JoukoJouko KarvinenKarvinen Helsinki,Helsinki, FinlandFinland CEO,CEO, StoraStora EnsoEnso OyjOyj Challenges for the Forest Products Industry of the North Stora Enso CEO Jouko Karvinen 14 November 2007 Introduction
Challenges for the forest products industry of the north
Steps to address challenges
November 2007 Challenges for the Forest Products Industry of the North Stora Enso in Brief
• Stora Enso is a forest products company producing newsprint, magazine paper, fine paper, consumer board, industrial packaging and wood products • 14.7 million tonnes* of paper and board • 7.4 million m3 of sawn and processed wood products • Sales 2006 EUR 13 billion* • Approximately 39 000 employees* in more than 40 countries • Market capitalisation EUR 9.5 billion (31 Oct 2007) • Shares listed on Helsinki, Stockholm and New York stock exchanges
* Continuing operations
November 2007 Challenges for the Forest Products Industry of the North Selected general trends
From To
• “Unlimited” resources • Constraints of wood fibre, energy, water… at competitive • Consumption focus in cost Europe and NA • Rapid expansion in emerging economies • Lack of information, analytical tools, • Ever more powerful IT, communication databanks, communication, analysis…
• Capital constraints • Abundance of money in the world seeking profitable investment targets
November 2007 Challenges for the Forest Products Industry of the North Introduction
Challenges for the forest products industry of the north
Steps to address challenges
November 2007 Challenges for the Forest Products Industry of the North Change Forces Affecting European Forest Industry - examples
• Product demand moderately → • Product prices P • Overcapacity N – Long-term assets vs. How to turn short term challenges these into a • Wood supply pressures N – Tight wood markets competitive – Bioenergy competition platform? • Other cost pressures e.g. energy • Customer needs N – Sustainability
November 2007 Challenges for the Forest Products Industry of the North Fastest demand growth in emerging markets
Long-term Demand Growth (%/a) of Paper & Board by Region through 2020
6 India
Russia 5 Eastern The market growth in Asia is two Europe China times bigger than in Europe and 4 Middle East Latin North-America combined! America 3 Africa Rest of Asia Average 2.1%/a 2 Oceania 1 Western Europe
North America Japan 0 020406080100 Share of consumption in 2004, %
Source: Jaakko Pöyry November 2007 Challenges for the Forest Products Industry of the North Paper price development in Germany 2000-2007
EUR/ton 1100
1000
900
800
700
600
500
400
0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 0 0 0 0 0 0 00 0 0 0 00 0 0 0 0 0 1 0 01 0 0 0 01 0 0 0 0 0 2 0 02 0 0 0 02 0 0 0 0 0 0 0 03 0 0 0 03 0 0 0 0 0 0 0 04 0 0 0 04 0 0 0 0 0 0 0 0 0 0 0 05 0 0 0 -0 0 0 0 0 -0 -0 0 06-0 0 -0 -0 0 0 0 0 -0 -0 n b r r 0n g t t c n b r r 0 e g t t c n b r r 0 e g t t c n b r r y e g t t c n b r r y e g t t c n b r r y n l g p t c n b r r- y- n- l- g p t- - c n- b r r- y- n- l- g p a e a p y u ly u p c ov e a e a p y n ly u p c ov e a e a p y n ly u p c ov e a e a p a n ly u p c ov e a e a p a n ly u p c ov e a e a p a u u u e c ov e a e a p a u u u e c ov e a e a p a u u u e J F M A a J u A e O D J F M A a u u A e O D J F M A a u u A e O D J F M A u u A e O D J F M A u u A e O D J F M A J J A S O D J F M A J J A S O D J F M A J J A S M J S N M J J S N M J J S N M J J S N M J J S N M N M N M
Newsprint 45 g LWC Offset 60 g CWF Sheet 100 g SC Roto 56 g UWF - A4 Copy (B grade) Source: Pulp & Paper Week
November 2007 Challenges for the Forest Products Industry of the North Coated Magazine Paper (Example) Regional supply/demand balance - 2006
W. Europe E. Europe North America Consumption 6,843 Consumption 767 10600 Consumption Capacity 10,600 Capacity 0 6843 6,001 Capacity 5,710 Japan Consumption 2,125 Capacity 1,890 Latin America Other Asia: Consumption Consumption: Capacity 505 1,110 Consumptio Capacity Capacity n 205 880
Africa Oceania Consumption Consumption 70 355 Capacity Capacity 0 Sources: Cepiprint/PPPC in 801,000 tonnes
November 2007 Challenges for the Forest Products Industry of the North Stora Enso Wood Supply in Europe Wood sourcing in 2006, million m3sub
Other countries 13.0 0.1 11.4 Finland Sweden 7.1 2.9 Russia The Baltic Countries 7.1 Continental Europe
Total amount of wood (roundwood, chips and sawdust) delivered to own mills was 41.6 million m3 (solid under bark) in 2006. The map describes the wood volumes which were sourced from each region.
November 2007 Challenges for the Forest Products Industry of the North Average wood costs up 15 to 25% Marginal wood costs up 45 to 65%
Example Finnish Short Fibre Pulp Wood 100
90
80 65% 70 te a 60 20%
ill G 45% 50 2007 M t a t 40 s 2006 o
C 30
20
10
0 0% 20% Re40%lative Purchase V60%olume 80% 100% Relative Purchase Volume
November 2007 Challenges for the Forest Products Industry of the North Recovered paper prices in Germany 2006–2007
EUR / tonne 120 9/07 EUR108 +54% year-on-year
100 Used mainly for newsprint 80 9/07 EUR93 9/06 EUR70 +60% year-on-year 60
40 9/06 EUR58
20 Used mainly for packaging grades
0 2/06 4/06 6/06 8/06 10/06 12/06 2/07 4/07 6/07 8/07 Month / Year
Mixed paper (1.02) Deinking (news and pams) (1.11) Source: Euwid
November 2007 Challenges for the Forest Products Industry of the North Biofuels could capture a significant share of the global fuel market
Billion liters
As one of the largest forest based companies, Stora Enso is in a great position to build a strong presence in the biomass and bio-energy fields.
Source: Tecnon; McKinsey November 2007 Challenges for the Forest Products Industry of the North Introduction
Challenges for the forest products industry of the north
Steps to address challenges
November 2007 Challenges for the Forest Products Industry of the North Steps to address challenges
Past 7 months:
• De-layering the organization – From 4 divisions to 7 business areas Simplify – Clarify the responsibility of individual businesses – Increase transparency – internally and externally
• Sale of North American businesses – Releases low returning capital Focus – Focuses the business – Potential up-side retained
• Further capacity closures and divestment announced in Europe Cut – Will significantly reduce costs, particularly for wood – Margins will improve at remaining mills – Capital employed reduced – Significant cuts in administrative personnel and costs
• Veracel pulp mill & plantations • Pulp and paper mill project pre-feasibility study in Russia Invest • Consumer Board, New Business Innovations
November 2007 Challenges for the Forest Products Industry of the North What’s next on agenda
• Changing industry fundamentals and dramatically higher wood costs require robust actions
• Stora Enso is determined to achieve its financial targets – by all means
• The guiding objective is higher profits - through cost leadership and innovation, not size or market share
• Winning businesses will be grown aggressively
• Participate in industry restructuring
November 2007 Challenges for the Forest Products Industry of the North Conclusions
From To • World largest paper & board • Regional clear leader company • ROCE 2002-2006 below cost • ROCE = 13% over the cycle of capital
• Production focus • Customer driven
• Cost issues • Cost leadership
• Capacity driven • Innovations & differentiations
November 2007 Challenges for the Forest Products Industry of the North Speakers notes
November 2007 Challenges for the Forest Products Industry of the North Demand outlook mixed but overall healthy
• Overall, there is still healthy growth in the global paper & board consumption
• However, the demand outlook varies by: – Product segment – Geography
• In general, strong growth is foreseen in emerging markets across all product segments
• In mature markets the growth is generally slower and the outlook more mixed: – Certain product segments stagnating or even declining, e.g. Newsprint in North America – E.g. commercial printing and packaging end uses still expected to grow steadily also in mature markets
November 2007 Challenges for the Forest Products Industry of the North Near-term Market Outlook
Europe Demand Development Price Development Prices for newsprint are rather stable. Some pressure Positive economic outlook and advertising Publication Paper remains for non-contractual magazine paper; prices, business expected to support demand. however, are expected to stabilise in Q4.
Outlook remains positive for both European price outlook remains positive. Fine Paper coated and uncoated.
Packaging Boards Seasonally normal demand expected. Prices are generally stable. Increases are being implemented in some business segments.
Wood Products Slow demand; weak outlook as stock levels are high. Heavy price pressure, especially in lower grades.
November 2007 Challenges for the Forest Products Industry of the North Long-term Demand Growth by Product Area through 2020
World paper demand is expected to grow by 2.1%/a in the long term. Tissue, coated woodfree papers and containerboards will be the fastest-growing product areas. 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 20406080100 Share of consumption in 2004, %
November 2007 Challenges for the Forest Products Industry of the North … also the absolute volume growth regarding Growth of total paper and board consumption, 2007 – 2012 (Million tonnes) 2.0 65.0 7.1 0.3 ~75% of volume growth 7.2
2.1 48.4 4.9 4.3 10.5
26.6
China Rest of Latin Eastern Middle Total Western North Japan Rest of Total Asia America Europe East Europe America the excl. & CIS World Japan Total growth in 5 28% 20% 15% 22% 16% 23% 8% 7% 1% 13% 14% years
November 2007 Challenges for the Forest Products Industry of the North Source: RISI China’s share of global Paper & Board capacity growth has reached ~50%
Share of global capacity growth, %
100 Other Rest of World Asia 80 Japan China
60
Europe
40
20 North America
0 1970s 1980s 1990s 2000s Source: Jaakko Pöyry Consulting November 2007 Challenges for the Forest Products Industry of the North Coated Magazine Paper (Example) Regional supply/demand balance - 2006
WORLD Consumption : 17 825 Capacity: 19 525 Ratio: 91%
W. Europe E. Europe North America Consumption 6,843 Consumption 767 10600 Consumption Capacity 10,600 Capacity 0 6843 6,001 Capacity 5,710 Japan Consumption 2,125 Capacity 1,890 Latin America Other Asia: Consumption Consumption: Capacity 505 1,110 Consumptio Capacity Capacity n 205 880
EUROPE (incl. Russia) Africa Oceania Consumption : 7 610 Consumption Capacity: 10 600 Consumption 70 355 Ratio: 72% Capacity Capacity 0 Sources: Cepiprint/PPPC in 801,000 tonnes
November 2007 Challenges for the Forest Products Industry of the North Latin American pulp producers have a significant cost advantage
BHKP, USD/Adt (indicative) 700 Delivered costs to 600 Rotterdam 500
400 Brazilian pulp producers 300 Manufacturing costs 200
100
0 0 5,000 10,000 15,000 20,000 25,000 - Cumulative capacity, 1 000 t/a - Source: Jaakko Pöyry
November 2007 Challenges for the Forest Products Industry of the North Supply trends
• Structural overcapacity in Europe short/medium term
• Restructuring, closures and consolidation in the mature markets in North America and Western Europe
• Significant cost differences between regions – e.g. Southern hemisphere hardwood pulp manufacturing cost roughly half of the Nordic cost levels
• Major paper production capacity growth in China
• Major pulp production capacity growth in Southern Hemisphere, especially in Latin America
• Cost increases (e.g. energy) and new competing uses for wood raw material - bioenergy
November 2007 Challenges for the Forest Products Industry of the North New Growth Markets Main Drivers and Focus Areas • Main drivers: – Low-cost local resources (raw materials, labour) -> competitive fibre – Fast economic growth, low GDP per capita -> demand growth • Focus areas for Stora Enso: – Fibre resources, low fibre costs, growing markets - 2 sawmills - 2 packaging board Russia mills - 1 packaging board mill being constructed China - 1 fine paper mill - 1 joint venture SC-paper mill being Latin - 1 joint venture pulp mill constructed - 1 coated mechanical paper mill- Plantations America - 1 sawmill - Plantations
November 2007 Challenges for the Forest Products Industry of the North Russian export duties
• Announced roundwood export duty increases: – 1 July 2007: from EUR 4 to EUR 10 – 1 April 2008: 20%, or EUR 15 min. – 1 January 2009: 80%, or EUR 50 min.
• Duties pertain to roundwood grades, with the exception of birch timber with diameter less than 15cm
• Aspen duties have been introduced at EUR 5 per cubic metre
• If a reasonable solution to the above is not found – soon - further production rationalisation will result
November 2007 Challenges for the Forest Products Industry of the North Superior sustainability performance – forest industry cornerstone
• Sustainability is built on environmental, economic and social pillars
• The industry is committed to sustainable forest management
• We as an industry have had challenges in promoting and getting credit for our good actions
• CO2 issues ever more important – forest industry can make this a competitive advantage
November 2007 Challenges for the Forest Products Industry of the North Forest Industry Carbon Cycle
1) Trees absorb CO (both fossil and non- Wood products act as carbon sinks. 2 fossil) from the atmosphere. In addition, their production process produces bio- fuels. 2) Trees store carbon. This carbon is transferred and stored also in wood products.
3) Use of biofuels and recycling of these
products release non-fossil CO2 which is again absorbed by the trees. Emissions from biofuels are considered to be carbon-
neutral because CO2 is recycled through the atmosphere and stored by growing forests.
4) Use of fossil fuels introduces “new” carbon to the atmosphere in the form of
fossil CO2.
November 2007 Challenges for the Forest Products Industry of the North High share of bioenergy in the forest industry to start with
• Paper industry is the world’s largest producer and user of bioenergy – Biomass fuels are a by-product of the pulp and paper industry – A long value chain of wood and fibre products is resource, energy and carbon efficient
• The forest products industry derives a greater fraction of its energy requirements from biomass than any other industry. – 50% in OECD countries
November 2007 Challenges for the Forest Products Industry of the North Biodiesel JV with Neste Oil
Examples from Stora Enso
• Full scale pilot plant to be built at Varkaus Mill, aim is to develop a new gas purification technology
• Major investment in R&D with the long-term goal of building a commercial, full-scale production plant
Stora Enso’s role Neste Oil’s role
• Joint technology • Joint technology development development • Supplying wood • Refining of the product biomass • Marketing of end- • Utilisation of generated product heat
November 2007 Challenges for the Forest Products Industry of the North Wood costs - Q3 2007 Euro / m3sub
Europea Southern Nordic Baltic Germany Brazil n Russia China
Long fibre for 41 –55 55 –65 43 –46 32 –48 47 –53 25 –31 chemical pulp
Short fibre for 60 –68 60 –70 43 – 46 25 –52 25 – 45 17 –25 chemical pulp
Sources: Jaakko Pöyry, Paperloop, Stora Enso
Notes − These are indicative costs of wood delivered to mill or railway / port terminal − European figures based on market prices, China and Brazil figures represent a range of market and cost-based prices of plantation-grown wood in certain regions − 1 Euro = 1.42 USD
November 2007 Challenges for the Forest Products Industry of the North Reporting Units
Reporting Unit Executive Responsible Responsibility Fine Paper Business Area Aulis Ansaharju Fine Paper, Country Manager Finland Consumer Board Business Mats Nordlander Consumer Board, Merchants Area, Merchants Business and Market Services Area Industrial Packaging Veli-Jussi Potka Industrial Packaging Business Area Magazine Paper Business Hannu Alalauri Magazine Paper Area Newsprint Business Area Juha Vanhainen Newsprint Wood Products Business Elisabet Salander Björklund Wood Products, Wood Supply Area and Pulp Supply
November 2007 Challenges for the Forest Products Industry of the North SENA Estimated Financial Impact on Stora Enso Group
Annual sales reduction EUR 1 950 million(*)
EBITDA reduction EUR 189 million (*)
Capital employed reduction EUR 1 750 million
Debt / Equity Ratio From 0.64 to 0.42 (**)
* Based on 2006 results for the divested businesses, with an average exchange rate of EUR/USD 1.2563 ** Including impact of reversing the impairment from EUR 1300 million to EUR 500 million in the third quarter of 2007
November 2007 Challenges for the Forest Products Industry of the North Planned closures and divestments
Planned Closures
Annual Mill Products capacity, Time of planned closure tonnes Newsprint, uncoated Summa Mill 415 000 During Q1 2008 magazine and book paper After conversion of Anjala Anjala Mill PM1 Book paper 120 000 PM2 to book paper
Kemijärvi Mill Long-fibre (softwood) pulp 250 000 During Q2 2008
At the latest by the end of Norrsundet Mill Long-fibre (softwood) pulp 300 000 Q2 2009 In addition, immediately after Q1 2008, Anjala Mill PM2, which produces 155 000 tonnes of coated magazine paper will cease production of magazine paper and be converted to produce book paper. Planned Divestments
Annual Time of planned Mill Products capacity divestment Laminating papers, special Kotka Mill 348 000 tonnes As soon as practicable coated magazine paper Kotka Sawmill Sawn goods 250 000 m3 If satisfactory offer received
November 2007 Challenges for the Forest Products Industry of the North Present operations in Latin America
• Veracel Pulp Mill in Brazil (JV with Aracruz) – Annual production capacity of 900 000 tonnes – 77 000 ha of eucalyptus plantations – Exploring possibility of ‘Veracel 2’
• Land purchase programmes in Brazil and Uruguay Veracel – Brazil – Rio Grande do Sul (46 000 ha) Aracruz – Uruguay – Rio Negro (45 000 ha) Sao Paulo • Stora Enso Arapoti Stora Enso Arapoti Rio Grande do Sul – Acquired from IP in September 2006 Rio Negro – Coated Mechanical (LWC) mill with annual production capacity of 205 000 tonnes – Sawmill with annual capacity of 150 000m3 – 50 000 ha of timberland (30 000 ha of productive plantations) – 100% of Sawmill, 80% of timberland and 20% of Stora Enso Arapoti LWC machine sold to Arauco for USD 208 million Land purchasing (EUR 147 million) in October 2007 Division office Sales office
November 2007 Challenges for the Forest Products Industry of the North Expanding operations in Russia – pulp and paper mill project prefeasibility study
• Aim to produce paper for the Russian market from Russian wood • Pre-feasibility study for a pulp and paper mill in Nizhny Novgorod now ongoing; full feasibility study may follow
• If the results of the feasibility studies are favourable, final investment is subject to Stora Enso BoD’s decision • Issues to consider include: – Infrastructure for logistics – Forest rights – Taxation
November 2007 Challenges for the Forest Products Industry of the North New Technologies and Materials for New
Solutions Examples from Stora Enso
• Media Solutions – 100% cartonboard packages for cd’s & dvd’s – Contract packaging services to blank media brand owners
• Digital Solutions – Value chain re-engineering – Integrated digital printing & packaging systems
Coming soon: – Pharmaceutical Solutions – Intelligent Solutions
November 2007 Challenges for the Forest Products Industry of the North