Södra’s business is based on wood raw materials and their processing. Market conditions vary for the various end products. The forest industry represents 10–12 per cent of the total processing and sales value of Swedish industry and employment in Sweden. Forest industry products represent more than 11 per cent of Swedish exports. Two-thirds of Södra’s revenue comes from exports.
The forest industry is sensitive in terms of economic cycles and reacts to changes in the economy at an early stage. Profitability is not only affected by demand, but also by costs in particular for wood and energy.
Economic cycle
The US housing crisis has developed into a global financial crisis and a recession with a duration that is hard to foresee. Rising unemployment and lower GNP growth not only reduce private consumption but also investment willingness in the business sector. Construction and print media advertising are also affected. Meanwhile, however, there is also a long-term trend towards the use of forest raw materials as substitutes for oil-based products.
GNP forecasts indicate no growth in Europe and the US accompanied by a fall in growth to single-digit figures in BRIC countries (the four largest growth markets: Brazil, Russia, India and China) in 2009 and most likely also 2010.
Forest
The price of forest land in Sweden has increased by almost 60 per cent over the past five years. In southern Sweden, forest prices have increased from some SEK 300/m3sk in early 2004 to SEK 440/m3sk in autumn 2008. The driving factors have been rising timber prices and good finance opportunities.
Forest owners generally have a low level of indebtedness and are not necessarily governed by economic cycles. According to the consulting organisation of the Federation of Swedish Farmers, LRF Konsult, this is primarily due to their strong sense of ownership and long-term investment, with only nine per cent of forest owners claiming return as the most important factor.
Saw logs and wood products
The key driving force behind demand for saw logs and processed wood products is development of the construction market. The construction market began to slow in Europe and the US in 2007 and contracted strongly in 2008. The Swedish Board of Building, Planning and Housing, Boverket, forecasts a 40 per cent lower construction level in Sweden in 2009 than in 2006. The government’s reintroduced renovation subsidy is expected to have a limited effect on the construction market as it only applies to work done on existing housing in the private sector.
Pricing for saw logs
Saw logs are subject to local/regional pricing, in contrast to other raw materials which are priced more on a global basis. Södra’s membership area is a single region, but prices vary within the region depending on proximity to sawmills.
Saw log supply
Due to the high degree of processing in the Swedish forest industry, Swedish saw logs are mainly used on a local and regional basis. Saw log imports are limited, and in Södra’s region there is currently a surplus of saw logs.
Reduced harvesting
Although southern Sweden still has high levels of saw log stocks from the storms, the price difference between saw logs and pulpwood has narrowed. This is expected to result in reduced harvesting of saw logs in 2009. According to Danske Bank’s five-year forecast, the situation is expected to be short-term and a future shortage of saw logs is anticipated.
Russian export duties no longer a threat
Russia introduced an export duty on timber in 2007 to secure access to raw materials for its domestic forest industry. A planned increase of EUR 50/m3fub has been postponed as the effect of the duty was contrary to what was intended; reduced demand increased unemployment in the Russian forest industry. The Russian export duties have not represented a serious threat to Södra, which has taken a position of independence from Russian forest products. The availability of Russian wood may however put pressure on timber prices.
Fragmented timber market with large inventories
The sawn timber market in Sweden is relatively fragmented with a great many small local sawmills and a number of large ones. The ten biggest sawmill companies represent 60 per cent of production in Sweden. Total production is over 17 million m3 in Sweden and some 110 million m3 in Europe (excluding European Russia).
As the market contracts, sawmills are experiencing overcapacity. Saw log prices have not declined at the same rate in 2008 as sawn timber prices and many sawmills have major profitability problems. Stocks are high due to the decline in construction and ongoing capacity reductions are expected in 2009 at the same time as surplus stock must be sold. This puts further price pressure on sawn timber. Over the Christmas and New Year holiday period, most Swedish sawmills have had record-long shutdowns and reduced production by some 400,000 m3, representing two per cent of Sweden’s annual production.
Pricing of sawn timber
Pricing of sawn timber varies across different markets, ranging from global to regional depending on the proximity to production. Wood acquisition and processing is done locally and currently provides Swedish sawn timber with EUR and USD currency advantages. The market is under price pressure from lower demand and higher stock levels.
Pulp and pulpwood
Demand for pulp is directly related to consumption of paper and other products based on pulp. Pulp can be broadly divided into four application areas: printing paper, packaging paper, tissue (soft paper for hygiene applications) and speciality paper (such as various types of filters).
Consumption of printing paper is declining in Europe
The consumption of printing paper has stagnated or declined depending on the type of printing. Newsprint is produced from recycled paper and mechanical pulp and the lower consumption of daily newspapers therefore has no effect on Södra’s sales of pulp for higher quality graphic paper. The paper market in Europe is highly significant for Södra, but the market is mature.
Overcapacity in paper production meant that producers have had difficulty in increasing prices even in the strong economy of recent years. Meanwhile, pulp prices have increased. This pressed situation is contributing to a structural change with a reduction in paper capacity in Europe. Slowness to change is part of the nature of paper production: it is a process industry where production stoppages are complex at the same time as return is required to finance the substantial capital investments. In China in particular, which is a major producer of fine paper, production is largely financed by borrowings. To cover their interest costs, the Chinese companies continue producing at the risk of creating a surplus, and this in turn exerts further price pressure on producers in other countries.
The prevailing finance crisis, high energy consumption and declining demand are however hastening the change process. In five years’ time, consumption of graphic paper is expected to decline in Europe.
Packaging paper stimulated by growing e-trade
Increased trading, not least via internet, is increasing the demand for packaging paper for distribution. Paper is increasingly replacing oil-based plastic, but the recession has caused the market to stagnate.
Tissue less sensitive to economic conditions
The growth in the global economy has created new growth markets for both printing paper and tissue. Improving living standards increase the use of paper for hygiene purposes, which means tissue is less sensitive to the economy than other products.
Speciality paper – wood fibre a substitute for synthetic fibre
The demand for pulp is also growing in the speciality paper segment, which encompasses a broad range of products from coffee filters to air filters for engines. The economic benefits of wood fibre have promoted the development of applications for replacing or complementing synthetic fibres. However, even in this heterogeneous segment little growth is expected in the coming years.
Rise in pulpwood price
In 2008 the price of soft pulpwood increased by 7 per cent and of hard pulpwood (birch) by 16 per cent. Harvesting of pulpwood is expected to continue at the same pace, partly due to increased thinning. Prices are set on a regional basis.
Price development for pulp
Södra’s pulp products are primarily based on bleached long-fibre softwood sulphate pulp, known as NBSK – Northern Bleached Softwood Kraft – which is produced in Canada and Scandinavia. Pricing is global with two tariffs, one for North America and one for Europe.
In 2008 the market quotation for NBSK fell by almost 24 per cent to USD 662/tonne. The USD rose meanwhile by over 30 per cent from its lowest level, representing a real price increase in SEK. Having increased steadily since 2003, prices are now expected to continue their downward trend during the prevailing recession.
Production of bleached sulphate market pulp in 2008 is estimated at 46 million tonnes, of which Södra Cell represented 2 million tonnes.
Competitors, production capacity, consumption
Södra Cell is the world’s leading producer of bleached long-fibre sulphate pulp and the third largest producer globally of bleached sulphate pulp. Competitors also include producers of short-fibre bleached sulphate pulp, as this is a competing input in further processing.
Production capacity for pulp has increased, primarily in South America but also in South-East Asia. During the past decade, production capacity for bleached softwood sulphate pulp has increased from 19.6 million tonnes to 24.6 million tonnes.
The current market situation and financial crisis have delayed capacity growth – an example being Aracruz’s decision to postpone investments of USD 2.2 billion. The trend is towards consolidation to fewer pulp mills with greater capacity.
Renewable energy
More efficient electricity production and electricity usage at Södra mills have enabled Södra to deliver more green electricity to the open market.
Higher energy costs and reduced dependency on oil are, in combination with climate change, strong motivating factors behind Södra’s energy strategy.
An economic driving force with inherent business opportunities is the production of renewable energy that entitles the producer to electricity certificates.
Biomass
Biofuel comes from forest harvesting and sawmills. Södra supplies biofuel to thermal power stations, combined power and heating plants, mills and pellet factories. The market has grown rapidly in recent years. Total deliveries from Södra Skogsenergi are now equivalent to the heating used in 100,000 homes and thus represent one-fifth of the market for biofuel in southern Sweden.
District heating and electricity production
Surplus heating from Södra pulp mills is supplied to local communities in the form of district heating. Production of district heating is being expanded continuously and Södra is providing 400 GWh (0.4 TWh).
The energy used to heat homes and commercial properties in Sweden is around 85 TWh, more than half of which is supplied by district heating. Between 2002 and 2007, district heating prices increased by two to six per cent annually. Pricing is local and prices vary considerably between district heating distributors.
Södra is currently the country’s biggest producer of green electricity from biofuel with an annual production of 1.8 TWh. The pulp mills in Mönsterås, Värö and Mörrum are self-sufficient in electricity and currently produce a surplus.
Wind power – demand greater than supply
The Swedish Parliament has set a national planning objective to have wind power of 10 TWh by 2015. This means that county and municipal councils are to set aside land and water areas representing the surface area needed for this development.
In 2008 1.4 TWh was produced from wind power in Sweden, one per cent of the total electricity production of 140 TWh. The Swedish Energy Authority expects a production increase to 30 TWh, but there is currently no parliamentary position on this.
Development of wind power is time-consuming for many reasons: wind measurements, licence applications, road construction and long delivery times. The establishment of a wind park takes an average of three years from planning to commission. A wind turbine currently represents an investment of SEK 30 million, and to achieve satisfactory profitability a wind park of 3–10 turbines is generally required. Based on today’s energy prices, payback time on the investment is expected to be 12–13 years.
Competition
Demand for electricity is increasing, with competition being largely a matter of land resources. Södra is competing for land with other wind power developers and 90 companies have entered the wind power market since 2007.
A summary shows that projects running in 2008 represented 3.35 TWh annually. Further plans for 8.98 TWh are under environmental assessment.