March 30, 2016 / 6:07 AM / 2 years ago

Finland hopes for new growth from shrunken forest industry

LAPPEENRANTA, Finland (Reuters) - It has created a modest 200 jobs in a Finnish forestry industry that has lost around 20,000 in the past decade, but UPM-Kymmene’s new biofuels plant offers long-awaited growth and hope.

A maintenance truck seen at UPM-Kymmene's biofuel plant in Lappeenranta, Finland, March 9, 2016. REUTERS/Jussi Rosendahl

The 180 million euro ($200 million) investment in wood-based renewable fuel production marks the first major case of transformation in a sector that has long been managing decline.

UPM still makes 50 percent of its revenue from sales of paper, and biofuels can’t yet plug a gap created by consumers in European export markets shifting from magazines and newspapers to smartphones and tablets.

But the new plant, a global first, is already breaking even after little more than a year in operation in the eastern town of Lappeenranta; its success now needs to be replicated across the economy if Finland is to drag itself out of stagnation.

The government regards forestry products, traditionally Finland’s industrial and export backbone, as vital to its hopes of promoting economic growth while simultaneously pursuing tough labor, budget and healthcare reforms.

“Making new products from wood is a big thing for the future of the Finnish economy. Finland still relies on the forests, it is our foundation stone,” said Employment Minister Jari Lindstrom.

With only 5.5 million people, Finland’s export-driven economy has suffered three years of recession due largely to the demise of Nokia’s mobile phone business, crisis in neighboring Russian markets and the decline of the forestry sector.

Three quarters of Finland’s land is under forests, so the industry’s problems have hit hard - the OECD says they have shaved 0.75 percent off gross domestic product since 2007.

However, investment in forestry products is finally picking up. Last year, the government announced the “bio economy” as a priority project, promising new funds for research and development projects financed by sales of state-owned companies amid the austerity elsewhere.

FIRST OF ITS KIND

UPM’s plant is the first of its kind in commercial use, making biofuel for diesel vehicles from crude tall oil, a residue of pulp production.

Its creation by UPM, the world’s largest maker of graphic paper for newspaper, magazine and office use, illustrates both the industry’s problems and its prospects.

It came as no surprise last year when UPM shut down one of two machines that make magazine paper at its complex in Lappeenranta, not far from the Russian border. The closure cost 114 jobs at a site which the company has operated since the 1890s, when it began by making wooden thread spools there.

While some workers found other positions within UPM, most retired or were made redundant, adding to the industry’s 20,000 job losses since 2005. But only a few hundred meters from the old paper factory, UPM began commercial production at the biorefinery in January, 2015.

On a recent sleety day at the Lappeenranta site, tanker trucks were queuing to fill up, ready to take the biofuel to service stations around Finland.

“We’re making good progress in reaching our full (annual) capacity of 100,000 tonnes,” said Sari Mannonen, a UPM biofuels marketing executive. The new operation broke even as soon as the fourth quarter of last year.

It uses crude tall oil from a pulp mill on the same site - which also has a biomass power plant and a sawmill - as well as other mills elsewhere. The product is blended with conventional diesel fuel.

“The first year was a bit challenging, which is natural when you’re ramping up a plant which is first of its kind,” said the plant’s production manager Jaakko Nousiainen. Once the 100,000 tonne target was reached, UPM would look at ways of increasing capacity by improving the production process, he added.

HELPING HAND

UPM got no public grants to fund the investment, although decisions made in Helsinki and Brussels are helping.

Finland has set a target for 20 percent of all transport fuel to be from renewable sources by 2020, rising to 40 percent by 2030. The European Union target is just 10 percent by 2020.

This has also encouraged others into the same area. Last month, China’s Sunshine Kaidi New Energy Group announced a 1 billion euro investment in a wood-based biofuel plant.. Nordic energy company St1 is building a plant to make bioethanol from sawdust.

UPM itself has succeeded in lobbying the EU to categorize tall oil as a residue, making its biofuel subject to “double-counting” rules which encourage the use of waste products.

In other words, distributors could sell fuel in 2020 which is 90 percent diesel and only 10 percent product from tall oil, and yet still meet the 20 percent renewable target.

The biofuel projects have been accompanied by signs of a pick up in investment in more traditional forest products. Metsa Fiber and Finnpulp are both looking to put up 1.2-1.4 billion euro pulp mills, encouraged by demand from tissue and packaging makers in China.

However, biofuel looks unlikely to contribute significantly to UPM’s profits for some time.

“The paper sunset will continue,” said Antti Viljakainen, analyst at Inderes Equity Research. “In the long term they will have to patch the hole in the cash flow somehow, and there is no clear plan for that.”

editing by David Stamp

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