Category Archives: Biofuel

Finnish competitiveness, trade balance and wrong-headed economic policies

[For more on Finland’s exports, see here. The data is until 2012 but as I tell here in Finnish, the picture has not changed much except that machine exports to China started to decline around 2012)

It seems the rest of the world finally starts to acknowledge Finland’s problems. On the one hand, it is vital to see what the problems are, but it is just sad that Finland has ended up in this ‘trap’, as Bloomberg calls it.

Those ‘in the know’ – to which I include myself, have known about this situation for quite a long time. Indeed, while originally I started this blog to write in English about the Finnish paper industry and industrial relations, I quickly moved to the impact of the eurocrisis.

Unfortunately to say, in my view there is a much longer story to what Bloomberg writes and it does very much relate to the euro. Nokia and the Finnish paper industry are in a way ‘collateral damage’. There are potentially many ways to explain the ‘slide downwards’ and especially on the centre-right and in business circles many blame high wage costs (and/or unit labour costs). These do have impact of course, but only (and especially!) in relation to Germany’s policies during the period 2000-2007, broadly. Another issue, which is entirely hidden from the discourse is the relevance of profit margins. In perfect competition (which especially in Finland does not exist) (marginal) profit tends to zero. But in the context of an economy with a relatively small number of big players – e.g. the paper industry but domestically also supermarket/retail chains – where the companies are on the stock exchange, the profit margin matters a lot and very roughly speaking one way to keep the profit margin steady is to cut other costs.

So if we accept this basic mathematical fact, it follows that in a ‘quarterly report economy’ companies would aim for quick profits in whatever way rather than for long term investment, at least domestically. And in this context, there is also a big difference between investing in Europe or domestically (which may be less profitable, given weak demand) and elsewhere in the world.

(There are of course many exceptions to this view – think of UPM-Kymmene, which greatly expands a pulp mill. But as Statistics Finland reported private investments have decreased, and in the pulp and paper industry the domestic investment has declined for a long time already, to quite a large extent to be replaced by foreign investments (which is true for many big Finnish firms). )

The main evidence I see in this regard, is the declining current account surplus. Here, at the site of the Bank of Finland you can see the development of the current account (and trade) balance for Finland since 1998. Earlier, I made a graph based on Eurostat data of the same development – although only goods – but with (probably) a different methodology. It looks like this:

Finland Goods Exports Balance

In the story which attributes a large part of the Eurocrisis to the imbalances within Europe, this is a good development, as it restores a bit of balance. But in the end Finland is a small player in this – the Netherlands and Germany are much more relevant.

But to return to the argument – the Finnish current account balance, and in particular the trade balance has weakened. The question is: why? Finland, in my view, has initially gained a lot through the favourable dollar/euro exchange rate, in which phase many Finnish companies (in particular the forest industry companies) could make investments abroad at a favourable moment. I have written about this in my dissertation regarding the paper industry. There it was simply a continuation of the fact that the domestic markets were ‘ready’ – no more consolidation could happen without the competition authorities interfering. Although this process had already started in the 1990s, nonetheless domestic investment declined even more now.

From 2003 onwards however, the exchange rate has been more unfavourable for Finland (and other euro-countries). Finland’s main trading partners are Russia, Sweden, Germany and China, all of with which Finland has had a trade deficit in 2012. Finland does have a trade surplus with the USA and the UK – regardless of the exchange rate. It is a topic for further research to find out what is imported from where, but Russia is at least mostly responsible for oil/gas and timber for the paper industry. Sweden also accounts for a lot of raw materials, including chemicals, and China exports many things to Finland (and the rest of the world). But on balance, still, Finland imports more than it exports. This is a graph with the major trade partners (excl. China):

Data by ULJAS/Finnish Customs

Data by ULJAS/Finnish Customs

The hard-to-see yellow line indicates Russia. My quick-and-dirty take on the “Finland’s wage costs are higher than Germany’s” is this: even though Finland’s unit labour costs have increases relative to Germany’s, and also Finland’s relative exchange rate within the eurozone has gone worse, this has not significantly affected trade with Germany. Basically, from 2003 onwards Finland has had a fairly stable trade deficit with Germany. But the deficit with Russia has worsened much more, while the trade balance with the USA and UK may have improved.

So what is really happening here? Why the obsession with Finnish wage costs? Finland always presents itself as competing with Germany on high-quality goods. But it can’t be (entirely) the issue of labour costs, because that picture looks like this:

RULC

Yes, Finnish unit labour costs have risen faster than Germany’s since 2007, but regardless of this, the trade balance with Germany has not significantly weakened. The trade balance with Russia nonetheless DID start to weaken around this time. So my take is that the whole competitiveness debate (at least in Finland) is based on completely the wrong indicators: the weakened trade balance doesn’t have to do with Finland becoming less competitive relative to Germany but has a lot to do with trade with Russia. And the following graph shows why. It shows the value (in euros) of imports of various categories of products (in the CN-nomenclature used by the EU).

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

So where does the worsened trade balance with Russia come from? Simple – a huge increase in the (euro) value of mineral fuels.

In terms of the Bloomberg story, where does that leave us? Unfortunately, in the light of the data presented here the conclusion must be that the Finnish government and the labour market organisations (very much including the unions) are looking at the wrong solution for the wrong problem. Aiming for wage moderation is simply not going to help with this problem of rising Russian energy prices. There may be a difference in relative labour costs between Finland and Germany, but as the graphs above show, it is unlikely that even similar labour costs would improve the trade balance with Germany.

So all that talk about improving competitiveness and getting exports going again: fine, but it doesn’t relate to the major problem Finland seems to have – which is a large fuel bill. And to me it sounds rather unreasonable to try to solve this problem by taking on wages – as these affect domestic demand also. And I have shown earlier, it seems that for a fairly long time, domestic demand has kept Finland floating.

The question of increasing investment is important, but it does not necessarily relate to the current crisis, especially Finland is still seen as one of the most innovative countries, thanks to its infrastructure, highly educated work-force and IT-qualities. If we combine these issues with the problem then now would be a very good time for Finland to make a transition to the Green economy/Green technology – something which is already happening in the pulp and paper industries.

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Nyt se varmistui – UPM tekee dieseliä jätteestä | Yle Uutiset | yle.fi

http://yle.fi/uutiset/nyt_se_varmistui_-_upm_tekee_dieselia_jatteesta/7028820

Tämä on mielestäni sellainen innovaatio mistä voi ylpeää. Jotain tärkeää tulevaisuuteen!

Finland uses more wood-based fuels than oil!

This Finnish press release by Statistics Finland shows that for the first time Finland has used more wood-based fuels as an energy source than it has used oil (in 2012). In addition, 32% of total energy consumption is from renewables. The use of fossil fuels declined by 8% and although the import of electricity grew by 8% the import of electricity from Russia declined by 59% from 2011. The share of imported electricity in total energy consumption is slightly more than 20%. Finally, nuclear energy accounts for 33% of total energy consumption, although the production shrunk by a percent from 2011.

…but also some good news in Finland

Finland is a very innovative country when it comes to products relating to the forest industries (and in many other ways as well – I will post another time about that).

I have in the past written about biofuels here, and how they could be a future direction for the forest industries. One such innovation is presented by a new company called Suomen Bioauto (no english link yet), which offers ‘the cheapest’ way to convert cars into cars that can run on biofuels. In practice this means gas made from all kinds of biowaste. Alternatively, natural gas can be used. The company can also convert cars so they can use bioethanol. I think this kind of company is very much to the liking of Neil Young, even though it doesn’t make cars into true hybrids.

Another piece of good news is that Stora Enso invests 14 million Euros in its Oulu pulp mill, to make it more environmentally friendly and improve cost effectiveness. The Oulu paper&pulp mill is on one of the bigger mills in Finland, with a capacity of 1 125 000 tonnes/annum fine paper and 360.000 tonnes/annum of long fibre pulp.

Paper industry news

Among all the developments in the Eurocrisis it is too easy to forget that there is lot happening in the paper industry as well. Some issues relate to the future of the industry, some to the current business model.

One such new development is the production of flexible graphite circuits, made from/on paper. This Finnish link states that it is unclear how and why graphite forms from cellulose, but in any case it could be a great development for intelligent paper and such applications.

Another interesting development, on a different scale, is a concept car made of biomaterials in a co-operation between UPM Kymmene and the Metropolia University of Applied Sciences. This link has some interviews with participants in the project. It would be great, a car that is biodegradable to a large extent!

In the category ‘Finnish forest industries are transforming into energy producers’ we have the news that UPM Kymmene wants to build up to 22 windmills in Paltamo. Currently, assessment of environmental impact is being carried out. The wind-power park would provide, depending on the final configuration, some 44-85 Megawatts.

In the same theme, two items that I missed: UPM did get EU support for a biofuel refinery (in France) while Stora Enso and Neste missed out on this.

Regarding prices, the IPW published news that two big players are increasing prices of specialty papers due to higher demand (Sappi and Ahstrom). If I have time, I should get back to the issue of pricing in pulp, paper, board and specialty paper.

And finally, the UPM Stracel sale has been finalized. I reported about this earlier, but these processes take their time. It is good to see that skilled personnal can still find good jobs – if there is a willingness to take a risk to invest.

Tekniikka&Talous: ‘Mäntyöljyteollisuus pelkää UPM:n biodieseliä’

Tässä vaiheessa sanoin tästä vaan jotain mitä liittyy minun lempiteemaan: markkinat ovat sosiaalisia rakenteita. Tämä on varmaan tärkein teema taloussosiologiassa, joka juurtuu Marxin, Weberin ja muiden varhaissosiologien tuotantoon. Siihen on kyllä tehty suurin vaikutus Patrik Aspersin kirja ‘Markets’ vuodesta 2011, josta kirjoitin mm. sosiologia-lehdelle 4/2011 kirja-arvostelun. Myös vuonna 2008 kävin kurssilla Oslossa missä Aspers oli opettaja, ja tätä teemaa pohdittiin viikon verran eri näkökulmista.

 

Pääpointtini tästä mäntyöljy-asiasta on se, että on tärkeää muistaa, että markkinat eivät ole ‘vapaita’ ja ‘luonnollisia’ – niissä on sääntöjä (normeja), tietty muoto miten markkinoiden roolit toimivat (onko yritys niissä markkinoissa aina myyjä (ns. fixed-role market) tai onko vaihteleva rooli (kuten börssissä)). Nämä jutut tulevat hyvin esiin kirjoituksessa, kun puhutaan siitä, miten määritellään tuotetta ja mitä sillä voi tehdä sitten (tässä kontekstissa, asia liittyy kestävyyteen). Sen lisäksi on minusta huvittavaa, että Arizona Chem sanoo, että (myös) ilman tukiaisia, mitä ehkä viittaa siihen, että biokemian/teknologian alalla tämä ei ole lainkaan itsestäänselvyys. Tämä taas liittyy siihen, että hinnat eivät välttämättä muodostuvat markkinoilla.

Forest BTL:n toinen biodiesel-laitos

Tekniikka ja Talous uutisoi siitä, että Forest BTL Oy suunnittelee toisen biodiesel-laitoksen. Ensimmäinen ei ole vielä valmis, mutta ilmeisesti kysyntä on olemassa. En epäile yhtään. Nimenomaan myös Rikkidirektiivin valossa biodiesel voi olla tärkeä vaihtoehto, ja mm. Wärtilällä on jo paljon kokemusta sopivien dieselmoottorien kanssa. Tämä raportti esittää ongelmat, uhat ja mahdollisuudet. Jos ehdin, yritän tehdä jonkinlaisen yhteenvedon eri asioista. Mutta myös tässä on tietoa biodieselistä ja muista biopolttoaineista.