Rottneros swings to Q1 net loss of 4M Swedish kroner from profit of 19M kroner in year-ago period; net sales down 7.3% to 371M kroner with lower sale prices of pulp
April 19, 2012
The beginning of 2012 was significantly more stable than the end of 2011 from the perspective of a pulp supplier. Strong deliveries to China, which started before and continued after the turn of the year, have altered the momentum of the global pulp market. The price falls have been transformed into an upturn. Demand has primarily been for short-fibre chemical pulp, as the price fell too low and there was a very significant price difference in relation to long-fibre pulp; more than USD 200 per tonne compared with the normal historical difference of USD 50-100 per tonne. The PIX Europe price index for short-fibre pulp rose by over USD 100 per tonne in 2012, while the index for long-fibre pulp rose by just over USD 10 per tonne, which means that the price difference is now normal. The Swedish krona strengthened in relation to the US dollar during the first quarter of the year, so that the PIX index in Swedish kronor is now lower than it was at the turn of the year. However, there is momentum in the market. All of the major market pulp suppliers announced price increases for both March and yet again for April so that the list price in Europe now amounts to USD 870 per tonne for long-fibre chemical pulp. These price increases will gradually have an impact during the spring; this combined with falling pulpwood prices will mean that our margins will improve once again. Our operational surplus for the quarter was SEK 10 million and our operating loss after depreciations was SEK -3 million.
It finally looks as though CTMP prices will follow chemical pulp prices upwards. Three price increases have already been made this year in Asia, albeit from a low level. In the course of the significant price rise for chemical pulp following the global financial crisis in 2008/09, CTMP prices became entrenched at a low level, with an ensuing negative impact for both the Canadian and Nordic forestry industry, which persisted until 2012. We are now seeing a high demand for primarily long-fibre CTMP for the packaging sector in Asia, where this pulp's unique combination of properties makes it possible to manufacture packaging that is both rigid and light. Better demand including improved sales prices combined with low timber and electrical energy prices mean that the low margins will now improve.
Despite the improving position for both of our two main products, a shadow is being cast over an old and proud Rottneros product, namely groundwood pulp. We are the last remaining supplier of bleached fine groundwood pulp and have therefore been able to retain a good price level. However, non-integrated groundwood pulp customers in the tough and vulnerable printing paper sector are losing both volume and market shares and are increasingly being forced to discontinue this paper production. We are still hoping for renewed opportunities in Japan where groundwood pulp is traditionally used for thin printing paper. We are also attempting to offer the board market an extremely high bulk pulp to keep the cost of board to a minimum without impairing the stiffness of the product.
President and CEO
THE PULP MARKET Markets and products Several price increases were made for short-fibre chemical pulp during the first quarter of 2012. The price of long-fibre chemical market pulp also increased in March and April, which is expected to have a positive effect on prices during the second quarter. There is high demand for chemical pulp.
Statistics for bleached chemical market pulp for the total global market showed that deliveries during January and February 2012 amounted to 6.84 (6.48) million tonnes, which was 5.5% higher than the same period of 2011. Ninety-three per cent (89% for the same period of 2011) of the global supply capacity for bleached chemical pulp was utilised for the period January to February 2012. An estimated 94% (96%) of production capacity was utilised during the same period.
Global producer stocks of bleached chemical pulp amounted to 3.9 million tonnes at the end of February. Stock levels thus remained the same compared with the beginning of the year.
Long-fibre chemical pulp (NBSK) (produced at Vallvik) The PIX price for bleached long-fibre sulphate pulp in Europe was USD 834 per tonne at the beginning of the year and USD 844 per tonne at the end of March, with a low point of USD 826 at the start of February. However, a strong Swedish krona at the end of the quarter meant that the price in SEK is lower than at the beginning of the year. The long-fibre chemical pulp market is well balanced, with stock reducing by approximately 120,000 tonnes at the end of February. Price increases of USD 20-30 per tonne were announced for April (to USD 870 per tonne). Producer stock levels for long-fibre chemical pulp are normal, corresponding to 31 days' production.
Supplies of bleached long-fibre chemical pulp increased during January and February 2012 and were 6.1% higher than the same period of 2011. Delivery capacity utilisation during the period January to February 2012 amounted to 96% (93% for the same period of 2011) and production capacity utilisation was around 93% (97%).
Mechanical pulp and CTMP (produced at Rottneros) The price of short-fibre CTMP was approximately USD 570-590 per tonne in the Western European market at the beginning of the year. A price increase of USD 30-35 per tonne was announced during the first quarter of 2012, which had an impact on prices. Demand for CTMP is high. Deliveries rose by 9 per cent during January and February 2012 compared with the same period of 2011. Deliveries amounted to 0.5 million tonnes during January and February 2012.
Delivery capacity utilisation for the period January to February 2012 was 99% (96%) and production capacity utilisation was 96% (104%).
PRODUCTION AND DELIVERIES
The Group's pulp mills at Rottneros and Vallvik have a combined annual production capacity of almost 400,000 tonnes. Production amounted to 81,900 (88,500) tonnes for January to March 2012. Rottneros Mill’s production of CTMP increased slightly, while the mill’s production of groundwood pulp fell sharply as a result of market-related production restrictions.
Deliveries during the first quarter of 2012 amounted to 84,700 (83,400) tonnes. Vallvik Mill’s deliveries of sulphate pulp have increased by 5,000 tonnes compared with the same period of the previous year.
This is largely due to higher demand. Demand for, and thereby deliveries of, CTMP increased during the first quarter of 2012. However, deliveries of groundwood pulp fell sharply compared with the first quarter of 2011, as a consequence of a weaker market for this product.
Maintenance shutdowns and seasonal variations
A holiday shutdown takes place at Rottneros Mill in July and August, which is combined with minor annual maintenance work. There is a maintenance shutdown at Vallvik Mill, which this year will be taken during the third quarter. Costs relating to maintenance shutdowns are recognised in the period during which the shutdown takes place. Otherwise, the Rottneros Group is not affected by seasonal variations to any appreciable extent.
INVOICING AND RESULTS
January to March 2012 compared with January to March 2011
Group net turnover amounted to SEK371 (400) million for January to March 2012. The average price of long-fibre sulphate pulp (NBSK) in USD fell by 13% (from USD 954 to USD 833), while the average price of NBSK pulp converted into SEK fell from SEK 6,192 to SEK 5,620 per tonne, a reduction of 9%.
The average price of electricity on the Nord Pool electricity exchange amounted to SEK 0.35 per kWh for January to March 2012, compared with SEK 0.58 per kWh for the same period of the previous year.
January to March 2012 compared with October to December 2011
Group net turnover amounted to SEK 371 million for the first quarter of 2012 compared with SEK337 million for the fourth quarter of 2011. The average price of long-fibre sulphate pulp (NBSK) in USD fell from USD 887 to USD 833, while the average price of NBSK pulp converted into SEK fell from SEK 5,985 to 5,620 per tonne, a reduction of 6%.
The average price of electricity on the Nord Pool electricity exchange amounted to SEK 0.35 per kWh for the first quarter of 2012, compared with SEK 0.33 per kWh for the fourth quarter of 2011.
INVESTMENTS AND FINANCIAL POSITION
AVERAGE NUMBER OF EMPLOYEES
The average number of employees was 292 (307) for January to March 2012.
Deferred tax assets amounted to SEK 71 million on 31March2012, representing a reduction of SEK2 million compared with 31 December 2011. Recorded deferred tax assets correspond to a carry forward of deductions for unutilised losses of SEK 271 million. There was also a tax loss carry-forward of SEK 148 million, for which deferred tax assets have not been recorded.
The parent company’s loss after net financial items amounted to SEK -9 (2) million for January to March 2012. The loss after net financial items includes hedging activities realised for the entire Group, which affected the result by SEK -2 (13) million.
The parent company’s balance sheet and income statement can be found on page 13.
Sale of treasury shares
The number of shares in Rottneros amounts to 153,393,890. Rottneros’ holding of treasury shares amounts to 821,965 shares. The AGM held in 2011 authorised the Board to make decisions regarding the transfer of shares in the company for the period up until the next AGM. No such transfer has taken place so far.
Transactions with closely related parties
Rottneros has sold pulp to the Arctic Paper S.A. Group, which is a closely related party. This has been conducted on normal market terms.
A resolution was made at the AGM on 19 April 2011 to issue a dividend of SEK0.20 per share, which corresponds in total to SEK 31 million. This dividend was paid out in April 2011. The Board has proposed for the AGM on 19 April 2012 the issue of a dividend of SEK 0.10 per share for the financial year 2011.
The company's operational work involves a number of measures and strategies – for example, focusing on niches and various specific customer segments – aimed at reducing the Group's dependence on market pulp list prices and moderating fluctuations in profitability over a business cycle. The factors that have the greatest impact on the Group’s results are linked with exchange rates and the prices of pulp, timber and electricity.
Currency exposure, USD and EUR
Although Rottneros issues invoices in various currencies, the main underlying currency for pulp prices is predominantly USD. Around 10% of invoicing is contracted in SEK, with EUR as the invoicing currency. The underlying exposure to USD is thus very high, while the direct inflow of USD (the real flow) corresponds to just over 45%. However, the impact of exchange rate fluctuations on indirect exposure is delayed, as the normal duration of a contract is between one and three months.
The average USD exchange rate was 4% higher for January to March 2012 compared with the same period of the previous year, amounting to an average of SEK 6.75/USD for the period compared with SEK 6.49/USD for January to March 2011. The impact on turnover of a higher average exchange rate for USD in relation to SEK during the first quarter of 2012 amounted to SEK 12 million compared to the first quarter of 2011.
At the end of March 2012, currencies were hedged in the form of forward contracts concluded for USD 28 million at an average rate of SEK 6.88/USD for deliveries in 2012. In addition to this, currencies were hedged in the form of forward contracts concluded for EUR 14 million at an average rate of SEK 9.18/EUR for electricity purchases for 2012 to 2015.
The price of pulp (NBSK) is set in USD, while manufacturing costs are largely incurred in local currencies. No pulp price hedging was used in the first quarter of 2012. However, at the beginning of April 2012, contracts were concluded for hedging the pulp price at USD 890 per tonne for 2,000 tonnes per month for the period April to December 2012.
All physical electricity for the Swedish mills is purchased directly via the Nord Pool electricity exchange. Electricity prices are quoted in EUR. At the end of March 2012, the amount of electricity hedged corresponded to the proportion of forecast consumption shown in the table. Average prices in EUR/MWh are specified in the table, together with average prices in SEK/kWh (based on EUR forward exchange rates as of 31 March 2012).
Total EUR hedging of EUR 14 million was concluded at an average rate of SEK 9.18/EUR for electricity costs in 2012-2015.
The average price level for electricity on Nord Pool amounted to SEK 0.35 per kWh for January to March 2012.
See pages 32 to 36 of the Annual Report for 2011 for further information on risk.
The table above shows the market values of all hedging. The valuation refers to the liquidation value; i.e. a valuation is made in accordance with the forward contracts on 31 March 2012. The reference value refers to the spot rate on 31 March and is provided as supplementary information. As a result of the application of IFRS/IAS, these market values are reflected in the balance sheet and in some cases in the income statement, but are also shown here as supplementary information.
This interim report has been prepa
red in accordance with IAS 34 ‘Interim Financial Reporting’, which com- plies with Swedish law through the application of the Swedish Financial Reporting Board’s Recommenda- tion RFR 1 ‘Supplementary Accounting Rules for Groups’ together with RFR 2 ‘Accounting for Legal Entities’, in respect of the parent company.
The accounting principles, definitions of key ratios and calculation methods are the same as those used in the latest annual report.
FORECAST FOR 2012
The company is not providing an earnings forecast for 2012.
FORTHCOMING FINANCIAL INFORMATION
18 July 2012 Interim Report January-June 2012
19 October 2012 Interim Report January-September 2012
24 January 2013 Year-end Report for 2012