Adjusting to globalization is vital for the finnish pulp and paper industries

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Succeeding in price and quality competition is not possible on a domestic basis alone

Adjusting to globalization is vital for the Finnish pulp and paper industry. Expanding production to other continents is indispensable so that the future competitiveness of domestic production can also be ensured. Finnish industry cannot respond to the needs of customers around the world on a domestic basis alone.

Succeeding in global competition is just as indispensable for the Finnish forest industries now as internationalization and the resulting consolidation and strong growth were a few decades ago. If bold steps had not been taken then, in all probability the Finnish forest industries would today consist of subsidiary mills directed from head offices abroad, more likely to shrink than to grow.

The operating model for the global paper industry in the coming years is quite clear. Pulp mills will be built in South America and Russia. Paper and board machines will be located in Asia, especially China. In addition to cost factors, business development will be guided by cheap or fast-growing wood resources and rapidly growing paper markets. Investments on other continents and in Russia will be measured in the billions of euros. Finnish companies in the forest branch have already invested nearly two billion euros in China, where over half of paper machines will be built in the near future.

Eight paper machines to China a year

Paper consumption is expected to increase the fastest pace in Asia and especially China, over 4 per cent a year. In eastern Europe and Latin America, growth in demand will be nearly as fast. According to a study conducted by Jaakko Pöyry Consulting, between now and 2015 global demand for paper and board will increase by 120 million tons, with China’s share estimated at 35 million tons. If growth in demand is to be satisfied with paper machines located in China, during the next ten years it will be necessary to start eight 450,000-ton paper machines a year in that country.

Entire cluster involved

Globalization has also taken many companies in the forest cluster overseas. They have internationalized at least as rapidly as companies in the paper field. Jaakko Pöyry Consulting began operating in South America in the 1970s and in Asia the following decade. Metso, a supplier of paper machines, says that over a third of its present order backlog is from China.

Other companies in the forest cluster have also moved their service and maintenance functions in the wake of their customers, where the branch is developing and growing. Internationalization helps strengthen the forest cluster’s preconditions for success.

Looking elsewhere for a model

The main market for the forest industry operating in Finland is still Europe – at least for the time being. Nearly 80 per cent of the branch’s exports, totalling over 11 billion euros, went to European countries in 2004. The EU accounted for two-thirds and Asia about 10 per cent.

The pulp and paper industry in Finland still has clear advantages provided by clustering and infrastructure and these can be further strengthened. The model can be taken from the country with the highest productivity in Europe, Ireland, where the United States invested two and a half times as much in 2003 as it did in China. With the help of capital and personal taxation and other supporting measures, Ireland has created excellent conditions for economic growth and investments. The model could also be taken from Sweden, where the government plans to eliminate energy tax on energy-intensive process industry because of emissions trading.

China today, India tomorrow?

There is no question about the direction of development; the pace will only become faster and more intense. Already 60% of the Finnish paper industry’s capacity is located abroad and 40% in Finland.

Finnish companies are expected to build mills producing short-fibre pulp in South America. A lower cost level will also attract companies to Russia, where two mills producing long-fibre pulp are planned.

People talk about the "China syndrome" for good reason. Paper consumption in China, which has well over a billion inhabitants, is expected to grow at least twice as fast in the next ten years as global consumption on average. Economic growth in the other countries in the Far East is also faster than in Europe or America. Attention is already being focused on India, where ITC companies are paving the way for heavier industry.