Tag Archives: Paper industry

Finland: what is its competitiveness?

The Finnish economy is not doing well, regardless of the better-than-estimated growth. Politicians, business representatives and also labour unions talk about Finland having become uncompetitive, especially relative to Germany. This is commonly expressed through a comparision of the (Real) Unit Labour Cost developments. Especially the wage increases in the sectoral collective bargaining rounds of 2007-2008 are frequently blamed for Finland’s downfall.

Recently, I have read all kinds of literature related to trade diversification, export performance and such. It was also nice to discover this website, which can provide a wealth of insight. Basically my thought for this post is: If Finland is so uncompetitive, this must somehow show up in the data. Another issue is: Finland is frequently mentioned as very competitive and high-tech, such as in this article, but does this show up in Finland’s exports?

Regarding the first question:

Export destinations of Finland (1995-2012)

Export destinations of Finland (1995-2012)

The top export destinations of Finnish exports are Sweden, Germany and Russia (followed by the Netherlands, UK, USA and China). That is the ‘macro’ picture. If you look at those individual countries, you will see completely different ‘export packages’.

Finnish exports to Germany (2012)

Finnish exports to Germany (2012)

Half of what Finland exports to Germany is either paper goods or metal goods (this can be steel plates, zinc, nickel, iron pipes etc.). Machines account for nearly 18% of exports. These are typically machines for the German industry to make things (e.g. paper machines, processing machines, lifting machines, …) but it also includes telephones, electrical transformers and electrical motors.

For Finnish exports to Sweden the picture looks quite different:

Finnish exports to Sweden (2012)

Finnish exports to Sweden (2012)

Mineral products is the category code for e.g. oil-based products, like petroleum and refined petroleum. Chemical products also include medicaments.

Finally, exports to Russia look like this:

Finnish exports to Russia (2012)

Finnish exports to Russia (2012)

Again, chemical products, phones, computers and other machinery are a large part of exports, but Russia is also a significant market for Finnish dairy products.

To make the picture complete, I provide a list of the Top-40 export products from Finland (in 2012), in terms of export value (in US$), see below. What I find striking, is that in terms of the classification used by Cafiso (2009) there are only a few high-tech export products in the top-40,  and the top-6 features ‘traditional’ industry products, as in relatively low-tech. In terms of export value, the Finnish paper industry is far from being history.

When we go back to the first question – does Finnish uncompetitiveness show up in the data? – it depends what you look at!! Here are the graphs fror the top-3 products:

Kaolin Coated Paper exports

Kaolin Coated Paper exports

Refined petroleum

Refined petroleum

Stainless steel

Large Flat-rolled Stainless Steel

Strange to say maybe, but depending on the destination and the product Finnish competitiveness does not look too bad. Yes, the start of the Great Financial Crisis is visible in the data in 2008-2009 and from 2011 European demand for two of the three products here is in decline. But that doesn’t mean that Finland is uncompetitive – German exports of stainless steel and kaolin coated paper also declines, especially in Europe.

I think one of the most relevant lessons of these sketches is that in Finland the industries that produce the top-40 products are typically very capital-intensive.  It may be true that Finnish Real Unit Labour Costs are higher than in Germany, but does it matter? Storm and Naastepad (2015) conclude that for Germany (and other industrialized countries) trade is not very sensitive to changes in Real Unit Labour Costs.

This overview of some of the aspects of the Finnish export industries has implications for the labour market relations and what issues are emphasised (either by labour unions, the state or employers). I hope to write more about that in a later phase.

 

1
Refined Petroleum $7,571,937,492.43 10.06%
2 Kaolin Coated Paper $5,546,692,160.65 7.37%
3 Large Flat-Rolled Stainless Steel $3,188,856,875.23 4.24%
4 Uncoated Paper $1,896,120,674.00 2.52%
5 Sawn Wood $1,578,749,613.50 2.10%
6 Sulfate Chemical Woodpulp $1,554,623,680.00 2.07%
7 Packaged Medicaments $1,402,117,640.52 1.86%
8 Electrical Transformers $1,397,459,014.12 1.86%
9 Telephones $1,213,812,358.00 1.61%
10 Excavation Machinery $1,141,698,501.29 1.52%
11 Broadcasting Equipment $977,911,850.49 1.30%
12 Papermaking Machines $874,822,111.30 1.16%
13 Machinery Having Individual Functions $821,263,336.80 1.09%
14 Electric Generating Sets $809,612,169.02 1.08%
15 Medical Instruments $789,197,173.22 1.05%
16 Electric Motors $707,507,667.19 0.94%
17 Other Construction Vehicles $652,354,778.80 0.87%
18 Raw Nickel $648,832,883.17 0.86%
19 Raw Furskins $619,987,425.28 0.82%
20 Raw Zinc $602,721,172.66 0.80%
21 Uncoated Kraft Paper $596,906,691.21 0.79%
22 Stone Processing Machines $574,838,607.82 0.76%
23 Plywood $570,319,551.66 0.76%
24 Cellulose Fibers Paper $557,917,828.69 0.74%
25 Cars $529,368,714.55 0.70%
26 Refined Copper $526,786,902.13 0.70%
27 Rubber Tires $522,128,649.04 0.69%
28 Valves $512,834,686.85 0.68%
29 Lifting Machinery $500,867,236.02 0.67%
30 Ethylene Polymers $495,928,852.51 0.66%
31 Passenger and Cargo Ships $456,775,890.54 0.61%
32 Other Uncoated Paper $430,972,171.17 0.57%
33 Electric Motor Parts $428,195,865.56 0.57%
34 Low-voltage Protection Equipment $423,857,644.83 0.56%
35 Flat Flat-Rolled Steel $421,897,577.90 0.56%
36 Coated Flat-Rolled Iron $415,547,511.74 0.55%
37 Special Pharmaceuticals $415,278,848.27 0.55%
38 Computers $411,008,464.22 0.55%
39 X-Ray Equipment $404,066,790.60 0.54%
40 Tractors $401,011,453.94 0.53%
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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.

In silence, a new collective agreement

UPDATE: It was not so much in silence, the union only concluded negotiations much earlier than I thought. See here for the original press release.

The Finnish Paper Workers’ Union never fails to surprise, and mostly in a positive sense. Earlier this year, a centralized incomes agreement (which was not to be a real ‘TUPO’ although it seems awfully close) was concluded amd following that, the paper industry’s collective agreement was rewritten. I have little time right now to go through it in detail but one interesting aspect is that there are again some innovations.

First is a framework for ‘working time banks’, which are supposed to help transfer (especially) overtime into free-time. More on the mechanisms later.

Second is a provision for taking into use a 12-hour shift system in continuous shifts. I will discuss this later in connection with the results from the so-called HYVIS-report by the Finnish Institute for Occupational Health.

But most interestingly is the creation of a general agreement for the paper industry. This new section regulates all general aspects of the relation between employer and employee, including shop steward duties, co-decision procedures, training and information (and other) duties on the part of the employer.

It is also very interesting that this collective agreement was born without the slightest publicity, like in 2008. One difference is at least that even the Finnish Paper Workers’ Union itself did not publicly announce this collective agreement. This is a far cry from the days that a new collective agreement of the paper industry was still significant political and/or economic news.

But as said, more on this collective agreement later.

The perils of post-closure support

[This is a draft, I try to get my thoughts straight, originally published 27.2.2012]

This story started with the closure of the Kemijärvi pulp mill in 2008. Although it was argued by some that it was pure destruction of capital and knowledge, as this mill had a very advanced testing lab, Stora Enso closed the mill ostensibly because it did not want competitors to buy it.

Kemijärvi is in the very north of Finland, and the loss of an employer of this size has tremendous local consequences. A local protest movement, including businessmen and employees alike, was formed and tried to pressure politics and Stora Enso not to close the mill. Alas.

Something did happen though after the mill was closed. The (then) Anaika Group informed that it would buy the mill to produce laminated wood products. According to this news it was a project driven by the state and Stora Enso to help the region. Both Stora Enso and the state (through Finvera) borrowed substantial sums of capital to Anaika Group, which by then had changed its name to Arktos Group.

However, the project was never completed and production never started. In 2011 there were co-decision procedures and a few weeks ago the production was stopped. Rather incredibly, Arktos Group got in 2010 a ‘Success certificate’ from the research and analytics division of Kauppalehti Oy.

Without further facts, it is not entirely clear what happened in this episode, but the owner of Arktos Group mentioned problems with technology conversion and deficient skills of the personnel regarding producing laminated wood products. The failure of the laminated wood factory can be explained sociologically as well as economically. Both explanations more or less amount to the same, though. Sociologically, it can be said that the Kemijärvi pulp mill was embedded in its surroundings (physical and business-wise). It got its raw materials locally but apparently also did international work thanks to its advanced lab. The Arktos laminated wood factory was not embedded in the same environment, although it also would procure wood locally. Its products (had there been products) were finished products ready to sell through hardware stores or furniture makers. The lack of connection between what was to be done at Arktos Group in Kemijärvi and the rest of its relevant market was too big. This is where we switch to economic explanation: the transport of pulp, due to its bulk nature, is most likely much cheaper than laminated wood transport. Pulp from Kemijärvi most likely went to the mills in Kemi and Oulu, whereas the sale of laminated wood products would have been national and non-bulk. From the point of view of the end-product, the physical location of a factory of (nearly) consumer products in Kemijärvi was not very well chosen. Local demand would not have been enough, at least.

The owner of Pölkky Oy, mentioned in the first link, has some critical words for state interference in investments. He especially criticized that the state came in so early, before there was a ‘product’.

A similar situation exists in Voikkaa, where the planned business center in the former paper mill has not yet materialized, despite optimistic sounds in Melin and Mamia’s (2010) Tapaus Voikkaa. On the other hand, the Hamina region was lucky when Google bought paper mill real estate to house a server park. This, however, did not necessarily benefit the former paper mill employees.

Reschooling programs should be studied for effectivity to re-employ, but a study for the Confederation of Finnish Trade Unions shows that re-employment programs have not worked very well.

The problem is simply stated: Finland is an ‘archipelago of paper communities’, and if a mill closes, not only is this a personal catastrophe for the employees, it is also a big problem for the community, which one way or the other depends on the spill-over effects of paper mill employment (employees shop, buy houses, drive cars, eat in restaurants, participate in politics, etc).

It is really difficult to replace lost demand for jobs in the paper industry. When a mill closes, all of a sudden a lot of employees with relatively similar work experience find themselves competing for jobs. They might not find work in their own sector and have to re-school. The laminated wood production planned for Kemijärvi was possible the kind of new investment that had possibilities to employ former mill employees in work close to their own experience, but the Google server hall or Voikkaa Business Park companies might not have the same effect.

This is really one of the hazards of capitalism for society: in regions where employment is heavily dependent on a single sector (or employer), its employees are left in the cold when the work disappears. In the case of Stora Enso, the Finnish state has a rather responsible position, as it partially owns the company.

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)).

EU Competition law and the European paper industry

(Originally posted 3.2.2012)

Last year, UPM-Kymmene completed the acquisition of Myllykoski Oy, after this merger was approved by the European Commission on the 13th of July. The merger was approved, apart from market share criteria, because

“Following a detailed investigation, the Commission found that the parties’ competitors have significant spare capacity which would enable them to react to attempts by Finland’s UPM to raise prices.”

All this was still under the assumption that it was a merger in the traditional sense, i.e. an expansion of UPM-Kymmene through the take-over of a competitor. In the paper industry (and not solely in Finland) it had been widely known that Myllykoski was not in the best of shapes, and initially, the reaction of the Finnish Paper Workers’ Union was one of relief regarding the take-over (link in Finnish), as it removed uncertainty about ownership. The merger had been in the works since the beginning of 2011, and the CEO of UPM-Kymmene has expressed the merger’s benefits in clear terms (translation by author):

“UPM sees the acquisition of Myllykoski as an unique possibility to improve profitability and create added value to the company’s paper business. According to CEO Jussi Pesonen the advantages of the merger have been confirmed already in the early stages of the merger planning.”

After the Commission approved the merger, though, UPM-Kymmene announced in November that it will close the Myllykoski paper mill and reduce capacity at some of Myllykoski’s German holdings:

“The Myllykoski mill has been making a loss for several years despite numerous measures aimed at making the operations more efficient. The mill’s cost competitiveness is weak. The high costs of raw materials and energy have further increased total costs and permanently damaged the mill’s opportunities to reach a profitable level,” states Jyrki Ovaska, President, Paper Business Group.”

Although it can be argued that, since Myllykoski was part of UPM-Kymmene after the approved merger, UPM could do with the business units what it sees as the best strategy, there is an awful discord between the initial statements by UPM and its ‘sudden’ decision to close the Myllykoski paper mill. It may be that UPM saw the ‘added value’ mentioned above only in some parts of the Myllykoski Groups’ assets – the Madison paper mill in Illinois at the moments is not part of capacity reduction programs. The press kit on Myllykoski includes these reductions:

• permanent closure of the UPM Myllykoski mill in Kouvola in Finland
• permanent closure of the UPM Albbruck mill in Germany
• permanent closure of the paper machine 3  at the UPM Ettringen mill in Germany

Given these permanent closures, it is not too far-fetched to question UPM’s motivation to merge with Myllykoski; nominally in the name of synergy benefits and competitiveness improvement, it does look like UPM-Kymmene wanted to buy a competitor off the market. This brings me to the main point of this post: the compatibility of the original merger decision with UPM’s actions afterwards. For the sake of the argument, it is important to keep in mind that it was no secret that Myllykoski had been performing poorly for many years, and UPM most certainly did not need many more assessments to establish Myllykoski’s situation.

Above, I mention that according to the Commission, the competitors have enough spare capacity to counteract price increases by UPM. This statement presumes two issues: first, that by controlling a larger share of production capacity than pre-merger, UPM would also gain some extra market share by which it can actually increase prices. Second, the statement presumes that by increasing production, price increases can be counteracted.

Regarding the first issue: UPM gained possibly some market share by the Myllykoski merger. But by closing a large part of Myllykoski’s operations, UPM has achieved two things – a reduction of excess market capacity while preserving Myllykoski’s clients/orders for UPM. This is business-wise undeniably a smart move. But in terms of the competition policy there might be a problem here, since it means the merger has in fact led to competitive advantages for UPM. The second presumption relates to this issue.

According to the Commission, existing overcapacity might be used to counter-act price increases. The logic used is that with a larger share of production capacity (and market share), UPM could influence prices. This reasoning is, however, not compatible with the situation in the European paper industry. For many years there has been excess capacity (and still new capacity is built, often with European money). In order to increase profitability, it is not possible to raise prices but capacity has to be reduced, because any increase in prices by a single actor can be counter-acted by increased production of competitors, given the existence of excess capacity. This logic ignores the (long-term) weak demand for paper, which is made worse by the economic crisis.

One plausible explanation for UPM’s actions is exactly the aim to restore or improve profitability, but not in the way the Commission argues. Instead, the merger with Myllykoski and its subsequent closure can be seen as a shrewd attempt to buy excess capacity off the market without hurting UPM’s pre-Myllykoski operations (which have seen many ‘competitiveness enhancement’ programs over the last years). When we keep in mind that the Commission argues that competitors have enough excess capacity to counter-act price increases, this means that if UPM can cut excess capacity by buying an unprofitable competitor instead of cutting its existing capacity (which is potentially in better shape than Myllykoski was), UPM has created competitive advantages through this merger, because relative to its competitors, UPM will have ‘free’ excess capacity which it could cut, while competitors in this situation have to cut of their existing capacity to restore profitability, which in turn hurts their capacity to counteract price increases by UPM in the future.

It is useful to compare this scenario with the case that Myllykoski would have gone bankrupt: then, its clients/orders would have gone also to other companies than UPM and UPM would not have had the potential to cut capacity freely. Overall paper industry production capacity would of course still have been reduced, but it would not have solely benefitted UPM, as (plausibly) in the case above.

The argument can be summarized as follows: UPM bought Myllykoski with the express intent to reduce overall capacity within Europe, in order to improve (the potential for) profitability. In the absence of a price increase the reduction of capacity and/or production might have quite the same effect, at least inasmuch it might affect a reduction in the capacity of competitors in order to stay profitable. Whereas UPM could easily cut capacity through its approved merger with Myllykoski, competitors in the short term do not have this option. This plausible chain of events shows that EU competition policy does currently not fully incorporate the possibilities of competitive advantages through other consequences of mergers. It is important not only to assess potential market shares, market capacity etc post-merger, but also the effects of blatantly buying a competitor off the market.

This alternative analysis of the decision to approve of the merger of Myllykoski and UPM-Kymmene does not anymore benefit the workers of Myllykoski that lost their job, in an economic downturn and at a time when finding alternative employment for relatively ageing employees in the paper industry is hard, to put it mildly.