UPM invested around € 680 million in four significant growth projects between 2013 and 2016. The goal is to increase the operating margin (EBIDTA) by € 200 million.
Kari Ståhlberg, Head of Corporate Strategy, notes that UPM has made significant investment in biofuels, the production of self-adhesive label papers and pulp in recent years. The production capacity for pulp is set to increase by 10% by the end of 2015.
“Demand for pulp is growing constantly in China and across Asia — this is one of our main reasons for investing in pulp production. In order to meet global demand, we have invested in both the Fray Bentos pulp mill in Uruguay and our Finnish mills in Kymi and Pietarsaari.”
In terms of paper production, the company has placed particular emphasis on productivity and maintaining a competitive edge in Europe. These efforts have enabled UPM to maintain its level of profitability and strong cash flow, despite the challenging situation on the market.
“With the acquisition of Myllykoski paper mills, we sought returns to scale in all the key fields that are important to us. One example here is magazine paper. We value productivity in all aspects of production, and the benefits of the merger are clearly visible in our results today”, Ståhlberg explains.
“While developing our current operations, we also invest in brand new areas that allow us to build on the strengths we already possess”, he adds.
UPM’s new business endeavours focus in particular on biofuels, biochemicals and biocomposites. The development of these fields is based on solid expertise in sourcing and refining forest biomass.
“The brand new biorefinery in Lappeenranta marks the first crucial investment. Using this investment as a basis, we can estimate what scope there is long term to develop this business even further in a suitable market segment.”
The company is also building a new production unit for manufacturing label materials and speciality papers at the Changshu mill in China. Stock production of self-adhesive labels aims at achieving consistent growth in emerging markets and at developing products that deliver a high level of added value.
Economic growth brings challenges
Ståhlberg notes that, as a result of the particular strategy selected, UPM’s cash flow has remained steady, and the company has secured the capacity to fund the projects deemed most appropriate. Currently, sufficient funding is available in terms of both risk financing and the financing from banks and other financing institutions.
“From the companies’ viewpoint, the challenges regarding investment are more related to poor levels of economic growth and demand. If the level of economic growth is insufficient, new investment projects also fail to appear. At present, small investments in development are enough to meet the demand.
Jyrki Katainen is the Vice-President of the European Commission and heads up the project team responsible for jobs, growth and investments. He admits that the low investment rate in Europe is partially down to the prolonged economic downturn.
“However, he points out that this is a global problem that also affects others outside of Europe.”
“Problems relating to competitiveness that complicate corporate investments within different EU member states are another issue. The solution for these issues has to be found at national level.” He also notes that there is no functioning internal market for energy and digital services, for instance.
Katainen is currently visiting different EU member states and introducing the European Commission’s investment package. The goal is to deepen the internal market for digital services, energy and capital, as well as to establish an investment fund totalling € 315 billion.
Risk investments within the private sector and investments in private and public partnership projects are some of the investments made from the fund.
“Capital investments are granted from the fund, and emphasis is also placed on higher risk investments within small and medium-sized companies, for example, as well as on technological pilot projects. The goal is to mobilise private funds for these projects”, Katainen notes.
Business environment requires an uplift
In addition to economic growth and demand, industrial competitiveness is another underlying factor when it comes to investments. Here, the term refers to the conditions under which companies can compete at European or global level.
The Confederation of European Paper Industries (CEPI) has estimated that forest industry will invest about € 5 billion in Europe over the next three years. Innovative technological breakthroughs, recycling and the concept of a bio-based economy are all attracting investors.
However, this cannot continue, not unless legislators are willing to develop an enabling business environment for companies. Ståhlberg from UPM believes that by eliminating some of the regulatory obstacles that hold companies back and by enhancing competitiveness, investments in Europe would be boosted to a significant extent.
“The regulatory framework, both at national and European level, influences the business environment for companies, so the legislation must be predictable in the long term. Investing in production mills and refineries requires a significant amount of capital, therefore companies must be able to predict their business environment for decades to come, also in terms of legislation.
Rapid changes in EU’s legislation on biofuels that is now under discussion have created uncertainty and delayed or prevented investments in the field. Katainen also admits that the on-going discussion around biofuels is an unfortunate example of the difficulties relating to regulations at European level.
“Different industries are lobbying strongly against each other in this matter. We hope that we can reach sound decisions quickly, in order to remove the uncertainty in the sector. In general, the EU should take decisions on energy and climate policy as quickly as possible; this would increase the level of certainty for investment in the energy sector”, Katainen concludes.