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Stora Enso revises its investment plans in China

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Stora Enso revises its investment plans in China

August 12, 2013 - 04:44

BRUSSELS, July 25, 2013 (PPI Europe) - Stora Enso has changed its plans for growth in China. Following the project approval for the integrated pulp and board project it intends to build in Guangxi, southern China, from the Chinese National Development and Reform Commission, the group announced that it has revised the original investment plans.

Stora Enso revealed its plans to invest some Euro 1.6 billion ($2.1 billion) in plantation-based integrated board and pulp mills at Beihai city in March last year. At the time, the group said the mill site would initially include a 450,000 tonne/yr paperboard machine and pulp capacity of 900,000 tonnes/yr, including the necessary energy plant and auxiliary facilities. At a later date, the site's board capacity was planned to be expanded to 900,000 tonnes/yr.

"We will be selling market pulp in the country before the second [board] line is built," Stora Enso's CEO, Jouko Karvinen, said during a conference call in March last year.

Now, Stora Enso has decided to start by building a consumer board machine scheduled to be operational in early 2016. Construction of the previously announced pulp mill will be started after the board machine has been completed.

"The revised two-phase schedule, starting with the board machine and related industrial investments, will enable us through our customers to access the Chinese consumer market with an accelerated timetable. The revised investment schedule will cut the mid-term three-year capital expenditure requirements by half, as capital will be committed for the pulp mill only when the board machine is already generating cash flow," Mats Nordlander, head of Stora Enso's renewable packaging division, said in a statement.

According to Stora Enso, the capital expenditure for the first phase of the project is estimated at around Euro 760 million, comprising Euro 590 million for industry and Euro 170 million for plantation operations.

"Delaying [the] construction of the pulp mill will also give us an additional three years to build up our fiber base and sustainable plantation operations in harmony with the local communities and with the support of all stakeholders. We will not be acquiring new land for eucalyptus plantations before we have solved the existing challenges concerning land leasing," Nordlander said.

"[...] now we don't have to rush, so to say, in ramping up the forestry operations and all those things and even land expansion because of the fact that we'd have a pulp mill waiting for wood. Now we can do it in a controlled, cost efficient and responsible manner," Karvinen explained during a conference call on Stora Enso's second quarter results. He added that he just approved a very small capital investment to start leveling the mill site. "So this is for real. This is not PowerPoint any more. We're off and going," Karvinen said.

Biorefinery for Sunila pulp mill

Elsewhere, Stora Enso has decided to invest Euro 32 million in building a biorefinery at its Sunila pulp mill in Finland, which is to reduce the CO2 emissions of the mill by replacing up to 90% of natural gas by lignin extracted from black liquor. According to the group, this will be the first step towards a new business selling lignin to external customers.

"We invest Euro 32 million and what do we do? With good contracts already with global customers [...], we will start producing lignin to replace fossil materials in insulation foam and adhesives," Karvinen said. He added that, at a later stage, Stora Enso would also be able to replace fossil materials for carbon fiber.

The investment includes a lignin extraction plant and dryer, lignin dust burners in the lime kilns and a packaging line. Production is scheduled to start up during the first quarter of 2015. The investment is expected to generate annual sales of Euro 80 million in 2017.

Stora Enso's Sunila mill can produce around 370,000 tonnes/yr of softwood pulp. The mill employs some 230 people.

Q2 profits down on stable sales

The continued decline in demand for printing and writing paper and the difficult economic situation in Europe continued to leave their mark on Stora Enso's results in the second quarter of 2013.

While the firm's sales remained stable year on year at around 2.7 billion, its operating profit declined by 52.3% to Euro 74 million. The group's net profit shrank from Euro 69 million in Q2 2012 to Euro 21 million in the same period this year.

"The second quarter was a demonstration of the mixed reality we have in Stora Enso. Whereas the overall performance was according to our second quarter outlook, including solid cash flow, the picture is very different in the different businesses," Karvinen said in a statement.

According to the CEO, Stora Enso's renewable packaging segment maintained a solid earnings performance in a healthy market, and the biomaterials business improved its operational EBITDA level year on year while entering the final stages of the Montes del Plata pulp mill project, which is now expected to begin the startup process at the end of the third quarter.

From its building and living division, Stora Enso reported that the segment swung back to decent profitability after several quarters of poor earnings. The development was ascribed to a cyclical recovery and to the fact that this business began streamlining efforts already in the fourth quarter of 2012, much earlier than the group's other businesses.

The biggest problem child among Stora Enso's business segments in Q2 was once again the printing and reading division.

"The disappointment for yet another quarter was the performance of printing and reading, which is now loss-making and experiencing a decline in demand that was in many grades substantially worse than the long-term structural decline," Karvinen commented.

The printing and reading division generated an operational loss of Euro 17 million in Q2, down from a profit of Euro 43 million in the year-earlier period. "It is, as we have said, a market in structural decline, and we continue to follow that down," Karl Sundstrom, executive vice president of printing & living, said during Stora Enso's conference call. "We have taken out basically 110,000 tonnes of capacity with the closures in Kvarnsveden and Hylte. But [...] if you look at the sales price and the volume impact, you're talking here about over Euro 60 million of profit disappearing, while we basically haven't had any improvement in fixed costs. That's not sustainable," he added.

Streamlining is key

According to Sundstrom, Stora Enso is now focusing on the streamlining and structure simplification project intended to achieve annual fixed cost savings of Euro 200 million it announced in April. "Obviously, the majority of the announced Euro 200 million [will need to come from] printing and reading. So that is very much in the focus, to have a speedy execution and focus on cost and productivity," he added.