Why do Finnish paper companies prefer to close mills rather than sell them? – Some thoughts

(Originally posted 9.2.2012)

Today in the Finnish news a surprising win for the French labour movement of the M-Real mill in Alizay. Through a wide range of resistance, the local section of the French CGT labour union pressured M-Real into re-considering the possibility to sell the mill.

This blue-print of what to do with ‘unprofitable’ or ‘undesirable’ mills is well-known in Finland. The Voikkaa paper mill was closed in 2006 (the first non-bankruptcy closure in Finland) and subsequently dismantled. The Summa paper mill was closed in 2008, its factory halls sold to Google for the use of servers and two of the three paper machines were dismantled and scrapped, the third on sale. Also in Kajaani the paper machines were dismantled and one was sold to India. The most recent case, the Myllykoski mill, also follows the same blue-print: the machines are in the process of being dismantled. Currently, they are planned to be stored locally, no other plans for the machines are known publicly. Also in the case of the Kemijärvi pulp mill, Stora Enso rather closed the mill than sell it.

Why do these companies prefer to dismantle working mills rather than sell them? The examples of Lohja Paper and the Kirkniemi paper mill (bought respectively by Mondi Ltd and Sappi Ltd) show that it can happen differently. At least for the former the explanation might be that it was a family-owned mill, with relatively old paper machines and lowish annual production volumes of special paper.

One thought, which is expressed also in the news article, is that paper companies don’t want production capacity falls in the hands of competitors. The apparent reason for this is that the production capacity might be used against the former owner. As also expressed in the previous post, in a situation of near-oligopoly (in Europe), it is not beneficial for company X to divest of a mill by selling it to Y, which means that either X has less advantage of the competitive restructuring relative to total production capacity on the market or that Y might gain an advantage for when demand is stronger.

There is, however, a problem with that argument (even if the market situation is more competitive than presumed) – if company X doesn’t want that a certain paper mill does not benefit a competitor, e.g. through a sale of the mill to that competitor, then it must mean that the paper mill has more potential than the company X wants to admit. True, it might be that a mill needs additional investments or some other reorganization, but perhaps in the not-so-immediate future paper mills that are not competitive to company X might be so for company Y.

One big question of course is the existence of overcapacity in (Western-) Europe. This does provide something of a rationale to permanently remove capacity from the market. However, this overcapacity is also the Finnish companies’ own doing in part.

So are Finnish companies doing their competitors a favour by closing paper mills? This is impossible to say without serious analysis (for which there might not be sufficient data). In any case, this is not the creative destruction advocated by Joseph Schumpeter; it is just capital destruction. A sale of a mill to a competitor might in the end seal the fate of a paper mill, but Finnish paper companies are not the sole possessors of wisdom, and especially considering the nature of Finnish paper industry communities, these companies have to show more responsibility for the fate of their employees. If the sale to a competitor in the somewhat longer term leads to the conclusion that the mill is not, in fact, economically viable, then that is the end of the story. But the social responsibility of the paper companies demands that a sale of ‘unwanted’ paper companies is at least seriously considered (especially regarding Stora Enso, in which the Finnish state has a majority stake through an investment company and the the Social Insurance Instution (KELA)).

One response to “Why do Finnish paper companies prefer to close mills rather than sell them? – Some thoughts

  1. Pingback: Non-creative destruction: Stora Enso plans to reduce its personnel by 520 persons in Europe | Arjen Polku

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