Finnish Pulp Firm Faces Tough Time Over Duties

HELSINKI -- In the new world order for pulp, Finland's Stora Enso is on the wrong side of Russia. That's making winners out of rivals International Paper and Mondi.

Stora, Europe's biggest papermaker, currently imports Russian logs to turn into pulp. Higher export duties will double the cost of timber from its eastern neighbor beginning next year. While Stora's first mill will not open in Russia before 2011, International Paper and Mondi already operate in the country, the world's second-fastest growing paper market after India.

Stora CEO Jouko Karvinen has closed mills to reduce dependence on imported wood and said he might shut more if the full tariffs go into effect. Jussi Pesonen, head of No. 2 European papermaker UPM-Kymmene, also warned of closures. The taxes on log exports will add 200 million euros ($316 million) to Stora's costs in 2009. That is 40 percent of the net income analysts predict for the year, excluding the Russian levies.

"If full duties come in, it will be catastrophic for all the Finnish companies," said Lars Kjellberg, a London-based analyst with Credit Suisse. "Fiber is their single biggest cost by a mile."

Stora has lost more than one-third of its value since the duties were announced last year. Seven of 20 analysts in a Bloomberg survey recommend selling the shares, while eight advocate holding and five say "buy." Meanwhile, International Paper, which already has a Russian pulp venture, is ranked "buy" by eight of 16 analysts. Mondi is ranked "buy" by seven of eight. There are no sell recommendations on either company.

Russia imposed the duties to help modernize the pulp and paper industry. For companies that do not process logs in the country, the tariffs will add at least 50 euros per cubic meter of wood starting Jan. 1. Stora will buy 4 million cubic meters of wood from Russia in 2008, slightly less than 20 percent of its total use in Finland.

"Russia is a fiber-rich, low-cost region that offers high growth," Mondi CEO David Hathorn said. "The growth rates were not exciting when we entered in 1996, but they certainly offered high potential and that potential's been realized."

Mondi Group, then a unit of Anglo American, bought into the Syktyvkar mill in north Russia in 1996 and took control six years later. The company's Russian earnings grew 13 percent last year, to 546 million rand ($68 million), and it is investing 525 million euros to increase capacity.

"Mondi has an extremely profitable pulp machine, they have the infrastructure, and they know how to deal with the Russian side," Kjellberg said.

International Paper last year spent $620 million to acquire half of Ilim Group, Russia's largest pulp and paper producer, with $400 million in annual earnings before interest, taxes, depreciation and amortization.

The U.S. company will add about $100 million to profit next year from the Ilim venture, JPMorgan analyst Claudia Shank Hueston said. International Paper has also owned a pulp and paper mill near St. Petersburg since 1998.