Nordic papermakers await upturn
under euro cloud
Nordic papermakers should face low yet stable European demand in coming months, but
earnings could be hit by a stronger euro if the sector upturn they hope for does not
emerge in the second half, analysts said.
The Nordic paper industry, led by global players Stora Enso (STERV.HE) and UPM-Kymmene
(UPM1V.HE), is suffering for a third year from weak demand and sliding prices, like its
North American peers, as the global economy sputters and an advertising slump hits
publishing clients.
Many analysts said the Nordic firms' first-quarter results showed better demand for early
cyclical fine paper in Europe and that there was improvement in North American markets,
usually preceding a broader upturn in the paper industry.
"There was surprisingly strong demand (in Europe) during the first quarter for fine
paper. If that is right, it confirms we are at the rock-bottom of the cycle," said
Nordea Securities' analyst Catarina Ihre.
"The market in Europe has not turned around in terms of publication paper but it is
at least not falling off anymore."
A jump in earnings is not expected in the April-to-June period, a seasonally weak quarter
for Nordic paper firms due to the summer holiday slowdown, while many analysts still hope
the sector recovery will start in four to six months.
But some say not much has changed since a year ago - when similar signs boosted hopes for
a recovery in the second half of the year - as there is still no tangible improvement in
the general macroeconomic situation.
"There are a number of factors, including recent weak pulp data, and weak waste paper
markets that are pointing to a continued bouncing along the bottom," said Morgan
Stanley analyst Charles Spencer.
A DOUBLE HIT
Analysts agree the effect of a strong euro currency , which is just off fresh four-year
highs versus the dollar, is another worry for the Nordic firms, which have seen the
profitability of their U.S. exports plunge.
A strong euro also weakens the Nordic firms' price competitiveness against North American
peers on global markets.
An upturn in demand could help offset the impact of the stronger euro as then producers
would be able to raise prices.
"But if there is no demand pick-up then you will get pressure on prices and if none
of the major producers is prepared to take out excess capacity, it is going to hit their
profitability," said Goldman Sachs analyst Denis Christie.
"No upturn in demand and a strong euro would be a double hit for the sector," he
said.
Nordic forestry shares, often favoured by investors in turbulent times, have been hammered
by falling earnings and a grim outlook and are currently trading around or below book
value. Finnish-Swedish Stora Enso (STERV.HE), the world's largest paper and board maker,
is still seen by many brokerages as the top pick in the Nordic group as it is best
positioned to gain from the upturn with its substantial presence in North America.
The top global magazine paper UPM-Kymmene (UPM1V.HE) and Norway's Norske Skog (NSG.OL) are
seen as less attractive, with their portfolios more geared towards late cyclical products.
Sweden's SCA (SCAb.ST) is not expected to benefit from a pick-up significantly as its
consumer-driven hygiene products have been hit less, while fine-paper maker M-real's
(MRLBV.HE) outlook is clouded by the weakness of its European markets.
Source: Lempros |
