By Sakari Suoninen, Nordic Forestry Correspondent
HELSINKI (Reuters) - A perfect storm of bad news is how the head of the world's top paper and board maker Stora Enso (STERV.HE: Quote, Profile, Research, Stock Buzz) described conditions in the forestry industry a few weeks ago.
How to thrive, or just survive, in an increasingly challenging economy, is the main theme for leading forestry industry figures at this year's Reuters Paper Summit, held in Helsinki on August 20 to 22.
Overcapacity has kept a lid on paper prices for years, while increasing costs of wood and energy have eaten into paper makers' already low margins.
Internet use has reduced demand for newsprint, especially in the United States, and the rapidly worsening economy in North America and Europe could cut demand outlook.
Analysts often mention consolidation as a way toward supply-demand balance, if combined with capacity cuts, but finding the right combinations at the right price is not easy.
"If two companies joining would not correct the oversupply, it will not be done," said Handelsbanken analyst Sampo Timonen. "Getting three to agree on terms is even more difficult."
Nordea analyst Harri Taittonen said it would be interesting to see whether the industry leaders view consolidation in local or global terms.
"Does one have to consolidate globally to make a difference, or is it enough to do it by continent?" he asked, adding the latter school of thought has gained ground recently.
Wood supply is another key question facing the sector, especially in the Nordics, which have suffered from warm winters hampering harvests, and higher Russian wood duties are adding to costs.
CAPACITY CLOSURES
"Companies have to make decisions soon and I am expecting news on capacity closures soon," Timonen said.
But closing plants might be difficult as some companies' balance sheets could not handle the asset-value writedowns. "This sector is like Hotel California, you can check in, but you can never check out," Nordea's Taittonen said.
Russia has lifted duties for raw lumber to 15 euros per square meter and plans to raise them to 50 euros in January, which would effectively double the cost of wood, aiming to attract forestry sector investments into the country.
Russian birch fiber wood would be up to three times as expensive as Finnish one after the next hikes, he said.
But just consolidating and closing capacity will not solve the industry's problems in the long term, analysts said. Continued...
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