Tag Archives: pulp

Interviewed for Investment Perspectives on Share Radio

On Wednesday, I was interviewed by Robert van Egghen of Investment Prespectives on Share Radio. It was my first radio interview ever, and probably as a result of my overly winding answers, only a small section of the material was used. But I think the whole section, which considers the state of the Finnish economy and whether Finland would leave the Euro is very interesting.

You can listen to the segment here.

Below I have copied the answers I actually prepared based on the questions I received. Note that while many economists seem to think Finland has structural problems (as in neoliberal structural i.e. labour market negotiations, unions, collective agreements, welfare state..) I think the decline in (labour) productivity signifies another kind of structural issue: the Finnish economy has been changing rapidly, in that there has been a significant decline in industrial output. So in my view, this lower productivity level shows more a change towards services than any kind of “structural” problem like too high labour costs.

– Why is Finland’s economy struggling?
A combination of deficient demand in the Eurozone, sanctions on Russia and austerity politics domestically which squeeze purchasing power and increase unemployment. Nonetheless, there are export sectors which perform well, such as the board and pulp industries and recently the shipbuilding industry has gained important new orders. Also companies like Kone, escalators and elevators and Wärtsilä, ship engines and other marine technology perform well. The impact of the sanctions on Russia is fairly recent and affects mostly food and dairy producers.

– Problems in export market:
Demand for Finnish goods. The story of Nokia is well-known and as a result many jobs were lost in the IT sector and related sector, although many ex-Nokia employees are regrouping into new small companies. As for the pulp and paper industry: demand for paper is declining for a long time already but demand for pulp and board is still booming, thanks to the Asian markets.

On a more basic level, the problems relate to the construction of the EMU and in particular the policies of Germany. German wage repression has led to a large gap in e.g. unit labour costs and relative competitiveness, which the Finnish economy can’t repair. The German policy has been clearly deflationary and Germany has undershot the inflation norm of 2% for many years. This has harmed many countries in Europe, not only Greece and Spain, but also the Netherlands and Finland. If Germany hadn’t been so obsessed with a trade surplus, the current problems of “healthy” European countries would have been far less. Here you can see that the Euro is very much a fixed exchange rate system, with all the problems that follow from it.

– Productivity levels in Finland
Many sides to this question. On the one hand, you can see the effects of deficient demand – after all, if companies sell less with the same personnel, productivity declines. On the other hand you can observe in the declining or low average productivity a restructuring of the economy. Labour productivity in industry is always much higher than in services and for example in the Finnish paper industry labour productivity is nothing short of astonishing. But with a decline in industry and also slight decline in services sector the average productivity will get lower. Especially since construction is still fairly strong in Finland for the moment, which is a low productivity sector. However, that may change because the application for building permits seems to be on the decline.

– Finland under the radar in the Eurocrisis
Finland has slipped under the radar because until recently it had a triple-A rating and also consistently scores highly on competitiveness indexes. Furthermore, Finland has been rather tough on Greece. So people may get the idea that if only Greece is more like Finland, than it would be in a better shape. Most importantly, Finland, as a Nordic country, simply doesn’t fit in the ‘lazy Southern Europeans’ -explanation of the eurocrisis.

– Fixit?
One politician is campaigning a so-called citizen’s initiative for a referendum on Finnish Euro membership. That apparently has collected many signatories already. The question is who would benefit from Fixit. The export industries may benefit although it is not quite clear cut that a new Finnish currency would devalue against the Euro. That is perhaps the idea. But like Greece, a devaluation of the currency would trash the purchasing power of citizens, which is problematic because Finland does import a lot of food products. Also, it would eliminate the AA-status of Finland in all likelyhood. It is clear that the Euro is not working for Finland, but that is also partly domestic politics – Finnish politics insists on austerity as the recipe to get the economy going. But I think the Finnish economy and Finnish citizens will have to endure a lot more hardship before exit is considered. One advantage Finland has relative to Greece is that its banks are in good shape (perhaps thanks to Finland’s banking crisis of the early 1990s).

– Scandinavian union
In a way, a currency union between the Scandinavian or Nordic countries sounds sensible, since e.g. Sweden and Finland are main trade partners in many sectors. They are potentially close to being an optimal currency area, as even labour mobility between the Nordic countries is quite good. But I think it can only work if there is also fiscal and political union, otherwise it probably will end up like the original Scandinavian Currency Union of 1873, which failed because of politics and, in the end, WW I.

– Further growth of the Finns party?
Timo Soini’s party is now in the government, and in my opinion, Soini has achieved a very big tactical win in Finnish politics by becoming Foreign Minister. It is a topic he is interested in, but most importantly, he can’t be accused (by the media or his own party-base) as implementing policies that harm the Finns Party’s voters (seeing as these are by and large the exact people who may be dependend  on social security and/or dislike austerity politics aimed at curbing the welfare state.). There are many things that may influence the future of the Finns party, but I do see potential for further growth, as long as Soini keeps the rabidly anti-immigrant wing of its party under control.

Advertisements

Short analysis: of market pulp, pulp markets and price formation

Although I have written recently more about the Eurocrisis and economic policy, I still follow the Finnish/European paper industry with interest. In this short analysis I would like to present some thoughts about the Finnish pulp market, its actors and its possible development. In a way, this analysis is an exhibition of how economic sociology, and how it understands markets, may be valuable for firms as well.

First, about price formation – I wrote about that topic before, in 2012, with regard to the price increases in softwood pulp.

The news from Finland (Helsingin Sanomat 30.10.2014) right now is that Finnish forest-owners’ lobbying organisation MTK demands price hikes to the price of pulpwood, arguing that the price of pulpwood has declined by some 40% since 2000, while the pulp industry has performed well.

My interest was raised especially by this sentence (citation of Mikko Tiirola; my translation from Finnish):

Although the price of pulp is set in markets, the price of pulpwood is like a brainwave during coma.

In other words: he, as the representative of the lobbying organisation, is not happy. And it is true that the pulp markets have been quite good, recently at least the pulp divisions of major Finnish forest industry firms have performed well (whether that will last with a slow-down of China is another question).

It is telling that the article mentions that there are about 300.000 forest owners but there are only four pulpwood buyers: Metsä Group, StoraEnso, UPM and Harvestia. For logs there are many buyers, since there are quite many saw mills still in Finland.

So, in effect we see here a market structure which is much like oligopsony. In this situation, the buyers effectively set the price and any standards regarding pulpwood. To see how this works, it is instructive to see the effect of harsh storms on the price of wood (in this news article, no differentiation is made between roundwood and pulpwood). Following the storm, and the inevitable harvesting of the fallen ‘storm-trees’, the price for wood dropped to 20 percent of normal prices. Following an earlier storm in 2012, UPM stated in a press release (my translation):

“The price of wood naturally is of interest for forest owners. However, the price level is determined on the market through supply and demand.”

The manager of wood acquisition who is speaking here then goes on to list many factors which influence the final price effect of the storm. Of course, one can dress this up as a question of supply and demand, but in a situation with only a few buyers this is rather more like a negotiation situation – as I emphasised in the older article ‘It should not be particularly difficult to get the market to accept the price increase, they said.’ – but in this case it would be what kind of lower offer would be agreed upon.

The article in Helsingin Sanomat mentions the divergence between prices of pulpwood and roundwood (which goes to sawmills). To show the influence of market organisation, look at this picture (data from the Finnish Statistical Yearbook of Forestry):

Pine prices 1983-2012

Pine prices 1983-2012

 

 

 

 

 

 

 

 

For simplicity I only present the price development (euro/cubic metre) for pine. I now also disregard all kinds of quality requirements regarding what is suitable for sawmills and for pulp mills. Although 2010 and 2011 saw damaging storms in Finland, prices did not change very much. The decline in prices between 2007 and 2009 more likely had to do with the emerging economic crisis in Europe.

Although there is probably a way to argue the same thing through econometrics, I have the feeling that part of the relative success (and in the early euro era, until about 2005, the substantial profits)  of the Finnish pulp and paper industries is also due to the quite constant price of pulpwood (at least for pine). And regarding market organization – I did not find statistics on the import of pulp wood to Finland but Finland does import significant amounts of pulp.

The Finnish Statistical Yearbook of Forestry also mentions the cost structure of the pulp and paper industry in comparison with the wood-products industry, and the fraction of wood raw material for the latter is indeed nearly twice that of the pulp and paper industry, which should not come as a surprise in the light of the picture above. In addition, total profit as a percentage of the total turnover is much smaller in the wood-products industry.

So, in conclusion, it can be understoon why the lobbying organisation is demanding hikes in pulpwood prices. The problem nonetheless is, seen from how the market is organized: why should the Finnish pulp and paper industry firms care about this demand? After all, they are more or less in a position to negotiate the prices that suit them, or even replace domestic pulp by foreing pulp. The organization of the market can then be seen as a key factor in the price developments of pulp wood. The fact that the article in Helsingin Sanomat mentions that the organization of  membership in the lobbying organization changes (not anymore mandatory) may even have the effect of downward pressure on prices, as the buyers may even have more scope to play off different sellers against each other.

 

 

New pulp industry investment in Finland/Äänekoski

Today is apparently a day for good news. On the website of Tekniikka&Talous a press release/news item was published concerning a new investment by Metsä Fibre in a so-called next-generation pulp mill, of a value of 1,1 billion Euros, which would make it the biggest single domestic investment in the pulp and paper industry in Finland.

Why is it next-generation? The english press release states:

The new mill will be the world’s first next-generation bio-product mill that can convert wood raw material into a diverse range of products. In addition to high-quality pulp, the mill will produce bio-energy and various bio-materials in a resource-efficient way. A unique bio-economy ecosystem of companies will be built around pulp production.

So this is why it is not presented as a pulp mill but as a bio-product mill: the diversity is an important issue I’d say. This development supports the ideas I have regarding the transformation of the pulp and paper industry (e.g. in the context of the Sulphur Directive: here). This is the kind of innovation Finland needs both in terms of employment (which is estimated at 2500 jobs in the whole value chain) and environmental impact. Finland has very high tech know-how regarding forest industries and more and more it is possible to see off-shoots of the ‘traditional’ paper industry developing into new industries.

‘A return to Pulp-Finland’ & the current balance of trade

It is quite difficult to describe the various reactions to the sale of Nokia (or big parts of it) to Microsoft. One reaction in Tekniikka&Talous is that ‘Finland is going back from Electronics-Finland to Pulp-Finland.’

This is rather a short-cut, and given the many direct and indirect off-shoots from Nokia in the broad electronics sector, from Rovio to Jolla quite probably nonsense.

But the point the article wants to make is a valid one: the growth and size of pulp-exports is not insignificant. Still, it is much smaller than the electronics numbers from the ‘good’ period. Metals-exports on the other hand experienced a decline thanks to declining world prices.

This preliminary graph shows that the Finnish trade balance has moved in surplus again,

No pulp fiction – rising prices and a stop to deforestation in Indonesia

This article tells about the increases of prices in various grades of pulp , notably NBSK and BEK. As I have written before, pulp prices have seen quite a lot of action recently – usually mentioned in the context of increasing demand from China/Asia. Obviously this could at a more local scale also be related to rising demand in carton/paperboard, which is needed for packaging all those products that come from China. It is in any case clear, that pulp and paperboard do fairly well, and paper is just in a very weak position, as e.g. Stora Enso also mentioned.

But for me as a sociologist it is interesting to see what language is used here in the article: ‘pushing through mark-ups’, ‘getting prices accepted’ etc. Of course, you can frame this in a supply-and-demand setting, but with this product, pulp, it seems so that prices are (at the moment at least) determined by producers and then kind of settled through negotiations of orders with clients, which in the end lead to contracts. That mechanism is quite a far cry from what microeconomics teaches us, although from a different perspective it can still be said that there are movements to find a new equilibrum. But ‘word has it that even additional volumes were ordered in some cases’ – which would seem incompatible with the usual story of supply and demand (as in: the higher the price, the less demand). This is definitely an interesting case.

 

On a wholly other issue, I read from a Dutch newspaper that APP (Asia Pulp and Paper) has announced that it stops using tropical wood from Sumatra, Indonesia for pulp production. The company has been under intense pressure by organization such as Greenpeace, but probably more decisive has been the decision by companies such as Kraft and Unilever not to order APP’s products. But in any case, good news for the fragile rainforests of Indonesia.

“Rottneros continues production of groundwood pulp”

From this source.

It seems to be a trend – Södrä Cell increases the price of pulp and now Rottneros does continue production (although this is a different type of pulp – CTMP is mechanical pulp whereas NSBK and similars are chemical pulps.

The article states that the grounded pulp developed at the mill would be of particular interest for board producers. I don’t know at what scale Rottneros operates, but the Finnish Forestry Research Instute METLA still indicates that pulp is a growing market, especially in Asia/China, apparently also for board.

Because this is not the only important factor (distance comes to mind), I won’t say anything about the merits of the exchange rates of Swedish Krona, Euro and Dollar relative to the Renminbi. Perhaps the production of pulp for board also is competitive for local producers.

RISI European Pulp and Paper Map

I finally got it! To some extent I am a very visual person, so it is great to have a map with all pulp and paper mills (as of 2011) on it. Saves me a lot of work – I only had a rough overview of Finnish-owned mills.

Some factoids:

  • I am surprised at the high density of very small mills in Northern Italy
  • There are more paper/board mills in the Netherlands than I thought
  • It is interesting to see the geographical spread of pulp mills – mostly Sweden and Finland, and then Portugal and Spain in the South. Must be the shipments of South-American pulp.

Great stuff. Shame that their other products are way out of the budget of the research community!