Tag Archives: China

Nine Dragons investments and expansions

I don’t have anything sensible to say about this news in itself, but look at these paragraphs:

Nine Dragons Paper has several expansion projects on the agenda until 2015. PM 35 with a capacity of 350,000 tpy of kraftliner and PM 36 with a capacity of 300,000 tpy of testliner will be commissioned in June this year at the Quanzhou mill. PM 37 is slated to be started in Shenyang in June 2014. This machine will mainly produce kraftliner with a capacity of 350,000 tpy.

PM 39 at the company’s Leshan mill is a new project. The machine will produce high-performance recycled corrugating medium for the local market. It is currently being built and is slated to be commissioned in December 2013. Recovered paper for PM 39 will be fully procured in China.

The last expansion project the company has announced to date is PM 38 in Shenyang, which is to start operation by the end of December 2015 with a capacity of 350,000 tpy of testliner. It is to take the total production capacity of Nine Dragons Paper to over 14 million t annually.

That is a rather swift pace of expansion. The expansion is apparently primarily in diverse species of containerboard production, and not in paper. This could indicate expectations of further growth in China, as all those chinese products need packaging. Nine Dragons also produces printing and writing paper, but this seems a relatively small activity. I was astonished by the specs of the Dongguang -plant, which has 15 (fifteen!!) paper machines (both board and paper). A total annual production capacity of 5.25 million tonnes. And on top of that, a ‘total land reserve’ of 2,4 million square meters. I don’t know whether it means that this is land which is not taken into use, but that is a rather big piece of land in any case. I mean, that is about 2/3 the size of the Uusimaa region in Finland, where Helsinki is located.

Paper industry financials, biofuel and expansion in China

After a scientific break at the Finnish Working Life Research Days, I can catch up with some news in the paper industry. At the conference, I also had the chance to chat a lot with the researcher of the Finnish Paper Workers’ Union, which was quite interesting and useful.
First, some companies ‘nearby’, i.e. in Sweden and Norway, seem to have a bit of financial trouble. In the case of VIDA Paper AB, I don’t know what is behind the termination of credit and loans, but the press release says that the company will continue its business as usual as long as the ‘reconstruction’ is in progress. The downgrade for Norske Skog is a bit more serious:

‘Moody’s believes that the company’s debt burden will remain substantial compared to its inability to generate meaningful profits.’

It also lists some positive achievements but the press release looks like Norske Skog has to achieve quite a bit of positive news for it to receive a credit upgrade (‘a trend of improving operating profitability and cash generation ability […] evidence of a sustainable liquidity position.’) Probably this is a case to follow up upon, because this company is a relevant competitor although it is the smallest of the main forest industry companies in Europe.

This news by Metsä Board made me quite happy:

The biopower plant owned by Pohjolan Voima and Leppäkosken Sähkö was inaugurated at the Kyro mill.

Otherwise, the press release acknowledges the difficult market situation, successful investments to expand board production etc. The company is apparently in a quite good position at the moment, as far as I understand from this news – even though there are a lot of uncertaincies.
Then, when I started reading the headline of this news, I was positively surprised, until I got to the end of the headline. UPM Raflatac expands technology and R&D…in China. While this is probably good for the whole Raflatac and UPM, it is again a reminder of where the growth markets of the paper industry lies.  UPM Raflatac seems to be doing well, regarding recent acquisitions and expansions.


Also Ahlstrom has a new plant in China (in specialized paper), which probably means a great deal. Per the press release:

The plant is a joint venture together with Longkou Yulong Paper Co. Ltd, and it produces medical papers used for sterilization wraps and masking tape base papers for the building industry in the Asian market.


I don’t know much about that specific market but it seems a rather sensible investment.

Frohnleiten in Austria to close down in 2013

It is not easy to compare different paper mills with different machinery and different histories, but still it looks like W. Hamburger GmbH has put much effort in preserving the paper mill in Styria.

Among the actions taken are, according to the press release:

  • investments,
  • product innovations and
  • a reorganisation of the plant

as well as attempted synergy effects with another mill relatively nearby.

In Finland most paper mills of this capacity have been shut down or have a much wider working width. In addition, in Finland paper machines/mills of even greater capacity have been shut down (notably the Voikkaa, Myllykoski and Kajaani mills). So the statement by the managing director below is laudable, especially given the Finnish experiences:

“Being obliged to close-down a traditional company like Frohnleiten, in which generations have been employed, and which, as an important employer, has revitalised and helped to form the region, is a very difficult task for us”, explains Harald Ganster, managing director of W. Hamburger GmbH today.

Obviously the situation in the Kymenlaakso-region of Finland, where much of the paper industry was concentrated, is very different and despite employer efforts it is difficult to help ‘make the change into a new period of their life easier.’ But the statement by the Austrian managing director do have a different sound to them because of the attempts to keep the mill in business – not only reorganization, but also product innovation and investments. This is not to say that in Finland these things did not happen, e.g. the Summa paper mill is a good example of large investments before it was shut down.
Although it is sad that yet again a traditional paper mill closes down and workers lose there jobs, it is relevant that also in this case the same issues are mentioned as everywhere else, e.g.

  • intensified international competitive context due to over-capacities
  • the current situation in the business sector does not give reason to expect a turnaround
  • Overseas markets cannot be supplied cost-effectively because of the euro-/dollar-exchange rate

This simply is the state of affairs, and the demand for pulp in Eastern Europe and China will only lead to more competition on the European market. To some extent the European paper companies investing in China have brought this onto themselves. By the logic of capitalism, if more profit can be made by competing with ‘Chinese’ products on the European market, this will happen.

So, still no positive news on the European paper market.



Redundancies vs. Dividend?, or: What is happening in the Finnish Paper Industry?

UPDATE: METSO has cancelled its planned extra dividend.

The announcement by machinery producer Metso Oy, that it will make hundreds of workers redundant from its paper machine -making units, has stirred a lot of controversy. I would like to take a bit distance from the issues at stake and put them in a wider frame. But there are nonetheless the key issues:

1. METSO Oy will reduce its personnel by at most over 600 employees, mostly in the units making paper machines or providing services for the paper industry, and about 150 jobs will be outsourced.

2. METSO Oy announced that it plans to pay an extra dividend.
3. The Finnish state has a 11,1 percent stake in METSO Oy through its investment company, Solidium.

The question is, whether these issues are somehow related, especially the first two. METSO is one of the leading global producers of paper machines and all the parts that belong to them. Also important is their production of cardboard-making machines (which is still somewhat of a growth area). METSO produces other machinery as well, but in the context of this blog those are less relevant.
The reasons stated in the article by Helsingin Sanomat about the news are:

  • Overcapacity of paper machine-producing units, and related,
  • Weakening of competitiveness and profitability
  • Permanently reduced demand for paper machines and switch to cheapers solutions
  • Increased competition and weakened demand for foundry products
  • Diminished investments due to uncertain global economy

Before going into the details of the redundancies and the other issues, let’s tackle these first. Overcapacity is a phenomenon which occurs in relation to the the business environment. In other words, when the business environment changes, the capacity to produce goods might be either spot-on, too little or too much. Obviously there are more factors, but on a simple level you could say that profitability is best when there is under-capacity or suitable capacity. Though in the former there is clearly the situation that profitability could be better if capacity would be optimal.

Markets and economies can change rapidly, but today’s investors and business managers rely to a large extent on forecasts and various scenarios, which take into account different development paths. A good – and leading – example is Jaakko Pöyry Oy’s World Paper Markets up to 2025 – report, published regularly to be bought by the industry’s strategists. The next figure shows the development of Finnish paper industry machinery production (expressed as a monetary value).

What is visible in this figure, is mainly the international success of companies like METSO, as the domestic Finnish paper industry has seen mostly declining investments. This growth can most likely be seen as the success of Finnish (and other) paper industry companies to invest in South America and Asia. From this figure, it is also clear where the potential for overcapacity comes from: wrong estimations of the growth market in (especially but not only) Asia. Like the paper industry companies themselves, also companies like METSO had to find new opportunities for growth, given the stagnation of the European markets.

If I am allowed to speculate a bit, then the stated reasons of diminished demand for foundry products and permanently decreased demand for paper machines would refer mainly to the Asian markets (although of course, the European market is going nowhere, so yes, permanently decreased demand there, too). The increased competition might well come from other established players in this market or from ‘upstarts’ from China. In any case, the reference to ‘cheaper solutions’ might give a clue towards increasing competition from Chinese companies. A simple Google search turned up a lot of Chinese companies providing supplies for the paper industry and also complete paper machines, e.g. this one.
Overcapacity can also occur through the entrance of new producers on the market – I can’t possibly say what the market share of these Chinese companies might be, but in terms of geography and most likely price competitiveness they might well have an advantage over Finnish and other European companies.

So, basically, stating that a reason for reducing the workforce is overcapacity, weakened profitability and competiteveness is clouding the issue. The problem is not with the employees in Finland, but rather in the management of METSO. After all, if this is a globally operating company, the company’s board should be expected to know the impact of various economic developments on its business position. Of course, estimating/predicting market developments is hard, but that is what e.g. Jaakko Pöyry Oy is good at. And it doesn’t take a genius to imagine competing with Chinese companies is hard.
So, in my view,  the reasons stated indicate more of a failing of the management strategies of the company regarding the market it chooses to operate in: the global paper machinery market, where buyers are now mostly located in Asia. Reducing the workforce does not remove the fundamental problem, that METSO may have underestimate the pressure of competition from other companies. Yes, there may be overcapacity, but is this the employees’ fault? It is by itself reasonable to reduce the workforce if there are too many workers given the work that can be done, but the point here is that METSO completely confuses causes and effects. The Finnish employees’ performance has little to do with failed strategy towards the markets in Asia/China. Nor is firing a couple of hundred people going to help very much, as personnel costs are relatively marginal in machinery production.

With this in the background, the firing of more than 600 employees and outsourcing a further 150 looks especially harsh. Why should more than 750 people be displaced from their jobs, since they did what the management asked from them? This is failure of management, just like with Stora Enso and UPM in their American adventures in the early 2000s.
From this we can move on to the misguided decision to probably pay an extra dividend to shareholders (in terms of public relations at least) . This is on the basis of the apparent solid financial situation of the company. Of course, this will benefit the state-owned Solidium investment company as well, but how does that a) help the people who lost their job and b) improve the company’s strategy/competitive position?
Again, in this case, Corporate Social Responsibility is apparently some fashionable phrase. It is true that neither the responsible minister nor the labour unions can do much about this, but telling the truth may put pressure on companies nonetheless.