Tag Archives: labour costs

Innovation in the paper industry – the only way forward (pulp bleaching)

Both in my dissertation articles and on this blog I have discussed the merits of product- versus process innovation. Finland is in such a location, that its industry can’t be just as good as Germany’s or Japan’s, no, it actually has to be better, because between Finland and most of its markets there is a barrier which increases price: the Baltic Sea. Now, Finnish export industries, including their trade unions, have complained a lot about the Sulphur Directive, as it would add an unfair extra cost on Finnish exports (from 2015). As I’d like to say: yes, that is true, but the time used to complain about this issue also could have been used to gear up for changes. And beyond that, the Finnish state also has instated a compensation program. On top of that, Wärtsilä is doing great business with retrofitting sulphur-washers to older ships. And, let’s not forget that Finland has the great potential of developing sulphur-free biofuels based on processes in the pulp- and paper industry. Admittedly, this is still in baby shoes, but right now, with nearly free money from banks due to zero interest rates (nearly) the industry should throw a lot of money on this issue, as this is a sure source of demand in the years to come, in contrast to paperboard markets, which may at some point in the near future (especially regarding China’s slowdown) reach a saturation point and then the whole overcapacity drama will play out all over again.

The biofuel issue is one of product innovation, and Finland can and should be a leader in that field – all Finnish forest industries have pilot plants and bigger refinery plans in various stages of completion. Product innovation in the sense of intelligent paper etc. is probably going on as well, but I do not know how scaleable these products would be and how popular they would be. Things like packaging that announces when food goes bad sound great, but for the end-seller (i.e. shops) they might be a cost which is too high relative to benefits. But we have to see about that.

The issue of process innovation has been very important in the Finnish paper industry. Due to process innovation, labour productivity has greatly increased over the years.

As a besides, which is a well-known phenomena, labour productivity growth has both benefits and drawbacks, both for employees and employers. It is obvious that greater labour productivity enables the final product to be cheaper, but depending on market demand, rising labour productivity might endanger jobs at the site (after all, less personnel would be needed to produce the same amount of product). Furthermore, especially in the Finnish context with its high local unionization rate, labour productivity increases have also led to wage increases. These have been justified for many years, as long as markets grew. Currently, however, high labour productivity and low demand make for a problematic combination. In the Finnish legal (and labour market relations) context, the only way to combine these facts is to shed labour – it is near impossible to be flexible on wages. This kind of rationalization has its own risks – firms are very vulnerable to sickness absence and chronic understaffing also increases the risk of sickness absence. Thus, in terms of labour, labour productivity increases are not quite always positive, especially because at the moment employers would not increase wages along with productivity, because the market situation is so weak.

Enter university-led innovation. A recent report on Tekniikka ja talous discusses an innovation by the research team of Tapani Vuorinen of the Aalto University. Short and simple, the innovation is a much faster way to bleach pulp. The article mentions that the process would be 100.000 times faster than the traditional process. This means that also labour productivity would greatly increase, and thus the labour costs of making paper could drop. The article mentions that this new method would be commercially available in about three years and it would need only small investments. Again, with the availability and price of credit as it is, a no-brainer I’d think. Professor Vuorinen also states that this method would have positive impact on the environment, because it would not be necessary to cook pulp as long as currently needed.

It is clear that the current economic crisis in Europe and (possibly soon emerging in) China and other emerging markets have a strong negative impact on industries through lack of demand. However, it is not possible to revive the economy by cutting costs. Firms should be bold and take the cheap loans that are now available and take the risk. It is only through investments that new jobs can be created, and only investment can lead to growth. Why be risk-averse when it’s almost money for nothing? Shareholders do not only watch corporate debts and labour costs, but also investments, because they may tell about future

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Finnish paper industry profitability and cost structure

Today an interesting press release from Metla was released, as to how the paper and pulp mills’ cost structure is formed. As METLA has always said in the annual reviews, the exact cost structure is difficult to estimate, because of the differences between various paper and pulp mills. But this METLA research is very important in that sense, because it shows through realistic simulations a cost estimation model that shows what is the paper and pulp mills’  ‘critical point’. A lot of respect for the researchers. I am not able to review those studies which were published, but I do not see any mention of the relevance of labour costs in the press release. Thus, in my view, the quote below is the most important piece of the press release (emphasis and translation mine):

Although the results are based on calculations of a simulated case, it may be inferred that the pulp and paper demand and market prices largely determine the essential profitability of the industry. The decline of market prices of the products towards the profitability limit of the industry is a clear threat. However, the results suggest that the production can be profitable also in Nordic conditions.

This may mean, for example, as I have also told my dissertation, that it is not labor costs that greatly affect the competitiveness of the industry. More broadly, such as the Austrian WIFO Institute study shows (link), labor costs are largely over-estimated in their impact on competitiveness. In particular, for capital-intensive industries such as the paper industry, this is quite logical – especially as the productivity is so high. So, when it is once again time to negotiate collective agreements, it would be good to focus on factors that facilitate process-innovation, and other domestic investment.
Of course, the quote also mentions what was left out of the simulation, and for the Finnish paper industry, the transportation costs are pretty important. In addition to these, market prices are relevant, but like many of the industry’s news sources show, these market prices are largely determined by contract negotiations. This must be dealt with more extensively, but now this statement may be sufficient.

The situation of the Finnish forest industries – low labour costs are the only source of competitiveness?

The Finnish Forest Industries Federation published a kind of press release of the situation of the forest industries until September this year. The overall picture is both positive and negative, as a result of the economic crisis. But on the other hand, the accession of Russia to the WTO might be positive for the Finnish paper industry.

On the issue of labour, however, the federation is placing the blame for potential competitiveness loss on labour and the labour union.

Moderate labour costs enable the forest industry to retain its competitiveness

All employee categories of both the paper industry and the mechanical forest industry concluded collective bargaining agreements that were in line with the framework agreement negotiated between the central labour market organisations.

[…]

Finland’s cost competitiveness must be looked after. If labour costs are permitted to rise, Finland’s competitiveness will weaken further in relation to our rival nations, and this will have a negative impact on corporate willingness to invest in our country.

So, there is the statement that moderate labour costs help competitiveness. So far, so good – this is kind of standard Wolfgang Streeck -fare of responsible labour unions (wage moderation etc., also like in 1982 in The Netherlands’ Akkoord van Wassenaar (‘Wassenaar Agreement’), which help industries to remain competitive by not letting wage costs run out of hand. However, the deal in those cases was really a deal: in accepting only very moderate wage growth, labour unions in the Netherlands and Germany got for their responsibility employment security (and some other goodies related to co-determination). In this sense, it was really a trade-off for both employers and employees in which both parties benefited in the long term.

If we look at METLA’s statistics of real income development, then since 2005 real income (as an index) has increased fairly moderately, which is mostly due to inflation, which also explains the fairly large jump in 2008-2009, when inflation in Finland was nearly 3,5 percent. Nominal wage increases have been very moderate since 2005. So, in collective bargaining the labour union has been prudent, and historically the Finnish Paper Workers’ Union has commonly taken into account the industry’s competitive position.

And we must not forget, as I have also argued in my dissertation, that although  labour costs are not marginal, they are not a very great part of total costs. Energy, logistics and raw materials account for the major changes in costs. In particular the raw materials, which may be timber and chemicals etc., fluctuate in price and there is a whole separate discussion on how to improve the availability and price level of timber for the paper industry.

But in the context of the employers’ federation, labour costs are the primary ‘bad guy’, as these are the few costs that can somehow be moderated through collective bargaining, whereas costs for transport, raw materials and energy are much less in the control of the companies. So let’s look at the statement again:

If labour costs are permitted to rise, Finland’s competitiveness will weaken further in relation to our rival nations, and this will have a negative impact on corporate willingness to invest in our country.

This indicates a belief that only labour costs drive the competitiveness of the Finnish forest industries, which is plain wrong. Moreover, labour costs can easily rise if other parts of the cost equation decline! And the bit about investment is just the stuff that comes from male cattle’s behind, because investment is surely not only related to labour costs. Other issues are taken in account too: the skills of the workforce, tax levels, availability of a supportive infrastructure, a value-chain of related businesses…let’s not forget that Finland has a fairly unique capacity in know-how and scientific institutions related to the forest industries – the whole idea of the cluster of the forest industries is to show the added value of the whole of Finnish R&D, knowledge, resources etc.

Concludingly, it is rather misleading to single out labour costs as the only important driver of competitiveness, especially since the same press release mentions transport costs already in the beginning. Besides, it is kind of harsh in an environment where already more than 4000 people have lost their job in the paper industry, even after serious efforts to implement cost saving programs. The statement in the press release does not do justice to the men and women who work in the forest industries.

Furthermore, it is difficult to square the resistance to the Sulphur Directive with the statement that ‘The forest industry as the locomotive for a low-carbon society’ is an important future direction. See also this separate press release.