December 11, 2008 / 9:16 AM / 9 years ago

WRAPUP 2-UPM warns on Q4 as paper sector eyes output cuts

* UPM warns Q4 earnings below target; ready to cut output

* UPM says weakness in demand applies to all its businesses

* Sappi cuts European fine paper output by 20 pct

* Norske Skog says would cut output to defend prices

(Adds company and analyst quotes, details; updates shares)

By Sakari Suoninen and John Acher

HELSINKI/OSLO, Dec 11 (Reuters) - Finnish papermaker UPM-Kymmene warned fourth-quarter profit would miss targets, and rivals said they were prepared for more production cuts in new signs the global slowdown is hitting demand for basic materials.

Magazine paper specialist UPM UPM1V.HE, which had earlier said comparable operating profit would stay at the same level as last year, warned on Thursday that weak markets made that target unachievable.

“Due to the weakening markets UPM will not achieve the expected result for the final quarter of the year,” the company said in a statement.

In an announcement that sent shares sharply lower across the sector, UPM said deliveries to customers would also decrease more than anticipated in the next few months and it was ready to cut production to adjust to the weaker market.

“The warning about volumes applies to all our businesses,” UPM’s investor relations chief Olavi Kauppila told Reuters.

In addition to its main paper business, UPM is Europe’s biggest plywood maker and one of the continent’s largest sawn timber producers. It also produces self-adhesive labels.

The demand softness stems from different factors for the various businesses, said Kauppila.

“Advertising is of course an important driver on the paper side (of the business),” he said. “On the wood side, it’s construction and in the label business general consumption.”

In October, UPM had said it expected its fourth-quarter paper deliveries to fall by more than 200,000 tonnes, or around 7 percent, from the year-ago level of 2.7 million tonnes.

“Now we are saying it is going to fall more than that,” Kauppila said, but declined to quantify the drop more precisely.

South Africa’s Sappi (SAPJ.J) said it would cut output in its European fine paper division by 20 percent over the coming months, and Norway’s Norske Skog said it was prepared to take out capacity next year if necessary to defend prices.

“All the papermakers share the same story ... stopwatches are running on when the others will warn,” said Nordea analyst Harri Taittonen. “Demand is weakening and companies are lowering their inventories.”

“Lately, the one positive sign in the sector has been the stronger dollar, but in the last few days even that has changed as the dollar has weakened against the euro,” Taittonen said.

SHARES PLUNGE

UPM’s shares traded down 9.1 percent at 1039 GMT in high volumes. Finnish-Swedish rival Stora Enso (STERV.HE) dropped 6.7 percent and Finland’s M-real MRLBV.HE fell 3.1 percent. Norske Skog fell 7.8 percent.

Sappi, which bucked the trend to rise 1 percent, said its European fine paper division would cut production by 20 percent, or between 40,000-60,000 tonnes, in December and the early months of 2009 to adjust to falling demand.

Even before the onset of the global crisis, the paper industry had suffered for years from overcapacity which weighed on prices and kept earnings weak. Producers have already responded this year with sharp output cuts.

Norske Skog (NSG.OL) declined to comment on its fourth-quarter earnings on Thursday but its spokesman Tom Bratlie said it was sticking to its guidance for second-half 2008 results to be better than results for the first half.

He also said it was prepared to take out more capacity next year, after cutting 13 percent of its European capacity in 2008.

“We are aware of how the financial crisis is affecting paper demand... There is quite a dramatic decrease in North America but also quite a drop in European demand foreseen for next year,” Bratlie said.

“We are prepared for both temporary and permanent capacity closures next year if needed.”

Reporting by Sakari Suoninen in Helsinki, Agnieszka Flak in Johannesburg and John Acher in Oslo; Editing by Mike Nesbit, John Stonestreet and Hans Peters

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