Europe's paper industry approaching major round of mill closures, consolidation, say analysts; production cuts seen as key to preventing further price erosion; newsprint considered most vulnerable in graphic paper segment

LOS ANGELES , August 25, 2011 () – Europe's paper industry is approaching a period of mill closures and consolidation, according to analysts, as increasing costs and the decline in print media add to the industry's existing troubles of poor demand and overcapacity, Reuters reported Aug. 22.

At this week's Reuters' Forest Forum, which is based on interviews with industry executives and analysts in Helsinki, Johannesburg and Stockholm, cost-cutting, moving into new business segments and mergers were the main subjects of discussion.

Investors are currently holding back while they watch the market to see how much capacity will be cut, rather than buying shares at what appear to be bargain prices. Shares in Finnish paper companies Stora Enso Oyj and UPM-Kymmene Ltd. have fallen around 40% in the year to date.

According to analysts, UPM's acquisition of its competitor Myllykoski was just the beginning of consolidation and capacity reductions in Europe. UPM said it would announce mill shutdowns by the middle of September, and is expected to slash as much as 1 million tonnes of paper capacity, which would amount to 2% of Europe's total capacity of 51 million tonnes.

Reducing production is seen as a necessary step to stop paper prices from falling further. Fine paper maker Sappi Ltd. of South Africa will soon shutter a 500,000 tonnes/year paper mill in Switzerland, while M-real Corp. is planning to either sell or close its paper mills in France and Germany to focus on packaging.

Newsprint is currently the most vulnerable paper grade among the graphic paper segment, analysts say. Katja Keitaanniemi, head of research at Swedbank Finland, said pulp and recycled fiber prices are high, but the paper market is shaky. She said Burgo Group SpA of Italy and Norske Skogindustrier ASA of Norway are among the companies that are most likely to restructure.

Finnish newspaper Helsingin Sanomat reported last year that Stora Enso, Norske Skog and Sweden's Holmen Paper AG had been in talks on consolidating their newsprint production, but that report has not been confirmed.

In the first half of 2011, many companies increased publication paper prices, but as Europe's economy weakens, companies will reduce advertising and consumers won't buy as many newpapers and magazines. The resulting price pressure will combine with higher input costs to affect the industry more severely that the recession of 2009, analysts say.

The primary source of this article is Reuters, Helsinki, on Aug. 22, 2011.

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