paper mill or pulp mill project, if implemented with the
EPC method, might consist of 4-8 large packages.
With the EPC method the number of contracts is reduced and thus also the
number of interfaces. For this reason, it is often applied when the owner
has limited project management resources and/or when the suppliers are
prepared to deliver the requested package. EPC increases the suppliers’
responsibility and reduces the owner’s possibilities to control the project.
Consequently, EPC projects must be carefully planned to be able to define
the EPC contracts in detail and thus to avoid costly changes during im-
plementation. The EPC method has lately been used e.g. in large pulp mill
projects.
3. Turn-key
Turn-key means that the entire project is procured as one large package
from a single supplier using only one contract. Complete responsibility for
delivering the project according to specifications remains with the supplier.
Turn-key projects are unusual in the pulp and paper industry. They might
become more common as equipment suppliers consolidate and grow in
size and their capability to deliver complete mills improves.
2.5 Criteria for selecting new equipment

The criteria for selecting new equipment should be based on the fact that pulp and
paper manufacture is a process consisting of a chain of equipment. When the chain is
broken, the process stops. Each machine and piece of equipment must be carefully

Chapter 10
selected, so the manufacturing process can perform properly and according to plan.
The following aspects and criteria need to be considered:
1. Performance and capacity

The part with the lowest rate of production – the weakest link in the chain
– determines the performance of the process. This part must therefore be
rigorously analysed. The bottleneck of the process should be the most
expensive machinery. In a paper mill this is usually the paper machine. In a
pulp mill, it is usually the recovery boiler or digester.
2. Operational reliability
The least reliable part of the process determines its total reliability. This is
usually difficult to assess in advance. Conceptually, it consists of the prob-
ability of disturbances and breakdowns.
3. Maintenance
To ensure effective maintenance, the spare parts and professional skills
needed for maintenance must be readily available at the mill or nearby.
Standardisation of electrical motors, bearings etc. is an advantage in ensur-
ing proper maintenance.
4. Controllability
The process should be easy to control. Relevant measurements should be
readily available to adjust the process or machine in the direction desired.
Good repeatability is important.
5. Guarantees
Most deliveries contain a guarantee clause that includes a penalty if the
delivery is late or does not perform according to standard. It is important to
note, particularly for inexperienced buyers, that penalties can never be high
enough to compensate the buyer for lost production. For instance, a one-
day shut-down of a new, 1 000 000 t/a pulp mill means approximately USD
1 million in lost contribution, assuming a pulp price of USD 650/ton.
Guarantees and penalties are a way of assuring the cooperation of suppliers
in correcting possible malfunctions and deficiencies in deliveries. However,
good guarantees should never be used as an important criterion in selecting
equipment.
6. Price
Price is an important factor, but considering the above facts, it is not a deci-
sive aspect. Price alone should never be the sole basis for selection.
An analysis of the costs of a large pulp and paper industry project will
substantiate the above statement. Table 1 shows the cost break-down of a
large pulp and paper industry project.

Table 1. Cost breakdown of a large pulp and paper industry project.

% of costs
1. Main process equipment 29
2. Auxiliary equipment, piping, tanks etc. 11
3. Electrical and instrumentation 9
4. Insulation, paint etc. 2
5. Construction managment 6
6. Engineering 5
7. Erection 15
8. Civil works 20
9. Insurance, freight, others 3
10. Total 100
According to Table 1, main process equipment accounts for less than 30 %

of the total investment cost. A 10 % saving in this item will lower the total
investment cost by less than 3 %. As Figure 2 shows, a change in total
investment costs does not influence the profitability of a project to any ap-
preciable degree. A reduction of 3 % in investment costs improves the IRR
by less than one percentage point.
An example of the conclusions drawn from Table 1 is a project where a new
paper machine is installed in an old building. Provided that the existing in-
frastructure allows maximum use of economy of scale, this kind of project is
often successful. Savings can be achieved with items 2-9 in Table 1, com-
prising two-thirds of the investment cost.
An opposite example is a case where an old paper machine is installed in a
new building. The savings can only come from item 1 in Table 1, account-
ing for less than one-third of the investment cost. An old machine cannot
achieve the performance of a new one. Its comparatively low production will
have a detrimental effect on profitability.
7. References
Many of the above aspects are difficult to substantiate. Suppliers’ good refer-
ences and earlier experience are valuable and important factors to consider.
3 Mergers and acquisitions (M&A)
3.1 Features of M&A transactions

M&A transactions vary significantly. Their four most important features are:
1. Method: auction or negotiated sale
2. Ownership: private or public company
3. Type of transaction: friendly or hostile
4. Object to be acquired: company or assets only

Chapter 10
Table 2 gives a summary of the characteristics of auctions and negotiated sales.

A public company transaction can be divided into friendly and hostile processes. In a
friendly transaction, the acquirer works in agreement with the target’s board of direc-
tors. The confidentiality of the discussions is vital and the process should be quick to
minimise the risk of leaks. A leak would most likely destroy and stop the project.
Table 2. Typical features of M&A transactions.

1. Governed by takeover regulations 1. Same as for negotiated sale of public
2. Board of target company can only companies
recommend the transaction to shareholders 2. In addition, the auction schedule is
Public 3. Buyer needs to make tender offer another process forced on the buyer
for the targets shares
4. Due diligence limited, no preferred acces
to any particular buyer
5. Can trigger competing offers
Target
1. Letter of intent is jointly developed by 1. Seller controls process
buyer and seller, joint agreement on 2. Limited interaction between buyers
process and timetable and seller before submission of
Private 2. Due diligence process engaged binding offer
informally or formally and can last for 3. Due diligence usually short and strictly
several weeks controlled by seller
3. Opportunity to build relationships with
target company managment
Negotiated sale Controlled auction
In a hostile process, the offer comes unsolicited (e.g. through an advertisement

in a newspaper), unknown and unwelcome to the target company’s board. For a hos-
tile offer to be successful, it needs to be significantly higher (e.g. 30-40 %) than the
target’s share price before the offer.
In an asset deal, the acquirer buys only the assets (such as a paper mill) but not
the target company itself. This means that the liabilities and commitments of the target
company are left outside the deal, thereby limiting the responsibilities assumed by the
acquirer.
3.2 M&A processes

The key M&A processes are:
1. Feasibility study phase
The purpose of the feasibility study is to evaluate and preliminarily conclude
whether the acquisition is of interest. If the answer is yes, a preliminary deal
proposal should be made, including a plan for the due diligence and nego-
tiation phase. By having a good plan and being well prepared the acquirer

takes control of the process, minimises the time for negotiations and thus
lowers the risk of a leak and new competitors entering the race.
2. Due diligence and negotiation phase

Due diligence means a process of reviewing and analysing all aspects of
the target as to ascertain and verify that it concurs with expectations and
does not contain nasty surprises. The due diligence team typically includes
several internal specialists such as technical, market, financial, legal, tax,
human resources, communications etc. Outside advisors such as invest-
ment bankers, auditors, lawyers etc., are also involved. This is particularly
the case in large deals. The negotiation phase includes preparation of the
final deal proposal and plans for the integration phase.
3. Signing and closing

Signing typically involves an agreement between the buyer and seller to
conclude the transaction within a certain period, subject to final checks.
Competing bids often come in just before signing. The buyer then needs to
decide whether to stay firm or be flexible. At the closing of the deal the par-
ties sign the final agreements, ownership changes and payment is made.
The integration and communication plan should be finalised during this
phase.
4. Integration phase
The objective of this phase is to successfully integrate the acquired com-
pany. A good way to do that is to establish an integration team consisting of
the acquirer’s experts.

Chapter 10
References

Chapter 11
Economy of scale
1 Definition and description..................................................................................................176

2 Economy of scale of a pulp mill.........................................................................................178
3 Economy of scale of a paper mill.......................................................................................179
4 Economy of scale in two-line paper mills ........................................................................180
5 Minimill concept.................................................................................................................181
6 Economy of scale of speciality paper mills.......................................................................182
7 Future development of economy of scale..........................................................................182

Chapter 11
Economy of scale
Economy of scale is the cost advantage achieved by using large and growing unit sizes in the
manufacturing process.
During the history of pulp and papermaking, economy of scale has been utilised to lower
both investment and operating costs. Since 1990, the optimum size of a pulp or paper
mill producing bulk grades has increased roughly by a factor of two to the present technical
maximum.
In speciality paper grades, other factors rather than maximum technical unit size are
decisive. These are market and order size, the time required for grade changes, quality and
service etc. Based on these, the optimum paper machine size can be estimated.
1 Definition and description

Economy of scale is defined as follows: “Economy of scale is the cost advantage
achieved by using large and growing unit sizes in the manufacturing process”.
The pulp and paper industry has utilised economy of scale in all areas of its
operations for the past 50 years. The size of new paper machines and pulp mills has
increased constantly.
1100
1000
900
Continuous digesters
800
700
Capacity (1000 t/a)
600
500
Newsprint
400
300
200
100
TMP-lines
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
Figure 1. Capacity trend for new TMP-lines, newsprint machines and continuous digesters.

Economy of scale
As illustrated in Figure 1, the production capacity of new newsprint machines

has increased from 75 000 t/a to 400 000 t/a – by a factor of more than 5 – during
1960-2005. This means an annual increase of about 4 %. The growth in size for con-
tinuous digesters has been almost as fast, from less than 200 000 t/a to 1 000 000 t/a.
The main reasons for the increase in size have been the lower investment and manu-
facturing costs per ton of output attained through larger unit size.
The following general characteristics apply to economy of scale:
- The investment cost per ton of a large unit, such as a pulp line or paper ma-
chine, is lower than for a similar unit of small or medium size.
- Manufacturing costs per ton of output are often lower in a large unit. For ex-
ample, wages and salaries might be numerically on the same level regard-
less of the size of a new line, because the number of personnel is the same.
However, due to larger output, the costs per ton are lower for the large unit.
There is an upper limit for new machinery that restricts the output to a certain
maximum. If this limit is exceeded, the mill has to be built in two separate lines. Some
savings can still be achieved in such a situation, although the advantages tend to sta-
bilise at a certain level. Typical savings achieved in these cases are the following:
- savings in costs related to the mill area and infrastructure, such as railway
tracks, roads, maintenance departments, administration buildings, water
intake, effluent treatment etc.
- lower general overhead, including administration, health care, research and
development etc.
The minimum economical size of a line is the size after which the cost ad-
vantage of larger capacity becomes minimal. Over time, this size increases for most
grades. As a general rule, for bulk grades such as pulp, newsprint, woodfree and me-
chanical printing papers, kraftliner etc., building a new line of maximum size or close
to it is necessary to maximise economy of scale.
With the maximum size of a line increasing over time, it has become apparent
that large size also has disadvantages:
- availability of raw material, such as wood or recovered paper, cannot be se-
cured within a reasonable distance due to the large volumes necessary
- transport distances for raw materials increase and cause higher costs
- environmental loads increase to unsatisfactory levels
- small orders are difficult to produce efficiently

Chapter 11
- marketing efforts must cover a wider geographical area. This adds to mar-
keting costs and increases transport costs of finished products, lowering
the prices after transport costs at mill. In addition, a sudden, large increase
in supply is likely to have a negative price effect, which is costly for exist-
ing and new producers. This factor has lately been mitigated by companies
shutting down old mills and machines, when deciding about a new paper
machine investment.
The above factors are becoming critical in many instances, especially when
considering a significant capacity increase.
2 Economy of scale of a pulp mill

The economy of scale of a pulp mill is determined by the main machinery, such as
the digesters, recovery boiler, and pulp drying machine. In most cases, economy of
scale is significant for investment and manufacturing costs. The largest possible size
is therefore usually selected, especially when building new mills. In 2005, the largest
single-line mills had a capacity of 1 million t/a. According to current investment plans,
this figure is likely to increase further.
Figure 11.2. Profitability as a function of capacity
(Extrapoloitu vanhan kirjan kuvaa 9.2 s. 143)
300
Brazil/Indonesia
250
Profitability index
200
150
100 Scandinavia
50
0
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200
Capacity (1000 t/a)
Figure 2. Profitability as a function of capacity in Scandinavian, Brazilian and Indonesian kraft pulp mill.
If a production capacity higher than indicated above is desired, the mill has to
be built in two lines. Figure 2 shows the effect of economy of scale on profitability as a
function of capacity in the Nordic countries, Indonesia, and Brazil.

Economy of scale
- In the Nordic countries, a second pulp line does not add to profitability; it
actually has the opposite effect. The main reason for this is higher wood
costs due to longer transport distances for raw material. Thus no new pulp
mills will be built in the Nordic countries.
- In Brazil and Indonesia, a second pulp line adds to economy of scale and
improves profitability, because investments in infrastructure, including rail-
way tracks, roads, bleaching chemical and electricity supply, housing for
employees etc., are very high for the first pulp line.
- The profitability of a new pulp line in Brazil or Indonesia is better than in the
Nordic countries because of lower wood costs. The rapid growth of wood
in these regions ensures that the second line does not significantly add to
wood transport distances and costs, as shown in Table 1.
Table 1. Comparison of wood growth area in Brazil between pulp mills with capacity
of 1 and 2 million tons/a.
Capacity
1 mil.t/a 2 mil.t/a
Production (1000 t/a) 1 000 2 000
Wood consumption ( m /t)3
4 4
Wood consumption (million m /a)
3
4 8
Wood growth (m3/ha/a) 40 40
Area required for wood supply (ha) 100 000 200 000
Area required for wood supply (km x km) 32 x 32 45 x 45
Although the example in the table is simplified, it illustrates the small additional
wood transport distance for the second line. The advantage of lower wood costs re-
mains. Combined with equal investment costs and lower wood costs, this gives Brazil
and Indonesia a clear advantage.
3 Economy of scale of a paper mill

The speed and width of paper machines influence the economy of scale of a paper
mill. The dominant factor since the early 1980s has been speed rather than width. In
bulk grades, a machine wire width of 9-10 m was possible during the 1970s. This has
increased by only 1 metre due to the following factors:
- Roll diameter increases by an exponential factor of three, causing dramatic
increases with higher widths. Increased weight and price will result.
- The principal machine suppliers’ (e.g. Metso and Voith) manufacturing ma-
chinery, including grinders and foundries, set a limit of about 11 m.
- Wire and felt manufacturers’ machinery has also restricted the width to
11 m.

Chapter 11
Figure 11.3 Speed development of newsprint machines 1955-2005
2500
2000
Speed (m/min)
1500
1000
500
0
1955 1965 1975 1985 1995 2005
Figure 3. Speed development of newsprint machines 1955—2005.
Figure 3 illustrates the dramatic development of economy of scale through

increased speeds. The maximum speed of new newsprint machines in 1955 was ap-
proximately 400 m/min. In 2005, it had increased to 1800-1900 m/min. This is an an-
nual increase of 4.5 % or 30 m/min.
Greater widths than the present maximum of 11 m seem unlikely because of
construction and technical constraints. Research and development efforts therefore
concentrate on increasing paper machine speeds and efficiency. Maximum paper ma-
chine speeds will therefore probably continue to grow.
To make full use of the potential economy of scale achievable through higher
paper machine speeds, the maximum speed of the drive should be slightly higher
– for example 100-200 m/min – than the maximum running speed with best available
technology (BAT). The balancing speed of paper machine rolls should also exceed the
drive speed by another 100 m/min. The additional costs of these measures are negli-
gible compared with total project costs.
The paper machine alone constitutes 25-30 % of the total mill investment.
Economy of scale for the entire project can sometimes increase further at capacity
levels where the economy of scale of the paper machine alone is decreasing.
4 Economy of scale in two-line paper mills

The addition of a second paper machine often improves the economy of scale of a
paper mill. This is because the investment costs for the second line are 10-20 % lower
than for the first line due to savings from existing infrastructure. Another benefit is the
mill organisation’s experience of the first machine in start-up, marketing etc.

Economy of scale
Against this background, when selecting a greenfield site for a new paper mill,
the site should have sufficient space for at least a second paper machine. In some
cases, a third and fourth paper machine on the same site might still have positive ef-
fects on profitability, although the disadvantages of economy of scale could start to
grow to unacceptable levels. Space, layouts, water availability, energy, environmental
factors etc., need to be considered for a much larger production than only one ma-
chine, when selecting a greenfield site.
5 Minimill concept
Economy of scale has long been a dominant factor when building new pulp and paper
mills. Disadvantages connected with large production units may include the following:
- high total investment risk and therefore increased financial risk
- higher total environmental loads
- exclusion of excellent mill locations suitable for small to medium-size mills
only due to restrictions in water availability, total area available etc.
To combat the above disadvantages, a so-salled minimill concept has been

developed with the aim to achieve competitive small scale paper mill structure. The
advantages of the minimill concept are the following:
- smaller total investment and total risk
- proximity to raw material source and markets and thus lower raw material
costs and increased product price at the mill due to lower transport costs
- possibility of using existing infrastructure such as energy from a municipal
power station, effluent treatment in a municipal sewage system, railways,
roads etc., to lower investment costs
- good availability of high-quality personnel
- use of maintenance facilities outside the mill, but in its physical proximity
- simpler technology results in a larger number of equipment suppliers than
for BAT machinery, with more intense competition leading to lower total in-
vestment costs
There are also some disadvantages:

- investment costs per ton of output may be higher than for larger units
- production costs may be higher than in large units, because manpower
costs per ton of output are higher (because the number of personnel is the
same regardless of unit size)
The minimills contemplated in the 1990s were usually based on a paper ma-
chine width of 2.5-5 m. Despite several plans, the idea never became popular. One
reason was possibly the fact that the consolidation of the paper industry created large
international companies. These selected their future mill sites on a continental or even
international basis, which enabled them to utilise economy of scale effectively.

Chapter 11
6 Economy of scale of speciality paper mills

As noted earlier in this book, the single most important buying criterion for bulk prod-
ucts, such as newsprint, corrugating raw materials, printing and writing papers etc.,
is price. Low manufacturing costs are therefore critical. For speciality papers, quality,
service, research and development support and similar factors are more important.
These factors can often overshadow the price aspect as a buying criterion. In addi-
tion, the market volumes for many speciality grades are small As a result, large ma-
chines do not produce speciality papers, and use of economy of scale as a competi-
tion factor is rare.
If a speciality grade develops over time into a bulk grade, the competitive envi-
ronment changes radically. This happened in the 1970s with uncoated fine papers and
in the 1980s with coated fine papers. These grades had been non-standard speci-
alities ordered and produced to specific customer requirements. Volume was often
small. This caused small production runs and frequent quality changes that would
have ruined the efficiency and profitability of large machines. As a result, fine papers
were produced on 2-4-metre-wide machines with capacities of 10 000-30 000 t/a.
Some fine papers such as envelope paper, continuous stationery and bulk offset have
become standard 30-40 years ago, allowing the use of economy of scale as a com-
petitive factor. New machines built after 1995 have therefore had maximum width and
speed with a production capacity of 350 000-450 000 t/a.
Many speciality paper grades have low market volumes. These include bi-
ble paper, cable paper, cigarette paper, filter papers for the automotive industry, wet
strength label paper, teabag paper, release base paper etc. Manufacturing these
grades on small paper machines can be highly profitable on a machine of the right
size. On a too large machine the short production runs and consequent frequent
grade changes would cause low efficiency and production rates and thus ruin efficien-
cy and profitability. High paper price caused by successful tailoring of quality to meet
customer specifications is the key success factor, rather than low manufacturing costs
caused by efficient production.
The optimum size of a speciality paper machine can be calculated on the basis
of order size, the estimated time required for grade changes, the total estimated pro-
duction volume according to market size for main grades etc. Benchmarking by mak-
ing use of the experience of existing machines gives additional information, which is
of value in determining the optimum machine size.
7 Future development of economy of scale

Efforts to maximise economy of scale will probably further increase the maximum size
of both pulp mills and paper machines.
The maximum size of a single-line pulp mill with continuous digesters is likely
to increase from 1 million t/a in the early 2000s to 1.2 million t/a in BHKP within a few
years, assuming that recovery boilers and drying machines can provide a correspond-
ing capacity increase. For batch digesters, the recovery boiler and drying machine will
be the limiting factors, since it is easy to add digesters .

Economy of scale
The maximum width of paper machines is likely to remain at 11 m. Growth

above this figure would require new, expensive machine tools and better control of
dynamic loads. However, maximum speed will continue to increase, although at a
slower pace. For newsprint, SC, and LWC papers, the present maximum speed of
1800-1900 m/min will approach 2000-2100 m/min, resulting in increases in production
capacity.
Other development views related to papermaking include the following:
1. Future furnish composition
- fractionation of fibres according to fibre properties
- upgrading of fibres through chemical or enzymatic treatments
2. New technical solutions

- stratified web forming
- higher consistency and integration of wet end
- high-temperature papermaking; improved energy efficiency and dry-
ing capacity
- spray/curtain coating
- shoe calendering
3. Environment
- conservation of water through closed water systems (more corrosion-
resistant and thus more expensive materials will be required)
- increased recycling
- improved heat recovery and increased energy integration between
production lines and society
An important objective for future technical development will be to lower invest-

ment and manufacturing costs per ton of new production. This should be the primary
goal of all development plans in order to combat declining real paper prices.

Chapter 12
Economy of integration
1 Definitions...........................................................................................................................185
2 Financial integration...........................................................................................................185
2.1 Degree of financial integration .............................................................................................186
2.2 Main objectives of financial integration.................................................................................186
2.2.1 Streamlining of production....................................................................................................186
2.2.2 More efficient use of investment funds..................................................................................187
2.2.3 Lessening the impact of cyclical variations............................................................................187
3 Vertical integration.............................................................................................................188
4 Two common development strategies of the pulp and paper industry............................191

Integration means the operation of several manufacturing locations and mills under a
common management.
There are several types of integration. Financial integration is common when the aim is to
gain synergies from improved efficiency and streamlining of production. This has been the
key driving force for mergers and acquisitions during the past 10-20 years.
In bulk products, a much used strategy has been to go for large companies through financial
integration. If growth is limited by a shortage of raw materials, vertical integration is
another alternative.
1 Definitions
Integration means the operation of several manufacturing locations and mills under
common leadership and management. Various types of integration are possible:
- Financial integration means co-operation between geographically separated
units based on common ownership.
- Vertical integration means that the end product of one manufacturing unit
forms the raw material of another. Examples would be a pulp mill producing
pulp for a paper mill, a sawmill producing chips for a TMP plant etc.
- In horizontal integration, different units use the same raw material base. A
sawmill and a pulp mill are good examples.
- Geographical integration means cooperation between different units situ-
ated in close geographical proximity, usually on the same mill site.
- Optimum multi-product integration refers to geographically integrated units
combined to use raw materials such as the wood resources of a certain
area in the best way.
The aim of integration is to achieve benefits and savings that cannot be ob-
tained without integration.
2 Financial integration
Financial integration through M&A’s has been a dominant feature in the pulp and pa-
per industry during the past 10-20 years.

Chapter 12
Table 12.1.
2.1 Degree of financial integration
Operational • Intervenes frequently or runs the business

Operator
• Initiates and leads most improvement
programs
• Directs the business

Strategic Strategic
• Brings expertise and coordinates interfaces to
planning controller
achieve synergy
Nature of • Launches some special initiatives
corporate
center • Gives guidance to business
Strategic Strategic
guidance guidance • Develops a strategic framework within which
architect
businesses operate
• Checks business logic before approving large
initiatives
Financial Holding
contro company • Gives financial targets
• Intervenes by exception if targets not met
• Sells and acquires businesses
Stand-alone Shared Shared Same

skills business business
system system
Integration degree of businesses
Figure 1. Degree of financial integration
There are several different degrees of financial integration as described in Figure 1:

- Stand alone: This represents a light degree of integration, often in the form
of a holding company structure. Financial control and targets are the main
integration tools.
- Shared skills: The integrator has strategic skills and knowledge, which ena-
bles it to provide business guidance and a strategic framework within which
to operate.
- Shared business systems: The integrator knows the business, is involved in
strategic planning, sometimes directs the business and brings expertise to
achieve synergies.
- Operator: This represents a tight degree of integration. The integrator runs
the business. In the pulp and paper industry, M&A’s carried out have been
based on tight financial integration to maximise synergies. Lately, when
private equity firms have acquired pulp and paper industry companies, the
degree of financial integration has been low, but financial control and target
setting extremely tight.
2.2 Main objectives of financial integration
2.2.1 Streamlining of production

The main objective of financial integration is to improve efficiency of operations by
streamlining production. A typical way to achieve this is to limit the number of grades
of each paper machine or production unit rather than having each production unit pro-

duce a wide variety of grades. Such specialisation improves production efficiency by

several per cent without requiring any investments. Certain additional quality improve-
ments such as a more stable quality level can also be achieved. Optimisation can also
be done relative to transports, i.e., by distributing orders and optimising transport
distance and costs. The example in Table 1 illustrates the potential benefits of these
measures.
Two paper companies, each with an annual newsprint production of 500 000 t/a,
income of 105, variable costs of 49.3 and fixed costs of 50.7, decide to merge. After
the merger, production is streamlined, which increases the mills’ production by 5 % or
25 000 t/a per mill.
Table 1. Impact of production streamlining on profitability

1. Income 1.05 x 105 = 110.25
2. Variable costs 1.05 x 49.3 = 51.77
3. Fixed costs = 50.7
4. Profit = 7.78
5. Profit with 500 000 t/a production =5
6. Difference (4) - (5) = 2.78
The extra profit of 2.78 gained per mill is significant. Its capitalised value – its
present value assuming a constant extra profit of 2.78 during a reasonable period of
time such as 5 years – varies with the interest rate and number of years between 12
and 15. For a 500 000 t/a newsprint mill, this equals approximately EUR 35-40 million
in extra value.
Assuming in the above example that both mills can achieve the said production
increase, the total additional value is significant.
Based on Section 7.2 in Chapter 8 in this book, the synergistic benefits
achieved through financial integration (M&A’s) since 1995 have averaged 2-3 % of the
combined sales. This is one of the strong driving forces for consolidation, which has
been experienced since 1990.
2.2.2 More efficient use of investment funds

More efficient use of investment funds means using economy of scale and directing
investments to those geographical areas and locations that have the highest earning
potential. This potential can be used by global pulp and paper companies.
2.2.3 Lessening the impact of cyclical variations

The objective is to decrease the impact of e.g. the following cyclical varations:
- economic fluctuations in the national economy, causing changes in com-
petitiveness and the profitability of manufacturing in that country or region
- variations in the demand for a certain paper grade
- economic fluctuations in a larger geographical region such as Europe, influ-
encing the overall demand pattern of pulp and paper products

Chapter 12
The impact of cyclical variations can be decreased with financial integration by

spreading the risk of market areas and manufacturing locations.
3 Vertical integration
The main characteristics of vertical integration are the following:
- achieving higher value added production
- increasing sales without increasing raw material consumption
- changing the mode of operation to greater marketing orientation so that
production and raw material-oriented policies are less important
Table 2. Development from rawmaterial oriented to market oriented operation.

Development from rawmaterial to market oriented operation
Step 1 Sale of wood and woodchips
Step 2 Sale of pulp
Step 3 Sale of liquid packaging board
Step 4 Sale of polyethylene coated liquid packaging board
Step 5 Sale of liquid packages
Step 6 Sale of packaging systems
Table 2 gives an example of the development from raw material- to market-ori-

ented operation, showing the steps in the development of a company through vertical
integration. In Table 2, step 1 is totally raw material-oriented, and step 6 totally market
-oriented.
Vertical geographical integration makes it possible to achieve integration ben-
efits which are impossible to obtain in production facilities situated on different sites:
- Some manufacturing phases are eliminated, saving both capital and costs.
For example, pulp drying and baling are unnecessary in an integrated pulp
and fine paper mill. The savings are about EUR 30-40/t, or 5-10 % of pulp
manufacturing costs.
- In a converting plant integrated with a paper mill, such as a sheeting plant in
a fine paper mill, the broke from converting can be reused in the paper mill.
- Economy of scale can be utilised more efficiently, for example by using the
energy generated by the production process, lowering both investment and
production costs.
Vertical geographical integration is often limited and unfeasible for market rea-
sons. Particularly high value-added products need to be produced near their markets.
This often requires cutting the vertical integration geographically.
A typical question facing all Nordic pulp and fine paper mills concerns the most
feasible location of paper production and sheeting operations in Europe. Table 3
shows three possible alternatives.

Table 3. Feasible location of paper and sheeting production in Europe.

Alternative 1 Alternative 2 Alternative 3
Scandinavia Pulp production Pulp production Pulp
Paper production Paper production
Sheeting
Central Europe Sheeting Paper production
Sheeting
All alternatives in the table are feasible under certain circumstances, and all
have been implemented at some time. Tables 4-6 show the advantages and disadvan-
tages of each alternative.
Table 4. Alternative 1: Pulp, paper and sheeting operations are geographically

integrated on one site in a Nordic country, sheets are shipped to continental
Europe.
Advantages Disadvantages
+ manufacturing cost savings through elimination of - longer delivery time of sheeted products in compari-
pulp drying son to having the sheeting facility in Europe
+ capital cost savings through elimination of pulp - more transport damage to sheeted products in com-
drying and baling parison to
1. sheeting facility in continental Europe
2. pulp bales or paper rolls produced alternatively
+ capital cost savings through smaller energy genera- - relatively higher transport costs of sheeted products
tion unit (energy of pulp dryer is used on paper in comparison to pulp bales or paper rolls
machine)
+ sheeting broke re-used at paper mill without - larger storage capacity and thus working capital
storage and transport requirements to compensate for longer delivery time
+ control of total manufacturing chain at one single - longer distance to end user and consequently less
location communication

Chapter 12
Table 5. Alternative 2: Pulp and paper operations geographically integrated on one

site in a Nordic country Reels are shipped to central Europe.
+ capital cost savings through elimination of pulp dry- - not possible to re-use sheeted broke on same site
ing and baling
+ capital cost savings through smaller energy - integration of production planning with paper mill
generation unit (energy of pulp dryer is used by more complicated than in Alternative 1
paper machine)
+ manufacturing cost savings through elimination of - longer distance and less communication to paper
pulp drying mill
+ short delivery time of sheeted products - need for larger intermediate storage of reels and
consequently higher working capital in order to
achieve short delivery time of sheets and production
+ short distance and easy communication with end runs of suitable length on the paper machine
user
Table 6. Alternative 3: Pulp mill located in a Nordic country and pulp shipped in
bales to continental Europe Paper production and sheeting integrated at
one site in continental Europe.
+ short delivery time for sheeted products - higher capital costs due to pulp drying and baling
+ short distance and easy communication with end - higher capital costs because of two separate energy
user units (pulp mill and paper mill)
+ sheeting broke re-used at paper mill without stor- - higher manufacturing costs due to pulp drying
age and transport
+ integration of production planning with paper mill
+ possibility to use pulp from other sources also
The selection of any of these alternatives requires careful analysis. The exist-
ing structure – present production facilities – requires consideration, since integration
benefits through expansion might provide additional savings. Note that all the alterna-
tives are practicable, often combined, depending on circumstances.

4 Two common development strategies of the pulp and paper industry

Considering the above descriptions of different integration alternatives, the following
fundamentally different development strategies may be formulated:
1. Increased added value based on vertical integration.
2. Multi-product integrated organisation using financial integration to achieve
synergies and economy of scale.
The main characteristics and fundamental differences of these two strategies

are summarised in Table 7.
Table 7. Two pulp and paper industry development strategies.

Forest industry development startegies
Vertical integration Multiproduct integrate
Strategic base Increased added value Optimal use of raw material
End products Specialities Bulk products
Mode of operation Market oriented Raw material and production oriented
Raw material Dependence on wood raw material Use of wood raw material is optimised
decreases
Industry structure Decentralised, international Located close to raw material sources
Limiting factor of operation Markets. Integration of added-value Availability of wood limits growth
products to unprofitable raw material
production does not improve com-
petitiveness sufficiently.
The application of both of these strategies simultaneously in one company is

difficult and usually not very successful.
Considering the increasing size of Nordic pulp and paper companies and future
shortages of raw material, the following scenarios may be possible:
1. A multi-product integrated organisation producing bulk products in an ef-
ficient and optimal way.
2. At a later stage, when availability of wood raw material becomes a limita-
tion, growth is generated through market-oriented vertical integration. Here,
self-manufactured bulk products can be converted to higher value-added
products.

Chapter 13
Currency exchange rates and risk management
1 Currency exchange rates....................................................................................................193

1.1 Introduction..........................................................................................................................193
1.2 Definitions............................................................................................................................193
1.3 Historical aspects of the Western monetary system...............................................................196
1.4 Factors affecting exchange rates..........................................................................................197
1.5 Purchasing power parity.......................................................................................................198
1.6 Conclusions..........................................................................................................................201
2 Risk management...............................................................................................................202
2.1 Introduction..........................................................................................................................202
2.2 Features of risk management................................................................................................202
2.3 Hedging methods and instruments........................................................................................204
2.4 Case examples.....................................................................................................................205

Currency exchange rates

and risk management
Currency exchange rates have a big impact on the relative cost-competitiveness of companies
situated in different currency regions. In addition, export revenues in foreign currency
fluctuate with exchange rates, thus having a direct impact on the financial result.
Currency exchange rates cannot be predicted, but deviations from purchasing power parity
can be significant and last for several years. These deviations can have a big impact on
profitability.
The purpose of risk management is to mitigate risks that have a critical impact on company
performance. One way to manage risks is to use financial instruments called derivatives.
The most actively traded derivatives are in pulp, newsprint and recycled paper. In these, the
seller and buyer agree to fix the price at an agreed level for a certain length of time in order
to avoid the negative impact of any major fluctuations.
1 Currency exchange rates
1.1 Introduction
European pulp and paper industry companies export a significant part of their produc-
tion. Their costs are therefore in domestic currency, and their sales revenues are partly
in some foreign currency. As a result, fluctuations in exchange rates between seller
and buyer countries immediately influence the net result.
When two companies in different currency regions compete for an order in a
third country, exchange rate variations between the countries influence the competi-
tive position of both companies. As explained in Chapter 10, Section 2.3, exchange
rate variations are the largest factor of uncertainty in analysing competition.
Since exchange rate variations have such a significant effect on the pulp and
paper industry, this chapter clarifies some basic principles of international finance and
their impact on pulp and paper industry operations.
1.2 Definitions
The descriptions below apply to countries and regions with different currencies. The
Euro-countries from a currency point of view form one entity, although each EU-coun-
try still has its own central bank with certain powers to control e.g. local interest rates.
1. Balance of trade and current balance
In all countries, a central bank controls the currency flow. When a foreign

Chapter 13
buyer pays for purchased goods in his domestic currency, this increases
the currency reserve of the central bank of the receiving country. The central
bank then pays the producer of the goods in the domestic currency. Exports
therefore increase the currency reserve and flow of domestic currency of the
exporting country.
When a domestic company buys foreign goods, it pays the central bank in
its domestic currency. The central bank uses its currency reserve to pay in
foreign currency to the producer of the purchased goods. Therefore, im-
ports decrease the currency reserve and the flow of domestic currency of
the importing country.
The balance of trade is calculated on the amount and value of goods ex-
ported and imported during a given period of time. The definition is as fol-
lows:
Balance of trade = value of merchandise exports – value of merchandise imports
If the balance of trade includes intangible factors such as services, tourism

etc., a current balance or current account is formed. It is defined in the fol-
lowing way:
Current balance = value of all exports (merchandise and services) – value of

all imports (merchandise and services) + net receipts of
interest, profits, and dividends from abroad
The current balance or current account therefore also equals the sum of
visible (trade) and invisible balances. A country that has a positive current
balance accumulates more currencies than it consumes.
2. Inflation
Inflation is the decrease in purchasing power of the domestic currency.
According to modern monetary theory, inflation is the outcome of an expan-
sion of the money supply in excess of real output growth. In practice, infla-
tion has the following effects:
- The domestic price level increases.
- Because of the higher price level, the cost-competitiveness in relation
to competing countries decreases. This lowers exports and the cur-
rency reserve.
- The competitiveness of imports increases so that the volume of im-
ports grows and lowers the currency reserve.
A high inflation rate compared with competing countries therefore causes

the currency reserve to decrease. If this development continues, it forces
the central bank to take steps to strengthen the domestic currency. A com-
monly used measure to counteract this trend is increasing the domestic

interest rate. This causes a higher savings rate and less consumption, both
of domestic and imported goods. Investments also decline as a result of the
higher cost of borrowed capital. This measure often causes the unemploy-
ment rate to rise.
A second measure often used to correct the negative effects of a high infla-
tion rate is currency adjustment as described below.
3. Purchasing power parity and currency adjustments

In theory, exchange-adjusted prices of identical tradable goods must be
equal globally. This concept is known as the law of one price. For this to
happen, the foreign exchange rate must change by the difference between
the domestic and foreign rate of inflation. This relationship is called pur-
chasing power parity. In simple terms, it means that a unit of domestic cur-
rency should have the same purchasing power around the world. Because
of different inflation rates, exchange rate corrections should equalise pur-
chasing power in different countries.
Devaluation means lowering the exchange rate in relation to foreign curren-
cies. It has the following effects:
- The competitiveness of the domestic industry improves, thereby in-
creasing exports and the currency reserve.
- Imports become more expensive. This usually lowers the volume of
imports and the demand on the currency reserve.
- The input of imports for domestic production increases in price.
- Foreign debt becomes instantaneously more expensive. This con-
cerns both interest payments and amortisation.
- The inflation rate often, but not always, increases.
Devaluation increases the cost of living due to higher prices of imported

goods and services, foreign travel etc. Devaluation therefore means a de-
cline in the total salary level and the standard of living. This causes new
pressure for wage increases and higher costs of domestic raw materials.
It may trigger a new round of inflation and subsequent currency exchange
movements.
Revaluation is the opposite of devaluation. It means an increase in the ex-
change rate in relation to foreign currencies. Revaluation can be effective in
a country that has an excessively high currency reserve and where the com-
petitiveness of the domestic industry is good. As the price level of imports
declines, revaluation causes an overall increase in the standard of living.

Chapter 13
1.3 Historical aspects of the Western monetary system

After World War II, the Western monetary system was based on the Bretton Woods
agreement, which consisted of the following main points:
1. The value of the US dollar was tied to gold, with one ounce of gold priced at
USD 35.
2. All other currencies were tied to the US dollar and therefore indirectly to
gold. Exchange rates between currencies were fixed with the limits of cur-
rency movements at 1%.
3. As a result of the above factors, the US dollar became a reserve currency
kept by most other countries in their currency reserves in the 1950s and
1960s. This arrangement was considered to be safe, since dollars could
always be exchanged for gold, if necessary.
The fixed exchange rates stipulated in the Bretton Woods agreement func-
tioned well until the beginning of the 1970s. During that period, currency fluctuations
between major countries were rare. The United States ran a constant current account
deficit that the reserves of other central banks absorbed. If a country had a severe
imbalance in its economy for a long period, or a higher inflation rate in relation to other
countries with a resultant dangerous decline in its currency reserve, a devaluation of
this currency occurred in agreement with the International Monetary Fund (IMF).
At the end of the 1960s, the inflation rate in the United States increased due
partly to the Vietnam war. As a result, the volume of US dollars increased to such an
extent that its exchange for gold became unrealistic. For this reason, the exchange
of US dollars for gold was ended in 1968 for private persons. Finally, in 1971 dur-
ing the Nixon administration, the exchange of US dollars for gold stopped entirely.
Simultaneously, the US dollar was devalued by 10 % against other currencies.
Western monetary policies still aimed at maintaining fixed exchange rates as
earlier, but this proved to be impossible. In March 1973, major currencies started to
float, with their exchange rate determined by supply and demand. This meant a dra-
matic change.
During the 1990s, the main influence on economic development and exchange
rate fluctuations was the formation of the European Economic and Monetary Union,
based on the Maastricht Treaty of February 1992. All European currency member
states changed to the union in three stages as follows:
Stage 1:
Started before the Maastricht Treaty in July 1990. Its main objective was to
remove limitations of capital, merchandise, labour, and service flows be-
tween member countries.
Stage 2:
Effective since January 1994. It deepened the economic and monetary co-
operation between member states.

Stage 3:
Began in January 1999. Countries judged as meeting the requirements pro-
vided for in the Maastricht Treaty entered Stage 3. The main requirements
formulated in the treaty were the following:
1. Gross public debt should not exceed 60 % of gross domestic prod-
uct (GDP).
2. Public sector deficit should not exceed 3 % of GDP.
3. Inflation rate during preceding 12 months should not exceed the av-
erage of the three lowest member country inflation rates by more than
1.5 percentage points.
4. Long-term interest rates should not exceed those of the three coun-
tries with the lowest inflation rates by more than 2 percentage points.
Stage 3 meant that all participating countries will follow the same monetary and
economic policy and that the changeover to a common currency, the euro, could start
in 1999.
Based on experience gained so far, the euro has worked satisfactorily. One spe-
cific problem has been that economic policy since 1999 has varied in different coun-
tries. A consequence of this has been that the gross public debt in some European
countries has exceeded the stipulated 60 %.
1.4 Factors affecting exchange rates

According to the law of one price, exchange-adjusted prices of identical tradable
goods should be equal globally. Exchange rates and purchasing power parity should
therefore be based on the trade of manufactured goods. However, only a very small
part of the flow of currencies is connected to the trade of goods. Accordingly, other
factors are decisive in forming exchange rates.
The most important factors are the following:
- inflation rates and expectations
- interest rates and expectations
- growth expectations
- political stability
The following example illustrates two of the factors: If the inflation rates in coun-
try A and country B are 4 % and 7 %, respectively, the nominal interest rate should
then be 3 % higher in country B than in country A. If this were not the case, then
funds would flow from country B to country A to take advantage of the difference until
such time as equilibrium in interest rates would be restored.
Another way to compensate for the difference in inflation between the two
countries would be devaluation by 3 % of country B’s currency in relation to that of
country A. In principle, a country with a high inflation rate must have a high interest
rate, in order to avoid the flow of funds from the country that would lower its currency
reserve. This means lower economic growth and an eventual, theoretical lowering of
the value of the currency.

Chapter 13
1.5 Purchasing power parity

Figure 1 shows the total relative exchange rate fluctuation, ktot, between some coun-
tries in 1999-2006 in relation to the US dollar. The fluctuations have been significant.
As the base prices of many pulp and paper industry products, such as chemical pulp
and many paper grades sold in Europe and overseas, are US dollar-based, the fluc-
tuations in this period have greatly influenced the competitiveness of European vs.
overseas producers.
USDEUR USDCNY USDCAD USDBRL
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
1999 2000 2001 2002 2003 2004 2005 2006
Exchange rate indices, ktot, 1999-2006
Figure 1. Exchange rate indices, ktot, 1999-2006.
If the exchange rate variations in Figure 1 had followed purchasing power parity
(PPP) accurately based on consumer price indices shown in Figure 2, the exchange
rates would have been as shown in Figure 3. Then the cost-competitiveness of these
countries would have remained stable at exactly the 1999 level. Because of large devi-
ations from PPP in 1999-2006, the cost-competitiveness of the entire pulp and paper
industry and of individual companies varied significantly. Such deviations form a risk
factor as analysed below:
If
ktot = total relative currency value change during period t (Figure 1)
k1 = inflation index in foreign country/inflation index in home country
during period t
k2 = relative deviation factor of currency value from PPP during period t
(Figure 4)
ktot = k1 x k2 (1)

Table 1 shows the changes in consumer prices in certain countries during the
period 1999-2005. These figures indicate that the inflation rates of the countries con-
cerned have been fairly similar except in Brazil.
Table 1. Consumer prices in certain countries 1999 and 2006.

1999 2006 Annual
increase, %/a
USA 100 121 2,8
Euro 100 116 2,1
China 100 103 0,4
Brazil 100 157 6,7
Canada 100 117 2,3
175
170
165
160
155
150
145
Brazil
140
135 China*
130 USA
125 Canada
120 EURO
115
110
105
100
1999 2000 2001 2002 2003 2004 2005 2006 *China: 1999-2005
Consumer price indices, 1999-2006
Figure 2. Consumer price indices 1999-2006.

Chapter 13
USD/CAD USD/EUR USD/BRL USD/CNY
145
140
135
130
125
120
115
110
105
100
95
90
85
80
1999 2000 2001 2002 2003 2004 2005 2006
Theoretical PPP exchange rate indices, k1, 1999-2006
Figure 3. Theoretical PPP exchange rate indices, k1, 1999-2006.
USD/CAD USD/EUR USD/BRL USD/CNY
180
160
140
120
100
80
60
40
20
0
1999 2000 2001 2002 2003 2004 2005 2006
Relative deviation factor from PPP, k2, 1999-2006
Figure 4. Relative deviation factor from PPP, k2 , 1999-2006.

Factor k1 (inflation index in foreign country/inflation index in home country)

alone would have required a gradual, slight devaluation of the US dollar in relation to
the euro, the Chinese yuan and Canadian dollar and a revaluation in relation to the
Brazilian real (or devaluation of the real relative to the US dollar). In reality, the fluctua-
tions in Figure 1 have been stronger. Factor k2 (relative deviation factor of currency
value from PPP) has developed as follows:
1. During 1999-2002, the US dollar strengthened against most currencies
more then the PPP would have required (k2 was more than 100). In the case
of the Brazilian real, the deviation was significant, as k2 in 2002 reached 170.
2. After 2002 the US dollar weakened more than PPP would have required against
the euro and Canadian dollar (k2 went below 100). For the Chinese yuan, k2
remained at 105-106. Relative to the Brazilian real, k2 declined to 84 in 2006,
suggesting that the real strengthened more than PPP would have required.
As a result of the currency developments during 1999-2002, the competitive

position of the European pulp and paper industry improved in relation to the North
American industry. In 2003-2005, the US dollar declined in value by some 30-40 % to
restore the PPP close to its 1999 level. During a time period of a couple of years, the
competitive position of the European industry therefore declined radically compared
with its North American competitors.
During 2003-‑2006 the US dollar declined in value also against the Canadian
dollar. This lowered the competitiveness of the Canadian pulp and paper industry
relative to the US industry. In addition, Canada exports a major part of its production
to the United States. The decline of the US dollar caused export revenues, and thus
profitability, to decline.
1.6 Conclusions
The above statistics warrant the following general conclusions:
- Demand and supply of currencies can cause exchange rate variations and
deviations from PPP. The reserves of central banks are too small to have a
major impact on exchange rates, making market forces the dominant factors.
- Deviations from PPP cause competitive advantages or disadvantages that
can be significant from normal equilibrium, and such situations may last for
several years.
- Analysis of the cost-competitiveness of a given product can give different
results due to the above departures from PPP that are dependant on the
time of the analysis.
- One cannot predict either changes in exchange rates or deviations from
PPP. Later calculation of both can estimate how close to normal the present
situation is.
- The reference point for the above statistics is 1999, when the euro was in-
troduced. One can question how well 1999 represents a “normal” year to be
used as a reference. Careful selection of the reference point is therefore of
major importance and should be emphasised.

Chapter 13
2 Risk management
2.1 Introduction
All companies are subject to a multitude of risks. The purpose of risk management is
to mitigate risks that have a critical impact on a company’s performance.
Risks can be broadly divided into two main categories:
1. Physical risks
- fire, flood, theft etc.
2. Price risks
- product sales prices and volumes
- raw material costs and volumes
- energy costs and volumes
- currency fluctuations
The purpose of this chapter is to describe the most important elements of risk
management and hedging strategies. The definition of hedging is given in the follow-
ing: Dealing in such a manner as to reduce the impact of movements in rates/prices
on profitability to the minimum that can be achieved and/or to the desired level. The
objective is that if rates move against you, the profit on your hedge will offset all or
nearly all of the loss on the position you are seeking to cover. Conversely, you will no
longer benefit if the rates move in your favour. The profit on the covered position will
be offset by the loss on the hedge. You are therefore attempting to lock in the profit or
loss on the position at the current level.
2.2 Features of risk management

1. Physical risks
Typical of physical risks is that companies do not have any informational
advantage over their competitors. Physical risks are most often covered by
insurance.
2. Price risks
The most common reasons to hedge (=insure) price risks are:
1. To stabilise earnings, cash-flow, budgeting and planning
2. To support marketing objectives
3. To improve access to capital
1. Earning stability
The pulp and paper industry is subject to large price volatility. This is
particularly the case in the raw material end of the product range, as
illustrated in Chapter 3, Figure 10. Pulp price fluctuations in 1995-
2002, measured as standard deviation, were 22 %. The top price for
BSKP was USD 1200/t and the bottom price less than half of this, i.e.
USD 550/t, as seen in Chapter 4, Figure 10 (both prices in 2005 USD

value). The fluctuations in many raw materials have been even worse.
Based on Chapter 4, Figure 11, the top price of mixed waste was
EUR 210/t and the bottom price EUR 45/t, during the above period
(both prices in 2005 EUR value).
Such price fluctuations obviously destabilise earnings, particularly
if input and output prices do not correlate. Typical examples are
uncoated woodfree papers and recycled fibre-based newsprint, in
which raw materials account for a major part of manufacturing costs.
By hedging the price risks, a company removes the uncertainty about
future prices and price fluctuations, adding stability. At the same time,
it takes on the risk of an opportunity loss.
2. Marketing objectives
Hedging strategy and instruments can be used to support marketing
objectives e.g. as follows:
1. Price fluctuations are disliked by many buyers of paper. This
presents an opportunity for a seller to offer its customers a
long-term contract at a fixed or capped price.
2. A company increasing its production of a certain paper grade,
such as a speciality grade with a small market volume, re
alises that the increase is likely to put pressure on prices.
Hedging instruments enable the company to lock-in forward
prices based on the market situation before the additional
production is placed on the market.
3. Access to capital
Risk management plays an active role in project finance. Planning
and constructing a new paper machine or pulp mill takes 3-5 years.
The project is financially most vulnerable in the first years immediately
after start-up. Given the time frame, it is possible that the start-up will
coincide with a market down-turn. Therefore, companies can lock-
in a forward price and thus secure the cash-flow in the first critical
years.
Hedging is often done by a company’s own decision. However, in
many cases hedging is required by the lending banks as a prerequi-
site for financing the project.
The inroads of private equity companies into the pulp and paper
industry increased the use of hedging instruments significantly. The
reason here was to increase the financial leverage by allowing a
reduction in equity capital. Because debt financing increased at the
same time, the financial institutions providing debt funding required
hedging instruments to be used as security for their funding.
A recent example of the above type of deal is a take-over of a major
paper company by a private equity company in North America, where

Chapter 13
hedging instruments were used for pulp, energy and exchange rates.
The hedging costs per ton of paper for the first three years after take-
over were significant, amounting to about USD 10/t, but a prerequi-
site for financing the deal.
2.3 Hedging methods and instruments

In managing the exposure to risk, there are a number of ways and instruments avail-
able.
1. Inventory adjustment
The most basic hedging method, mostly not thought of as such, is adjust-
ment of inventories. For an unintegrated paper company, this might mean
build-up of pulp stock when prices are low, and running them down when
prices increase.
2. Supply management
Supply management typically includes the use of downtime to control the
volume of products being placed on the market during weak demand. This
strategy works only if enough producers adopt a similar strategy simultane-
ously.
A typical feature of downtime in supply management is its heavy cost in
terms of lost production. This cost is shared inequitably among producers.
3. Forward selling and/or buying

Other ways to manage price risks include selling or buying forward, fixing
input and/or output prices for various periods of time into the future etc. A
typical example is newsprint where sellers and buyers negotiate a contract
annually or semi-annually for a fixed price and fixed volume.
In currency hedging, forward selling and buying is common practice to secure
a stable flow of domestic currency from exports sold in foreign currency.
4. Financial derivatives

A final way to manage price risks is to use financial instruments, called
derivatives. A derivative is defined in the following: any type of transaction
whose value depends, at least in part, upon the value of a related asset or
liability.
Derivatives have been used in many commodity markets for a number of
years. The pulp and paper industry has been slow to adopt them, but their
use is gradually increasing. The most actively traded derivatives are in pulp,
newsprint and recycled paper. There are currently two markets for trading
derivatives:
1. NYBOT (New York Board of Trade), a futures and options market for
standardised pulp products.
2. OTC (over-the-counter) pulp and paper swaps and options that are
offered by financial institutions.

In principle, a futures market like NYBOT is used for setting contracts finan-
cially, rather than a physical product exchange, although physical settlement is done
in a minority of cases. The definition of a future is given in the following: an agreement
to buy/sell, on an organised exchange, a standard quantity of a specific commodity,
financial instrument or currency at a future date at a price agreed between two parties.
The OTC swap is an agreement between a buyer and seller to fix the price of pulp
or paper at an agreed level for a certain specified length of time. The contract is linked
to a market price index. If the index price exceeds the fixed, agreed price, the buyer re-
ceives the difference from the seller. If the price index falls below the fixed, agreed price,
the buyer pays the difference to the seller. The settlement of these flows usually takes
place on a monthly or quarterly basis until the end of the contract period.
It is important to notice that in OTC swaps there is no need for any physical
connection between the two parties; each continues to sell and buy its pulp or paper
from its existing customers/suppliers. That is why companies use a financial interme-
diary, e.g. a financial institution. The majority of these contracts are done via a finan-
cial intermediary, such as a bank, which takes care of the credit risks of both parties
and ensure that both the buyer and seller remain anonymous.
Companies are also using the financial market in order to offer physical con-
tracts that match their customers’ needs. For example a pulp consumer is asking its
pulp supplier to offer a fixed price for one year. If the pulp producer has the view that
pulp prices will rise during that period, the producer would not like to enter into such
a contract. In order to secure the physical contract with its customer and benefit from
rising pulp prices, the pulp producer could buy a financial contract with a fixed price
for one year and could sell its customer the pulp at a fixed price for one year. By doing
so, the pulp producer has “neutralised” the price in the physical contract and is ex-
posed to the market price again. If pulp prices rise above the agreed, fixed price, the
producer is compensated by the seller of the financial contract; and vice versa, if pulp
prices fall, the producer needs to pay the seller of the financial contract.
2.4 Case examples Table 2. Rough examples of potential

hedging alternatives.
Table 2 describes three case examples to
Case 1 Case 2 Case 3
give an idea of their potential hedging al-
1. Sales
ternatives. It should be emphasised that
- Euro 100 100 60
the examples are highly simplified and - USD 40
intended for illustrative purposes only. 2. Costs
The case example is a medium- - Euro 95 95 55
sized, recycled fibre-based newsprint - USD 40
producer in continental Europe. 3. Equity
- Euro 75 75 75
4. Debt
- Euro 75 35 35
- USD 40 40

Chapter 13
Case 1
Observations
As all income and costs are in euros and debt in total is in euros as well,
there is no risk attached to currency. The risks are thus solely focused on
fluctuations in newsprint and raw material euro prices.
Hedging alternatives
To stabilise income and earnings, long-term supply agreements (usually for
one year) could be considered. In addition, OTC swaps could be of interest,
particularly if the newsprint market is strong (=market prices are high). The
volume of swaps should be reasonable, amounting to a maximum of 30-40
% of sales. To lock too high volumes in swaps would increase the risk of
opportunity losses.
Part of the recycled raw material and energy could be secured through
long-term contracts or OTC swaps.
Case 2
Observations
Case 2 is similar to Case 1 with the exception that debt is partly (40) in US
dollars. Thus, the risks are the same with the addition of the currency risk
attached to this debt.
The alternatives are in principle as in Case 1. In addition, a hedge for the
debt of 40 US dollars needs to be considered to protect the company from
a strengthening of the US dollar.
Case 3
Observations
Case 3 is similar to Case 2 with the exception that part of sales (40) and
costs (40) are in US dollars.
Exports sales (40) and costs (40) in US dollars balance each other. Thus,
the only remaining currency risk is attached to the US dollar debt (40), as in
Case 2. Accordingly, the hedging alternatives are the same as in Case 2.

Chapter 14
Future strategies for the Nordic pulp and paper industry
1 Global trends 1990-2006....................................................................................................208

2 Trends in Europe 1990-2006...............................................................................................210
3 Future trends......................................................................................................................212
4 Conclusions . ......................................................................................................................215

Chapter 14
Future
Chapterstrategies
10 for
the Nordic pulp and
paper industry
1 Global trends 1990-2006
The pulp and paper industry is built on a solid foundation: it uses a renewable raw
material, its products can be recycled several times and, with modern technology, its
effluent load is minimal.
The following factors and trends have had a decisive influence on the develop-
ment of the pulp and paper industry globally during 1990-2006.
1. Demand and prices

Paper and paperboard demand has grown from 240 million tons in 1990
to 358 million tons in 2004 or by 2.9 %/a (demand in 2005 was 366 million
tons). This has been a cornerstone for the development of the pulp and pa-
per industry.
The fastest growth has taken place in China and Asia, where demand has
grown from 31 to 92 million tons in the same period, i.e. by 8.1 %/a. In
North America, demand has grown from 84 to 100 million tons, stagnating
at this level since 2000. Competition from electronic media and information
technology, and saturated paper markets have been the main reasons for
the slow-down.
A trend shift in global demand seems to have taken place around the year
2000. In China, Asia and Latin America demand growth seems to continue
unabated in all grades. In North America and Europe, growth is slowing
down generally and turning into decline in certain graphical grades.
Prices of most grades have increased slower than inflation, which means
that real prices have declined, in many grades by around 1 %/a.
2. Profitability
Cyclical patterns have continued in the industry in most grades. During the
period 1990-2006, the industry experienced two peaks with acceptable
profitability, i.e. in 1995-1996 and in 2000 and 2001. Otherwise, financial
results have been largely unsatisfactory and even declining.

The worst profitability performance has been recorded in Canada and the
United States, where the stagnating, and in some grades declining, de-
mand has aggravated the industry situation. Because of the low investment
level asset quality has deteriorated. The industry has tried to adapt to this
development by lowering fixed investments and closing rather than adding
capacity. Further consolidation in newsprint and printing and writing papers
is in progress.
Companies in Latin America have mostly experienced good or excellent
profitability through utilisation of modern technology, economy of scale and
low fibre costs. In China and Asia many companies have also been very
profitable, relying on modern technology, economy of scale and low labour
costs in investment projects and operations.
Shareholders’ activity and influence have increased dramatically. The in-
roads of private equity companies have contributed to this trend. This has
forced the pulp and paper industry management to look closer at profitabil-
ity, also in the short term.
3. Structure and investment behaviour

The structure of the pulp and paper industry has remained fragmented, as
the share of the top 5 companies of world production has remained below
20 %. In comparison to most other industries, this is low.
A more meaningful way to look at the industry structure is to focus on con-
solidation by grade. This is higher, with the top 5 companies accounting
for 20-55 % of the global production, depending on the product. As trade
flows between continents in most grades are fairly small in comparison to
demand, this leads to a higher degree of consolidation in some continents.
For example in North America, the top 5 companies have a market share of
60-80 % in most main grades. In Europe the concentration is slightly lower.
The structural changes in the pulp and paper industry have been dramatic.
Out of the top 10 global companies in 1990 only three remained under the
same name in 2005. During the same period, M&A activity within the in-
dustry grew to levels not experienced earlier. A total of more than 50 large
companies have merged into eight new entities. New entrants have been
private equity companies, particularly during the past five years. This trend
has been strengthened by easy access to low-cost capital.
Since 1999, the 15 top companies in Europe, North America and Japan
(companies in Asia and China have been excluded) have invested about

Chapter 14
6-8 % of sales in fixed assets. This has materialised in 20 new paper ma-
chines, of which 11 have been tissue or speciality paper machines. The
remaining 9 have been bulk grade paper or board machines. The total ca-
pacity added has been 4 million t/a. During the same period, these compa-
nies have shut down 187 machines, with a total capacity of 12 million t/a.
Thus the leading companies have clearly aimed to reduce production and
strengthen remaining capacity.
Asia and China have not only emerged as large and growing markets. They
have also added capacity at an astonishing rate, thus being able to meet
growing domestic demand without increasing total imports from the 1990-
1995 level of 5 million t/a. During the period 2000-2006, China and Asia
added 263 new paper machines (of these 203 were in China) with a com-
bined capacity of 25 million tons, i.e. 3.5 million t/a. 37 new paper machines
are currently on order (spring 2007). The largest local company, APP, has
become the world’s 10th largest producer, with 7 million tons of capacity.
Latin America added eight new pulp lines in 2000-2006 with a total capacity
of 5 million tons. Three new pulp lines are currently on order (spring 2007).
4. Technology and raw materials

Economy of scale has increased the optimum pulp mill and paper machine
size in bulk grades by a factor of about 2. As a result, the financial strength
of the investing company, the availability of raw materials in terms of both
volume and price, and the availability of suitable locations have all become
more critical and important.
Equipment suppliers have consolidated into a few big and global compa-
nies. This has made it easier for pulp and paper producers to get the best
available technology, lowering the entrance barrier to new entrants from a
technical point of view.
Recycled fibre has become a widely accepted raw material. Its share of
the global fibre consumption has increased from 30 to 50 %. Out of a total
consumption in 2005 of 180 million t/a, North America, Europe and Japan
accounted for 70 %. The largest importers are China and Asia, with imports
close to 40 million t/a.
Virgin fibre production has increased most in Latin America and Asia
(Indonesia), from 9 million t/a in 1990 to 23 million t/a in 2005, and in Europe
from 32 million t/a to 38 million t/a. In all other areas the production has
remained largely stagnant. The use of wood raw material as a CO2-neutral
fuel has increased. This has increased the competition for wood and thus its
price.
2 Trends in Europe 1990-2006

The most striking trend in Europe since 1990 has been the consolidation of the in-
dustry carried out predominantly by Nordic producers. This has resulted in a situation
where the three largest European producers in most grades are Nordic. The excep-

tions are coated woodfree, tissue and cartonboards, but also in these at least one
Nordic producer belongs to the top three. Thus, the competition has changed from
Nordic versus continental European producers increasingly to internal Nordic compe-
tition or Nordic versus overseas producers.
The driving forces for the above development have been the following:
1. Europe has been the key market area for the Nordic pulp and paper in-
dustry. A major part of the Nordic production has been sold in this region.
Continental Europe (Western Europe excluding the Nordic countries) is the
second largest market area in the world after North America. It has been of
particular importance for the Nordic pulp and paper industry.
2. The Nordic industry, due to a shortage of wood and recovered paper from
domestic sources, has more or less exhausted its regional expansion poten-
tial. Thus the only way to expand has been to grow organically or acquire
companies elsewhere. A natural market for these activities is continental
Europe, as it is well known and offers geographical synergies for Nordic
production.
3. The advanced technical know-how and efficient industry structure in the
Nordic region has formed a good platform for this expansion.
Another important trend in Europe has been the continuing expansion of pro-
duction, from 62 million tons in 1990 to 95 million tons in 2004. Nordic companies’
share of the growth has been 9 million tons, with the remaining 24 million tons origi-
nating from continental European producers. The largest increase took place in print-
ing and writing papers, 14 million tons. The expansion has significantly exceeded the
growth of domestic demand, causing net exports during the above period to grow
from 2.5 to 8.1 million tons. In all other grades the corresponding combined increase
in net exports has been more moderate, from zero in 1990 to 5.5 million tons in 2004.
As a consequence of the above changes, the European pulp and paper industry
has become more dependent on exports than ever before. The following observations
can be made:
1. The impact of the export sales currency, particularly the US dollar, on profit-
ability has grown.
2. The consumption trends and demand/supply balance in overseas export
markets have become more important. This leads to the following conclu-
sions:
2.1. North America is the largest consumer of printing and writing papers,
with demand in 2004 amounting to 30 million tons. Net imports were
2.5 million tons, mainly from Europe and Asia. The demand outlook
varies by subgrade, being slowly growing in magazine grades but
declining in uncoated woodfree grades. In addition, the expected
decline in newsprint demand will free capacity, as part of the capac-
ity is closed, part converted for printing and writing papers, which will
increase future competition.

Chapter 14
2.2. The expansion of demand and production in China and Asia involves
both opportunities and threats. The net imports of printing and writing
papers of close to 1 million tons in 1990-1995 have turned into net
exports of 0.5 million tons. As a result, this region does not offer the
European producers an outlet for their export needs. In addition, the
excess local supply has started to look for markets in North America
as well as in Europe, challenging European producers in their earlier
home territory.
2.3. The fact that many Asian currencies have been tied to the US dollar
has made the export revenues of Asian producers less vulnerable to
exchange rate fluctuations. In combination with less stringent profit-
ability requirements, this has improved the competitive position of
Asian producers during the past few years, as the US dollar has de-
preciated.
On the domestic European front, the concerns over global warming and CO2
emissions have increased the interest in biofuels including wood. Most likely, compe-
tition for wood from the energy sector will increase substantially. In addition, political
decisions to subsidise bioenergy, including the use of wood as fuel, will improve en-
ergy producers’ wood paying capacity. In combination, these two factors will increase
the manufacturing costs of paper and thus impair the competitive position of paper.
One factor related to CO2 emissions is the electricity consumption in producing
different paper grades. Mechanical printing papers consume much more electricity
than woodfree papers. Depending on the price of CO2 emissions in electricity genera-
tion, this might lower the competitive position of mechanical printing papers in the
future, despite their higher yield factor.
3 Future trends
The six most important global trends in early 2007 that will shape the pulp and paper
industry in the coming decade are the following:
1. Impact of electronic media and information technology on newsprint and

printing and writing paper consumption
In North America, the demand for both newsprint and uncoated woodfree
papers started to decline in the year 2000. In newsprint, demand declined
from 12.9 million tons in 2000 to 10.3 million tons in 2005. In uncoated
woodfree papers, demand declined from 15.1 million tons to13.2 million
tons. In other printing and writing papers, the consumption is still expected
to increase, although slower than earlier.
If the above trends will be duplicated in Europe and Japan with a time lag,
the production will have to be cut back in these regions as well.
Another issue is the impact of electronic and information technology on
demand in emerging economies, most notably China and Asia. The de-
mand growth in these regions in 1990-2004 has been 7-8 %/a. It appears

likely that they will still experience significant growth, according to current
estimates at growth rates of 4-5 %/a up to 2020. However, if the demand
slows down, either because of slower economic growth or because of a
frog’s leap directly to electronic media and information technology, the local
production must find outlets elsewhere, which is bound to lead to increased
global competition.
A positive factor is India, where the economy is growing fast. The consump-
tion is starting from such a low level that any potential negative impact of
new technology is unlikely to be felt for a long time.
2. Use of wood as biofuel and CO2 emissions

The concern over human-caused CO2 emissions and global warming has
increased the interest in CO2 -neutral biofuels like wood. It seems likely that
both wood consumption and wood prices will increase as a consequence.
Making use of new technology, pulp mills evolve in the direction of inte-
grated wood bio-refineries, which are able to produce – in addition to pulp
– also electricity, chemicals and transport fuels. In this way, future pulp mills
will be able to improve their wood paying capacity and thus their competi-
tiveness. This avenue is not open for mechanical pulp or recycled paper.
The total impact of global warming on the forest industry in the years to
come poses both opportunities and threats. The final outcome might be
grade-specific, with neutral or positive impacts on some grades, negative
on others.
3. Future of North American forest industry and production level

North America is the world’s largest consumer and producer of pulp and
paper. Thus the trends in North America will have a big impact on the global
situation and future outlook.
North America’s production of paper has declined from 107 million tons in
2000 to 104 million tons in 2004, and the production of pulp from 84 to 78
million tons. The industry’s profitability has been unsatisfactory for a number
of years. The investment level has been low, causing asset quality and
competitiveness to decline. Consolidation efforts have recently been made
to create stronger companies in newsprint, uncoated woodfree papers and
magazine grades. These efforts have been well founded, but they do not
change the underlying and growing problem of a lack of investments in new
and competitive technology.
If above negative trend will continue, particularly in Canada due to the
present strong Canadian dollar versus the US dollar, it will result in lower
exports, and in certain grades increased imports, in both pulp and paper.
Considering the size of North American markets this would have a profound
effect on the global demand/supply situation and might offer new opportu-
nities in selected grades for exporting countries.

Chapter 14
4. Future growth in China and Asia

The growth of demand in China and Asia since 1990 has been astonishing,
from 31 million tons in 1990 to 92 million tons in 2004. The future growth of
demand and local production will have a strong impact globally, in principle
in a similar way as in North America.
An important restrictive factor for increased production will be the availabil-
ity of resources, most notably fibre, energy and water. It appears that local
authorities are paying increasing attention to this aspect in order to safe-
guard balanced development.
5. Russia
Russia has an enormous untapped forest potential. Half of the world’s soft-
wood growing stock is in Russia. A significant part of the unutilized harvest
potential is currently inaccessible.
Russia exports significant amounts of wood both to Europe and China. In
spring 2007 Russia decided to impose an export tax on wood as of July 1,
2007. The tax will be gradually increased from EUR 4/m3 at present to EUR
50/m3 by 2009. If strictly followed, this will stop wood exports totally within
2 years.
Russia’s decision will have a strong impact in Europe, but can probably be
mitigated to some extent by making more effective use of Europe’s grow-
ing wood reserves. In China this kind of reserve does not exist. Thus, the
Chinese production based on Russian wood might be severely curtailed,
with unpredictable global consequences.
6. Use of biotechnology
The pulp and paper industry is facing big challenges in striving to secure its
wood supply in competition with the increasing needs of a growth in global
population, energy production etc. Biotechnology and biochemistry offer
potential to support the pulp and paper industry in the competition for its
main raw material.
Examples are new fertilizers which allow higher retention in trees and thus
faster growth, rather than causing nitrogen leakage into the environment.
Modification of the structure of cellulose to increase fibre length and thus
strength properties, in Nordic trees as well as in eucalyptus, poplar and similar
species, would improve the wood paying capacity of the pulp and paper in-
dustry. For the energy industry, trees with a higher content of lignin would be of
interest. Valuable chemicals could be extracted from the wood and bark for use
by the chemical industry. The growth of both Nordic trees and eucalyptus spe-
cies could be increased significantly. For example, the best eucalyptus planta-
tions today yield 40-50 m3/ha/a. This could be doubled to 90 m3/ha/a.
The utilisation of biotechnology to strengthen the competitiveness of the
pulp and paper industry during the next decade is of great importance and
deserves full support from the industry.

4 Conclusions
Based on the above six key trends, the future outlook for the pulp and paper indus-
try in the Nordic countries looks highly challenging. It appears that the industry will
need to adapt to slower domestic (= continental European) demand growth, or even
declining demand in certain grades. Under these circumstances, Nordic companies
will have to maintain the competitiveness of their European production mills. Since a
shortage of wood raw material and higher wood prices will limit capacity expansion,
while domestic demand remains stagnant, existing capacity cannot be modernised
and new mills built without closing down obsolete machines and mills. Though such
measures have been initiated, they are in many cases difficult to implement and will
require new skills and entail unprecedented decisions. In addition, there is still poten-
tial to streamline mill operations and structures, which in many cases are heavy due to
the long traditions of the industry.
Projects in fast-growing areas like China, Asia, Latin America and Eastern
Europe should be carefully considered as future growth avenues.
The future development and utilisation of Nordic technical know-how and the
combined resources of the Nordic forest industry cluster constitute an important plat-
form in the effort to stay at the forefront of technology development. This know-how
represents a potential competitive advantage in developing new, less price-sensitive
paper and board grades for special uses. This advantage must be utilised to safe-
guard the industry’s future strength and profitability.

Glossary
The economic terms are explained very briefly in the glossary. They are explained
more properly in Table 2, Chapter 9.
BHKP Bleached Hardwood Kraft Pulp

Boxboard Paperboard used to fabricate boxes, see also Folding boxboard.
BSKP Bleached Softwood Kraft Pulp
Capital employed Total assets - interest free liabilities
Capital turnover Sales divided by total assets
Cartonboards Cartonboards are used for packaging boxes and consist of two or more layers.
The outer layer is usually from chemical pulp, and the middle layers either
from mechanical pulp (FBB) or recycled fibre (WLC). Both coated and uncoated
cartonboards are produced.
Cash flow EBIT + depreciation - taxes +/- change in working capital
CEPAC European Confederation of Pulp, Paper and Board
Industries (see CEPI)
CEPI Confederation of European Paper Industries
Chemical pulp Pulp obtained by digestion of wood with various chemicals. The separation
of fibres is accomplished by dissolving away the lignin to release the intact
fibres. The two major types of chemical pulp are sulphate (Kraft) pulp and
sulphite pulp.
Coated woodfree paper (CWF) Coated fine paper
Containerboard Same as Corrugated raw / case materials
Corrugated board Consists of one or more layers of rippled paper (fluting) glued to one layer or
between several layers of flat paper (liner).
Corrugated raw / case materials A collective term for different paper grades (kraftliner, testliner and fluting)
used in the production of corrugated board. Same as containerboard.
Deflated sales Real value of sales, e.g. value of 1985 sales in 1995 money.
Deinking Removal of ink and other extraneous material from waste paper.
Depreciation A bookkeeping transaction which should cover the wear and tear of an invest-
ment made earlier.
Digester A vessel used to treat cellulosic raw material with chemicals under pressure
and temperature to produce pulp. It may be designed for either batch or con-
tinuous operation.
DIP (Deinked Pulp) The pulp resulting from the deinking of waste paper.

Clossary
Dry-end That part of the paper machine where the paper is dried, calendered and
reeled.
EBIT Earnings Before Interest and Taxes, same as operating profit
EBITD Earnings Before Interest, Taxes and Depreciation, same as gross profit
EPS Earnings Per Share
FAO Food and Agriculture Organisation of the United Nations
Felt Continuous belt made of wool, cotton or synthetic fibres. It is used to mechani-
cally convey the wet sheet, provide a cushion for the sheet between press
rolls and serve as a medium through which water is removed. In addition, it
provides power transmission to various rolls in the press section.
Fibre wood Wood which is usually too small, of inferior quality or the wrong species to be
used in the manufacture of lumber or plywood.
Fine paper High quality printing and writing paper produced from bleached chemical pulp,
either coated or uncoated. Same as woodfree paper.
Fluting Rippled middle layer of corrugated board produced from semi-chemical pulp
(SC fluting) or recycled fibre (Wellenstoff).
Folding boxboard (FBB) Paperboard produced from mechanical pulp, with one surface made from
chemical pulp. Packaging uses include food, cigarettes and cosmetics.
Forest industry Forestry, mechanical wood processing industry (sawn timber and panels) and
pulp and paper industry
GDP Gross Domestic Product
Gravure printing A method of printing utilizing a plate or cylinder with minute engraved or
etched depressions on the surface to hold ink and then transfer the ink to a
paper surface.
Groundwood (or Stone Groundwood) Mechanical pulp produced in process in which pulp-
wood blocks are ground into pulp at atmospheric pressure.
Hardwood (HW) Wood from broad-leaved trees such as birch and eucalyptus (short fibres).
Headbox That part of the papermachine which receives the stock and transforms the
pipeline flow into a uniform rectangular flow equal in width to the paper ma-
chine and at uniform velocity in the machine direction.
Investment rate / level Total investments divided by sales
IRR Internal Rate of Return
Kraftliner Kraft linerboard, outer layer of corrugated board produced from virgin fibre.
Liner Outer and inner layers of corrugated board. See also Kraft-and Testliner.
Liquid packaging board (LPB) Paperboard used in the packaging of milk and fruit juices. LPB consists of sev-
eral layers of paper pressed together and treated to make it impermeable.
Log / Sawlog Wood which is used in the manufacture of lumber.
Long fibre See softwood
Lumber (Same as Timber) Product of a sawmilling operation.

LWC paper (Light Weight Coated) Coated super-calandered paper used mainly in con-
sumer magazines, catalogues and advertising material. LWC paper is made
from a blend of mechanical and bleached chemical pulp.
M & A’s Mergers and Acquisitions
Market pulp Non-integrated pulp sold on the world market. It is mostly bleached sulphate
pulp (chemical pulp). It can be divided into softwood and hardwood pulp.
Mechanical papers Paper grades made of mechanical pulp, e.g. SC, LWC and Newsprint.
Mechanical pulp Any pulp produced by mechanical methods (using mechanical energy and/or
methods to separate the fibres).
NBSKP Northern Bleached Softwood Kraft Pulp
Newsprint Paper used in newspaper publishing, traditionally it has been made largely
from mechanical pulp but nowadays increasingly from waste paper.
NSSC fluting Neutral sulphite semi-chemical fluting
OECD Organization for Economic Cooperation and Development
Offset printing Any printing method in which the image is transferred to a rubber-covered
blanket which, in turn, transfers the image to the paper.
Operating margin EBIT divided by Sales
Operating profit EBIT
OTC paper One-time carbonised paper
PE-ratio Price per Earnings ratio, share price divided by earnings per share.
Pulp and paper industry Manufacturing of chemical and mechanical pulp, paper and board.
R&D Research and Development
Recovery boiler Water tube boiler which utilizes concentrated black liquor or other chemical
pulping waste liquor as the principal fuel.
Recovery rate Recycled fibre collection divided by paper and board consumption
ROCE Return On Capital Employed
ROE Return On Equity
ROI Return On Investment
Sackpaper Paper manufactured from sulphate pulp. It has high strength and is used for
production of paper sacks.
SC paper (Super Calandered paper) A high-glaze uncoated printing paper made largely
from mechanical pulp. SC is usually used in consumer magazines and adver-
tising material.
Short fibre See hardwood
Softwood (SW) Wood from trees characterised by having needles such as spruce or pine (long
fibres).
Solid bleached board (SBB) High quality paperboard produced from chemical pulp. It is characterised by
its purity and good printability. Packaging uses include perfume, chocolates,
pharmaceuticals and cigarettes.
Testliner Recycled linerboard, outer layer of corrugated board produced from recycled
fibre.

Clossary
Tissue A paper used for hygienic purposes like toilet paper, serviettes and kitchen
towels. The proportion of recycled fibre in the furnish of tissue is high and
increasing.
TMP (Thermomechanical Pulp) A pulp produced by a thermomechanical process in
which the chips are softened by steaming under pressure prior to a pressu-
rised refining stage.
Trim Width of finished paper produced on a paper machine.
Utilisation rate Recycled fibre consumption divided by paper and board production
Wellenstoff Rippled middle layer of corrugated board produced from recycled fibre.
Wet-end That portion of the paper machine which includes the headbox, wire part and
press section.
White lined chipboard (WLC) Paperboard produced from recycled fibre. WLC is used in the packaging of
washing powders, dry food and toys.
Wire Endless belt of woven wire cloth for the drainage of stock and forming of a
fiber web. Usually made of metal and/or plastic.
Woodfree paper (WF) Same as fine paper
Working capital Accounts receivable + inventories - accounts payable

Conversion factors
Conversion factors
To convert numerical values found in this book in the RECOMMENDED FORM, divide
by the indicated number to obtain the values in CUSTOMARY UNITS.
Property To convert values expressed Divide by To obtain values expressed

in RECOMMENDED FORM In CUSTOMARY UNITS
Area square centimeters [cm2] 6.4516 square inches [in2]
square meters [m2] 0.0929030 square feet [ft2]
square meters [m2] 0.8361274 square yards [yd2]
square meters [m2] 4046.86 acres
square kilometers [km ]2
0.01 hectares [ha]
square kilometers [km ]2
2.58999 square miles [mi2]
Length nanometers [nm] 0.1 angstroms [D]
micrometers [Fm] 1 microns
millimeters [mm] 0.0254 mils [mil or 0.001 in]
millimeters [mm] 25.4 inches [in]
meters [mm] 0.3048 feet [ft]
kilometers [km] 1.609 miles [mi]
Mass grams [g] 28.3495 ounces [oz]
kilograms [kg] 0.453592 pounds [lb]
metric tons (tonne) [t] (= 1000 kg) 0.907185 tons (= 2000 lb)
Mass per grams per square meter [g/m ] 2
3.7597 pounds per ream, 17 x 22 - 500
unit area grams per square meter [g/m ] 2
1.4801 pounds per ream, 25 x 38 - 500
grams per square meter [g/m2] 1.4061 pounds per ream, 25 x 40 - 50
grams per square meter [g/m ] 2
4.8824 pounds per 1000 square feet [lb/1000 ft2]
grams per square meter [g/m2] 1.6275 pounds per 3000 square feet [lb/3000 ft2]
grams per square meter [g/m2] 1.6275 pounds per ream, 24 x 36 - 500
Speed meters per second [m/s3] 0.30480 feet per second [ft/s]
millimeters per second [mm/s] 5.080 feet per minute [ft/min or fpm]
Volume, cubic centimeters [cm ]
3
16.38706 cubic inches [in3]
solid cubic meters [m3] 0.0283169 cubic feet [ft3]
cubic meters [m3] 0.764555 cubic yards [yd]

Index
A E
area.................................................................. 22 Economy of integration................................... 185
asset quality............................................. 61, 111 Economy of scale of speciality paper mills...... 182
Efficiency of production.................................. 154
B Electricity consumption..................................... 96
Balance of trade............................................. 193 Energy resources and consumption.................. 91
Bulk products................................................... 33 Environment............................................... 30, 25
EPC................................................................ 169
C EPCM............................................................. 169
Capital expenditure projects............................ 160
Carbon dioxide emissions................................. 93 F
Certification...................................................... 68 Feasibility study.............................................. 161
Challenges........................................................ 15 Fibre demand and outlook................................ 55
collection of recovered paper............................ 83 Financial derivatives....................................... 204
Consolidation.................................................. 122 Financial integration....................................... 185
Cost competitiveness...................................... 166 Financial valuation and analysis...................... 131
Cost- competitiveness...................................... 50 Finland............................................................. 19
Cost-competitiveness....................................... 49 Forest area....................................................... 66
Currency exchange rates................................ 193 forests.............................................................. 66
current balance.............................................. 193 Future development of economy of scale........ 182
Cyclical............................................................. 12 Future strategies for the Nordic pulp and
paper industry................................................ 208
D
Devaluation.................................................... 195 G
drain........................................................... 28, 22 Growth............................................................. 11
Due diligence.................................................. 173

INDEX
H Project implementation................................... 169

Hedging.......................................................... 204 Pulp industry structure...................................... 59
Purchasing power parity................................. 195
I
IAS................................................................. 132 R
IFRS................................................................ 132 Recovered paper........................................ 81, 57
increment................................................... 28, 22 Recovered paper prices.................................... 87
Industrial concentration.................................. 101 Recovered paper users and suppliers............... 88
Inflation 194 Revaluation..................................................... 195
internal rate of return (IRR).............................. 163 risk management.................................... 202, 193
Investment decisions...................................... 159 ROCE development..........................130, 144, 118
K S
Kyoto protocol................................................... 95 Sarbanes-Oxley Act (SOX)............................... 132
Structure of the global pulp and paper
L industry.......................................................... 100
Leading paper companies............................... 112 Sweden............................................................ 27
M T
Major mergers and acquisitions...................... 121 Turn-key......................................................... 169
major pulp and paper industry companies...... 124
Management accounting................................ 149 U
Mergers and acquisitions (M&A)..................... 171 US GAAP......................................................... 132
Minimill concept............................................. 181
V
O Vertical integration.......................................... 185
Opportunities.................................................... 14
OTC................................................................ 204 W
wood bio-refineries........................................... 97
P Wood costs....................................................... 76
Plantations....................................................... 73 wood supply............................................... 69, 66
Price trends...................................................... 45 Wood-paying capacity.................................... 165
Pricing.............................................................. 62 World paper markets........................................ 33


Book 1

Uploaded by

Copyright:

Available Formats

You might also like

Book 1

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Book 1

Uploaded by

Copyright:

Available Formats

Papermaking Science and Technology

Economics of the Pulp

Totally updated version

Published by Finnish Paper Engineers’ Association/Paperi ja Puu Oy

Copyright © 2007 by Paperi ja Puu Oy. All rights reserved.

Printed by Gummerus Oy, Jyväskylä, Finland 2007

Printed on G-Print 100 g/m2, sales: Papyrus

PAPERMAKING SCIENCE AND TECHNOLOGY,

Papermaking Science and Technology book series published by Finnish Paper

Updating has been supported by:

- obtaining information on forest industry raw material resources, markets

- evaluating the economic consequences of decisions taken in a pulp or

- analysing and comparing the profitability and competitiveness of the pulp

- analysing alternative investments with different criteria and selecting the

London, April 2007

2. Impact of the forest industry on the economies of Finland and Sweden...........................18

3. World paper markets............................................................................................................32

4. Fibre demand and outlook...................................................................................................54

5. Raw material resources – forests and wood supply .........................................................65

6. Raw material resources – recovered paper........................................................................80

7. Energy resources and consumption....................................................................................90

9. Financial valuation and analysis........................................................................................130

10. Investment decisions..........................................................................................................158

11. Economy of scale................................................................................................................175

12. Economy of integration......................................................................................................184

13. Currency exchange rates and risk management..............................................................192

 Book 1: Economics of the

 Book 1: Economics of the

10 Book 1: Economics of the

manufacturers and chemical suppliers also participate. Consider, as an example, that

2 Typical features of the pulp and paper industry

2.2 Technical development

1900 1960 1995 2005

11 Book 1: Economics of the

Table 2. Water consumption in pulp and paper production since 1970.

1970 1980 1990 2005

2.4 Cyclical nature of the pulp and paper industry

12 Book 1: Economics of the

Real 2005 USD/ t

Figure 2. Real price of NBSKP and BHKP 1970-20061.

2.5 High investment rates

13 Book 1: Economics of the

3 Opportunities for the pulp and paper industry

14 Book 1: Economics of the

4 Challenges to the pulp and paper industry

The following discussion highlights some aspects of the above issues:

2. The impact of electronic media and information technology on newsprint

3. Forestry and forest utilisation have been subject to considerable attention

15 Book 1: Economics of the

A new aspect in the discussion is the concern over human-caused carbon

16 Book 1: Economics of the

17 Book 1: Economics of the

18 Book 1: Economics of the

Impact of the forest

1.2 Past and present production

19 Book 1: Economics of the

Table 1. Forest industry production in Finland 1990, 2000 and 20042.

1990 2000 2004

Book 1: Economics of the

Book 1: Economics of the