Finland's paper mills battle the internet

UPM, the world's largest graphic paper producer, is diversifying to cope with falling demand

At least 40cm of snow is still lying on the ground, so Jaako Lehtinen has to use his GPS device to track whether new pine or birch trees need to be planted in Kesimaja's vast forest.

Mr Lehtinen, a dark-haired young hunter and forester, works for UPM, the world's largest producer of graphic paper (the kind that goes in your desktop printer) and Europe's largest maker of newsprint (including the kind used by many newspapers).

He and his colleagues are a hardy bunch. But working in below freezing conditions in the Finnish wilderness is routine compared with the upheaval the company faces.

The paper industry's raw material costs have been rocketing, and since the rapid growth of the internet, demand for paper is in free fall.

Henri Parkkinen, an analyst at Pohjola, says: "The main issue for the paper business is the fact there is declining paper demand and escalating costs. It has been the same story for the past few years. Fifty per cent of the end users are advertisers and they are shifting to mobile and internet."

So how does a company that has been producing paper from the thousand of trees in the Finnish forests survive in an online world?

In Finland, families have owned plots of forest for centuries. It is part of their culture to make a small income from selling the timber and wood products, and replanting for future generations. UPM, based in Helsinki, 100 kilometres north of Helsinki, grew from this tradition, and is now valued at ¤6.8bn (£6bn) on the Helsinki Stock Exchange. But it has been coping with a bleak future. Cutting jobs, as well as trees, has been its focus over the past five years.

"In the 1980s we were growing quickly, but by 2000 demand was flat," says Jyrki Ovaska, the executive vice president of UPM's paper business. "The 2000s were difficult. Demand went down 17 per cent in 2009. But last year there was a recovery, and demand, primarily export driven, was up 4 per cent."

UPM restructured the business in 2006, earlier than some of its rivals. The 35,000 it employed then shrank to 22,000 across 15 countries. Its share price fell below ¤5 a share in 2009 though it recovered to ¤15 this year.

The worst is far from over. Despite that heavy cull, the company might have to repeat the exercise. Mr Ovaska says: "In the longer run, we could have to shut more mills in Europe."

To become a stronger player in the sector globally, UPM is buying debt-laden rivals Myllykoski and Rhein Papier, both with lots of mills in Germany, for ¤900m. Analysts know this will mean closures. Mr Ovaska says: "This business is one of the most capital intensive in the world."

You can see just how intensive at its Kymi paper mill in in Kouvala, 139 kilometres east of Helsinki, where giant rolls whirr 24 hours a day, squeezing pulp into paper. The extent of the machinery needed is staggering. The paper tears often, costing the company thousands of euros each time. Teams work around the clock in a darkened room watching complicated graphs and data on computer screens to spot and fix problems.

The company reported an operating profit, excluding special items, of ¤731m last year. It also reported solid top-line recovery – sales increased by 16 per cent while net debt is down by ¤444m to ¤3.3bn. "Our balance sheet should be investment grade. We have strong cash flow – we generate around ¤1bn a year," Mr Ovaska says.

Those better-than-expected results are due to be repeated in 2011. But UPM isn't resting on its laurels. It is both diversifying and rebranding. Paper, currently 70 per cent of the business, will in time be diluted to about 50 per cent.

UPM now calls itself a Biofore company – a made-up term to cover not only pulp, paper, plywood and timber but also low-emission energy, chemical pulp, nano products, biochemicals, biofuels and bioenergy.

These new strands are not isolated from the old business. The technology is based on its tradition of felling and milling trees. "We are embedded in the biomass business, Mr Ovaska says. "The world has been through many industrial revolutions. Experts suggest the digital age was the fifth. This one was not for us. But the sixth industrial revolution is about bioeconomy – which offers UPM new opportunities."

Paper will still make up 50 per cent of business, though, so UPM has expanded beyond Europe. "In the future, all the growth will be in China, Latin America and India and also Eastern Europe," Mr Ovaska says.

How easy will it be to compete with the developing countries' home-grown businesses, which are already producing much of the paper for their domestic markets? India's Bilt Paper, for example, is expanding and is listing on the London stock exchange this month.

Mr Ovaska defends his position: "We are the only major Western graphic paper producer in China that has set up a large mill and we have been there since 1999 so we are established." It has applied for permission to build a second production line at its mill in Jiangsu and would like to build another three.

The company has the means to expand in both China and South America. It recently paid off ¤500m of debt from the purchase of a mill in Uruguay and will expand by increasing capacity at its existing plants and through new acquisitions.

On top of the erosion of its core business, UPM faces anti-forestry rhetoric from groups such as Greenpeace which recommend increasing the use of recycled paper.

UPM argues that it is impossible to create the world's paper purely from recycled fibres. Some waste paper is not collected in the first place, and much of the fibres that are gathered are lost in the process. "If we relied on only recycled paper we could run out within six months," says John Sanderson, UPM's environment director. The idea that cutting down trees for paper is wrong is a myth, says the company, one which it hopes to dispel.

"People automatically think about cutting down trees, the rainforest and the loss of our forests," Mr Sanderson says. "But this destruction is for cattle, not for making paper. Making paper is not destroying the forests."

The future for UPM is far from rosy but Mr Osaka is not defeatist. "I bought an iPad recently to see what the threat is. Readership habits are changing. But the jury is still out. We may see emedia and paper complement each other – publishers will sell their online packages with their print offering. It is still far too early to say it is the end of printed paper."

The giant rolls of paper at Kymi have not stopped spinning quite yet.