Tag Archives: Sulphur Directive

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

‘Commission approves amendments to Finnish scheme supporting investment in cleaner ships’

This is a positive development – state aid is a tricky thing, even when the competitiveness of the own industry is only a secondary effect of the state aid.

The European Commission has found amendments to an existing Finnish scheme supporting investment in cleaner ships to be in line with EU state aid rules. In particular, the amendments aim at giving ship-owners incentives to use less polluting fuel, ahead of the entry into force of EU standards to that effect.

Obviously, this scheme is to mediate the impact of the Sulphur Directive, and as such is to be applauded. The fact that the EC approves this scheme is an important moment in the Finnish debate on the impact of the Sulphur Directive, as the industry still insists that the Finnish state should do more to diminish the impacts.  From the original decision on this scheme (from 2011) we can see that this investment support is not quite negligible:

2.3.5. Aid intensity
14. In line with the provision of the Environmental guidelines, aid granted by virtue of the
present scheme may total a maximum of 50 per cent to large enterprises, 60 per cent to
medium-sized enterprises and 70 per cent to small enterprises of extra investments
included in the vessel project6. The maximum aid rate may be increased if the project
meets the definition of eco-innovation as defined by the above said guidelines.

Furthermore:

41. The Commission notes furthermore that the scheme is open to all operators in a nondiscriminatory
way.

In other words, it is not only open to Finnish operators, but to all operators. This is an obvious requirement, because otherwise it would be totally discriminatory. And, as said, this state aid can be used either for new vessels or upgrading old vessels. Thus, this can be seen as an important incentive to invest in new technology – whether through new ships or updated technology.

I expect, nonetheless, that the Finnish industry will not be satisfied with this. I assume that transport of the industry’s products is not done by the companies themselves but by specialized transport companies. So for the Finnish industry, this means they have to consider whether they change contracts now to companies which invest in clean ships, with the aid of this state aid scheme or whether they will pay much more for transport starting from 2015, when the Sulphur Directive enters into force.

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.

‘The Government betrayed the export industries’

…or so this Paper Workers’ Union press release says. I have absolutely no time at this moment to follow the debate on the budget negotiations, but apparently the government intends to aid the industry by somehow financing installations that clean sulphur emissions from ships and industry.
The president of the Paper Workers’ Union says that ‘we are afraid, that because of this decision [of limited assistance to the industries, presumably – PJH] investments and production will be transferred from the Finnish forest industries to competing countries’ (my translation).

There is probably more than a grain of truth in that statement, but there is also this:

  • At least since 1999, the percentage investments abroad by Finnish paper companies has been 50 to 75%
  • Finnish pulp and paper production has been slashed by already nearly 3.500.000 t/a since 2006
  • Interest levels are extremely low, so lack of investments is more likely due to lack of demand than dissatisfaction with public policy. On a broader scale, demand for pulp and paper in Europe will likely remain weak for years to come – growth can be found elsewhere and the Finnish paper companies know this.
  • As I have mentioned in a contribution to the debate in a Finnish daily newspaper, the Sulpur Directive can also be seen (at the somewhat longer term) as a great incentive to invest in biofuel technology which has the potential to a) create a new high tech industry and b) make the Finnish industry competitive for a world in which the Sulpur Directive is in effect. The low interest rates of this moment should make rapid investment a no-brainer, even when considering the uncertainty regarding the Eurozone economy, euro etc.

But yes, there might be more transfers of production abroad and less investments in Finland (in the traditional paper industry) but that has far less to do with public policy than with demand in Europe, overcapacity in Europe and the technical age of Finnish paper mills in comparison to elsewhere in Europe and the world.
Such are my thoughts this evening.

The Sulphur Directive, Sauna and Finland’s Competitive Position

Last weekend was Midsummer. In Finland this is celebrated extensively, either as the start of the Summer or the start of the countdown to the shortest day of the year (21 December). One obvious important part of the celebration, no matter what the weather looks like, is to go to sauna, preferably near a lake or the sea.

So it went this Midsummer as well. The weather was quite cold and rainy in the end, but the sauna was nice. One interesting aspect was a discussion in the sauna on the merits of the EU’s Sulphur Directive, which should be implemented by the end of 2015, in particular regarding the effects on Finland’s competitive position. The Sulphur Directive is explicitly aimed at sulphur emissions of the the shipping industry, in the context of the environmental fragility of the Baltic Sea.

My point of view, which I also recently advanced in an op-ed in the Finnish daily newspaper Helsingin Sanomat, is that the Finnish forest industries’ developing biofuel industry is the perfect answer to the punishment of the Sulphur Directive. As biofuel does not contain sulphur, it would create an advantage for shipping companies to use it relative to those who use traditional fuel (i.e. diesel or something). Furthermore, the enormous demand for fuel due to the geographical position of Finland and hence the great reliance on shipping for exports, would be a huge stimulus for this industry, which is still in its infancy, A CEO I spoke with mentioned that with the currently planned biofuel-plants, 2 (!!) ships could be provided with biofuel for a year. This obviously means there is not yet nearly enough capacity. But there is a prospect for growth.

I don’t know how biofuel would compare with normal fuel in terms of price, taking into account the Sulphur Directive. But my companion in the sauna advanced the opinion, that nonetheless Finland (and hereby taxpayers) would pay a large price through the Sulphur Directive. He mentioned two arguments: 1) biofuel would be much more expensive and 2) other Baltic Sea countries have not ratified the Sulphur Directive (either). 1) is hard to assess, but 2) is easily checked.

Actually – I take that back. I found a document, that listed most of the EU states and Norway regarding the implementation of the Directive, but countries like Estonia and Latvia were not included. But in any case, I will get back on this issue, in relation to the direct effect of Directives and the implementation of the Directive in all Baltic Sea countries.

So, as it is, it cannot be said that only Finland would pay a price for the implementation of the Sulphur Directive. Obviously, there is likely a huge effect in the short term, because so many products can only be exported by ship. But also on this issue, I hope to return to those aspects in a later post featuring statistics on trade, transport and the like.

Blogging will be somewhat slow, as I am on holiday.