2008 was yet another year that began with strong winds. Fortunately the storms were modest compared to the storms of 2005 and 2007. The storm was more turbulent in the market than in the forest during the year.

Where did the winds blow hardest in 2008?

Leif Brodén: Initially the timber market was worst affected. The price of sawn timber fell rapidly from its 2007 peak. The market continued to weaken throughout 2008 and this has continued into 2009.

What has been done to meet this trend?

Brodén: Södra was forced to counter it during the year with a 50-strong reduction in employee numbers at our sawmills in Traryd, Kinda and Åtvidaberg, and we also had a month’s production shutdown at pretty much all our sawmills last summer. Additional market shutdowns were held over Christmas and New Year for the second year in a row. Further measures have been taken in early 2009.

Unrest in the pulp market also increased gradually, a concern that was exacerbated when the finance crisis broke out in the autumn. The pulp price reached a peak of USD 900 per tonne in spring, but fell back after the summer. The price trend in SEK has however been more stable as the SEK has weakened against the USD. A ten-day market shutdown in Tofte in October was followed by further market shutdowns at the Tofte and Folla pulp mills over Christmas and New Year.

But there were strong winds blowing in the forest as well. How widespread were the storms?

Lars-Eric Åström: The storms, particularly those in January and February, didn’t cause anywhere near as much damage as the 2007 storm, Per. However, the biggest storm in February felled almost 1.5 million cubic metres on Södra members’ land. We had to rapidly pick up the pace of our bark beetle prevention programme when we realised we were at grave risk of it slipping through our hands.

How serious was the insect infestation in member forests following the storms?

Åström: It turned out to be less than we’d feared thanks to huge commitment from our members and Södra employees, and the weak growth in the bark beetle population due to weather and other factors.

Would you say the finance crisis has hit Södra hard?

Åström: We are affected in much the same way as our customers and other companies. Whether we’ve been hit harder than others or not, I couldn’t say. But what is clear is that Södra has proven to be relatively strong in a greatly weakened market. In 2008 Södra achieved a return on capital employed of 7 per cent.

What is the reason for it not being worse?

Brodén: Much of the reason for Södra being relatively resistant in such a turbulent year is the strong contribution that employees have made to productivity over several years. 2008 was a record year with almost 3,000 employee ideas being implemented. The Group as a whole had an overall productivity improvement of 3.8 per cent, which is an extremely good outcome.

The year marked a number of historic steps for Södra members. What were they?

Åström: Energy is becoming an increasingly important part of the business. A major step was taken at year-end when Södra commenced sales of green electricity to members and employees. This is a groundbreaking move for Södra which means that for the first time members can be supplied with electricity from their own forests.

Has Södra enough electricity to supply everyone who wants to buy?

Åström: We’re counting on that. To start with we’re selling the electricity we produce at the pulp mills, and this will later be expanded to include electricity from wind power.

The other step is that members now have greater flexibility in terms of their capital contributed. How does that work?

Åström: In early June, Södra started official trading in its issued bonus capital. This means Södra members can now free up capital or invest additional capital in Södra at any time during their membership. Trading is done on a transparent basis at a price set by the market.

I believe that a growing number of members who have the interest and the need will discover the value in this type of trade. In the long run I hope it will also help show up the surplus value inherent in the bonus capital.

Södra is focussing its investments in the energy area. What was the biggest decision in this area during the year?

Brodén: It was the investment in a new evaporation plant at the Värö pulp mill for SEK 500 million. The investment releases 200 GWh energy for external sale and paves the way for the mill to be run without using any fossil-based energy at all.

Improvements in energy efficiency continue to be a basic theme. In recent years Södra has expanded electricity production at its Swedish pulp mills, making it Sweden’s biggest producer of green electricity.

What more can be done in the energy area in Södra’s business?

Brodén: A lot can be done, not least at the pulp mills. Our mills are already supplying district heating to local communities and industry, but they are still producing huge quantities of energy that we are forced to cool for no purpose. We have the capacity to delivery more surplus heat to the district heating grid and thus force more fossil-based energy out of the energy system.

It doesn’t make sense to let sustainably-produced energy go down the drain, does it?

Brodén: Not if you see it from a community perspective. But discussions and negotiations are underway with a number of owners of district heating grids on expanding Södra’s sustainably-produced heating deliveries. Meanwhile we’re also closely following the political process that aims to help third parties contribute heating to the existing grid.

Södra is also planning to go on expanding its electricity production. Tell us more!

Brodén: Södra has a comprehensive investment programme for new electricity production. In the Södra Vindkraft business unit we are now working on projects for 250–300 wind turbines. During the year we’ve worked intensively with consultations, licence applications, wind measurements, negotiation preparations and other aspects central to the projects. A few of the turbines will be built on Södra’s own land, but most are being constructed on member land.

Will any new wind turbines be built in 2009?

Brodén: Construction speed is dependent on the processing of licence applications. That’s not something we have any control over so I wouldn‘t like to comment on it.

Åström: For Södra, major energy investments not only involve standard economic risk but also a great deal of political risk as our decisions assume predictability. The risk is primarily related to the various control methods that have been crucial to our investment decisions and how long they remain in force.

Research and development is traditionally in the spotlight at Södra, particularly given the R&D centre with its 50 employees at Värö. In a nutshell, what will the future bring?

Brodén: The main product for our pulp mills is of course pulp, combined with an expanding energy business that complements Södra’s other energy sales. Pulp will remain a key product in the future, but research and development points to greater usage of refined pulp in increasingly advanced applications in the chemical and other industries. The energy produced at the pulp mills can also be delivered in new forms complementing the hot water used for district heating and electricity.

What happened in the research and development field in 2008?

Brodén: It was an exciting year in which many new projects gained momentum. A highlight was the first doctoral graduation from the Avancell collaboration between Södra and the Chalmers University of Technology. We also presented new areas of research cooperation. A good example is the joint project with Tetra Pak related to formable cellulose, Formulosa, and the super absorbent project, Woodi, in collaboration with SCA. We also invested in the development and production of biodiesel from tall oil.

What is this new biodiesel and what is Södra’s role?

Brodén: During the year Södra invested in Sunpine in conjunction with Preem and Sveaskog. This facilitates a large-scale investment in production of biodiesel from tall oil, a renewable vehicle fuel that can replace fossil fuel.

Sunepine is investing SEK 250 million in an initial plant in Piteå. This makes Sweden the first country in the world to produce green diesel from forest raw material on an industrial scale.

How will the finance crisis and economic recession affect Södra in 2009?

Brodén: We don’t know more than anyone else how hard the slowdown will affect the market. But Södra is well-equipped, with a strong balance sheet and efficient mills, and there is scope for offensive measures should the opportunity arise. For example, Södra’s Gapro business unit has continued to grow through acquisition. There are similar interesting opportunities for all business units in future.

Extremely high dividends have been paid during the storm years. What is the long-term objective?

Åström: Our ambition is that our dividends should average one-third of profit. There should also be capacity for continued bonus issues. Of the total profit distribution, half is based on capital contributed and half on the value of wood deliveries for the year.

The idea behind this model is to reward members who choose to deliver to their own company, Södra, on a long-term basis. Contributed capital reflects the deliveries that members have made over the years. This means that the total dividend becomes bigger the more often wood has been delivered.

Are there factors that could affect profit distribution in the long run?

Åström: Depending on how things develop there can always be changes of course. Ultimately we are controlled by how we manage long-term profitability. It’s also important that our owners receive a market-based return for their wood as well as their risk capital. There is a difference here, as in addition to the dividend we have to pay market price for the wood, while the return on capital contributed is only made through dividends. This is why there is a lower limit for dividends on capital contributed. Depending on the development and factors such as rising market prices for wood, it can mean that a greater part of the dividend is based on capital contributed.

How do you see the opportunities otherwise for improving profitability on the forest estate?

Åström: The most important factor for the estate’s profitability is in our own hands as we are responsible for running it. It comes down to making the most of the forest’s actual production possibilities. The National Board of Forestry and the Swedish University of Agricultural Sciences recently presented their forestry analysis SKA 08. It shows that if we make good use of current knowledge on forestry management and the climate effect, forest growth will increase by 25-50 per cent over the next fifty years. That means a 100-hectare estate could be worth 150 hectares in terms of production.

My advice to Södra members is to take advantage of the opportunities presented in the Focus on Forestry campaign that’s running now and make the improvements needed to increase the profitability of their estates!