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UPM to close paper and pulp capacity in Finland

Tuesday, September 16, 2008

Press release from the issuing company

(UPM, Helsinki, 10 September 2008 at 09:30) – UPM continues actions to secure its profitability in a business environment of slow growth and rising costs. UPM reorganises its business structure and plans to close its least competitive paper and pulp capacity in Finland as well as to streamline operations in all business groups, units and functions. The number of employees affected by the programme is estimated to be approximately 1,600 in 2009–2010.

The planned actions to close capacity would improve UPM's cost competitiveness and are estimated to provide a positive EBITDA impact. In addition, streamlining of operations will result in cost savings of about EUR 70 million in fixed costs.

In case the closures will be implemented as planned, UPM will book in Q4/2008 a EUR 170 million write-off in fixed assets and make a provision for the reduction in the number of employees, and other closure costs of about EUR 30 million.

"Demand growth for paper in traditional markets has slowed down. Overcapacity still exists in Europe and slowing economic growth imposes further challenges. Prices of wood, energy and fuels have increased significantly in the last two years. UPM's employees have succeeded in increasing the internal efficiency to a new level but unfortunately cost pressures have multiplied. The situation is striking particularly in Finland, where wood prices have increased to such a high level that profitable operation of all our units is no longer possible. With today's market outlook and the recent cost development, UPM's paper and pulp production in Finland can not continue in its current form and extent. We have to be humble in heading for this rocky road", Jussi Pesonen, UPM's President and CEO says.

UPM is planning:

- a possible closure of Kajaani paper mill in Finland by the end of 2008;
- a possible closure of Tervasaari pulp mill in Valkeakoski, Finland by the end of 2008;
- significant efficiency improvement of UPM's Label Division in Europe in 2009–2010;
- streamlining of operations in all business groups, units and functions.

Kajaani paper mill

Possibilities for profitable operations at the Kajaani paper mill have constantly weakened due to the price development of wood and energy as well as the weak long term demand outlook for its main products. In the mill's main products, in newsprint, the sustainable market structure is based on recycled fibre and location in the middle of the customer base. Kajaani mill is distant from markets and it uses virgin fibre in paper production. The mill uses more wood and energy per produced paper ton than any other UPM mill in Finland. The mill has become unprofitable despite many well completed efficiency improvements.

"Both the mill management and personnel have worked hard for years to improve Kajaani mill's profitability. No stone has been left unturned and for that I want to give all employees full recognition. The external challenges have just become overwhelmingly big. We need to face the reality now and conclude that a paper mill operating in Kajaani is no longer viable", Jussi Pesonen says.

At the Kajaani mill, UPM has 670 employees, of which 535 at the paper mill.

The mill's production capacity is 640,000 tons of newsprint, special newsprint and uncoated SC magazine papers. One newsprint machine has been idle since February 2008. Through the closures, UPM plans to reduce 13% of its newsprint capacity in Europe, 25% of its special newsprint capacity and approximately 9% of its SC paper capacity.

According to the plan, UPM 's sawmill and wood procurement will continue operations in Kajaani. The sawmill's annual production capacity is 220,000 cubic metres of mainly pine sawn timber. The sawmill employs approximately 100 people. The wood procurement employs 34 people.

UPM is currently preparing a feasibility study on pellets production based on forest residues in Kajaani. In addition, the company plans to study the possibility to produce bio oil in Kajaani.

Tervasaari pulp mill

In the company's view, profitability of pulp production will significantly decrease in Finland in the coming months. The main driver for this is the high price of Finnish wood fibre. UPM has to steer fibre to its bigger, newer and more competitive pulp mills in Finland. Tervasaari pulp mill is the smallest and oldest of UPM's Finnish pulp mills. UPM sees no signs of recovery of the fibre supply but estimates it to continue to be challenging. Tervasaari pulp mill has no prerequisites to operate profitably in the coming wood supply situation.

Tervasaari pulp mill has an annual production capacity of 210,000 tons of pulp. In addition, Tervasaari mill operates three paper machines, which together have an annual production capacity of 370,000 tons of speciality papers. Tervasaari mill has 680 employees and the planned closure of pulp mill includes around 150 people.

The planned closure of the pulp mill would reduce UPM's pulp production by 10%. After that the company would still remain self-sufficient in chemical pulp.

Tervasaari mill's three paper machines continue production with no change in their current product portfolio. In future, chemical pulp will be supplied to Tervasaari from UPM's other pulp mills in Finland.

The planned closures would decrease UPM's wood consumption in Finland by 2 million cubic metres annually. This would not reduce the company's wood procurement in Finland. Instead UPM aims to increase the procurement in Finland.

Efficiency improvement in the Label Division

UPM's Label Division plans to undertake restructuring of its European operations in order to secure profitability in a weak economic environment. The Division will announce a detailed plan later this year.

Other streamlining

UPM will begin to investigate measures to improve efficiency in all of the company's business groups and functions in the new business structure. A preliminary estimate on the number of employees affected by these measures is around 950. UPM will announce more detailed plans on these measures later in autumn.

If all above mentioned measures will be completed, the Group's total amount of employees will reduce by around 1,600 in 2009–2010. This amount does not include the measures of the Label Division or impacts of possible outsourcing.

Employee negotiations and From-job-to-job programme

Negotiations with employees on the possible closures will start as soon as possible. First decisions based on the negotiations are expected in December.

Possibilities for retirement, relocation within UPM and retraining will be handled in the negotiations too.

If the planned closures will be completed, UPM will start a From-job-to-job programme with focus on the Kajaani region. The programme includes, in cooperation with various parties, active measures to support finding a new job and retraining.

"Plans on closures and heavy streamlining are necessary in order to remain a strong player also in the environment of slow growth. We want to take measures in time and tell our stakeholders about our plans directly and in a realistic way. We need to go through alternatives but necessary decisions need to be made without any delay, and they need to be realised in a professional and responsible way," says Jussi Pesonen.

 

 

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