UPM closes plant again, reducing production capacity by nearly 600,000 tons, while continuing the plan of thousands of layoffs
UPM Communications Paper has announced plans to permanently close its Pratlin plant in Germany, thereby reducing European production capacity for uncoated and coated publishing paper by 595,000 tonnes. UPM noted that these plans are a continuation of necessary steps to proactively ensure the competitiveness of our operations and enable printing paper capacity to meet profitable customer demand.
If the plan is implemented, it is expected that the number of employees affected by Pratlin UPM will reach 401. In addition, it is expected to have an impact on field service providers. The participation process of the workers' council will start immediately in accordance with local legislation. The two paper machines operated by the planned closure of the Pratlin plant will result in a permanent reduction of 380,000 tons of uncoated publishing paper and 215,000 tons of coated publishing paper. The two paper machines are scheduled to stop printing paper production by the end of 2023.
Demand for printing paper has been declining for the past 15 years, and this trend is expected to continue. The decline in demand has intensified significantly this year. In addition, long-term predictability of factors of production such as energy supply is critical to the industry. Uncertainty about the reliability and cost competitiveness of Germany's energy supply is currently a huge challenge.
"The mature printing paper market requires continuous and tireless efforts to ensure cost-competitive operations while meeting the needs of future customers. UPM is committed to leading our business in a responsible manner. We respect the interests of our employees and customers and treat them as a core part of our plans. We recognize that today's announcement is very difficult news for our Pratlin employees. Together with employee representatives, we will seek responsible solutions for our employees and engage in a fair dialogue directly." said Massimo Reynoldo, Executive Vice President, UPM Communication Paper Division.
The plans announced today will enhance the overall cost competitiveness of UPM Newsletter Paper and are a prerequisite for the long-term stable operation of the paper industry. UPM Newsletter Paper is also planning to continue temporary layoffs in Finland. Possible temporary layoffs may take place over several periods, with a maximum duration of 90 days. Decisions on whether to continue possible temporary layoffs at the four plants will be made after consultations, covering a total of approximately 1,100 employees.
In addition, UPM released its latest quarterly financial report. "Geopolitical uncertainty, low economic activity and high inflation are affecting consumers in the first half of the year," the company said. "At the same time, product value chain destocking in our industry continues. As a result, we are seeing a strong and rapid decline in the market, product deliveries are well below expected end-use demand, and global commodity prices such as pulp and energy have fallen from record highs to cyclical lows within six months."
In terms of financial data, UPM's sales in the second quarter were 2.558 billion euros, the same as the previous year. Comparable EBIT fell to 114 million euros (Q2 2022: 387 million euros). In addition to market challenges, quarterly results were affected by high maintenance costs for UPM Fibers, UPM Energy and UPM Biofuels, as well as normal start-up costs for the UPM Paso de los Toros plant.
In the second quarter, market shipments of most of UPM's products were significantly below the long-term average due to continued destocking. On the positive side, lower variable input costs in the second quarter contributed positively to the results. UPM responded to a challenging market through continuous flexible profit management and prompt cost-cutting measures. Permanent and temporary layoffs, flexible working hours and restructuring activities are being implemented across UPM business units. During the quarter, the UPM communication paper business permanently closed PM6 in UPM Schongau, Germany and PM4 in UPM Steyremmühl, Austria. The business will continue to adjust its capacity to meet profitable customer demand based on its strategy and long-term market outlook.
UPM pointed out that with these measures and highly competitive production assets, UPM will benefit greatly once production starts to return to more normal levels. In addition, its strategic milestone, UPM Paso de los Toros pulp mill delivered its first cargo to customers in May, and the capacity upgrade is progressing well, reaching an operating rate of 70% in July. The company expects the plant to have positive EBITDA in the third quarter even if current pulp prices are at the bottom of the cycle. With competitive lumber supply, scale, best available technology and efficient logistics, the plant is expected to reach a very competitive cash cost level of approximately $280 per ton of pulp delivered once fully produced and optimized.
Another milestone was the start of normal commercial power generation at the OL3 nuclear power plant, increasing its CO2-free power generation by nearly 50%. In the long run, UPM's competitive and flexible energy business platform will bring growth opportunities to the synthetic fuels and materials sector.
The company's biochemical investment project in Leuna, Germany, is progressing well and has obtained an operating license in May. However, the project faces an extremely challenging investment environment with scarce materials and contractors. Building the first biorefinery under these circumstances and making the necessary adjustments is demanding and has resulted in project rescheduling and delays. The investment project is expected to be completed by the end of 2024 and the project cost is estimated at 1.18 billion euros. The project is moving forward at full speed. Civil construction on the site will be completed in the third quarter of 2023. Commissioning will begin in phases in the fourth quarter of 2023.
All in all, the first half of the year has been challenging as the world has been adjusting to new economic and political realities. Nonetheless, UPM believes its business will improve significantly when the business cycle takes a more favorable turn. UPM's positive long-term drivers and growth prospects are intact and exciting. "
Looking at the full 2023 financial situation, full-year comparable EBIT in 2023 is expected to be lower than in 2022. UPM's comparable EBIT in the second half of 2023 is expected to be flat or increased compared to the first half of 2023.
UPM deliveries are expected to increase from the first half of 2023. Deliveries in the first half of 2023 are unusually low due to significant destocking across product value chains. Destocking is expected to be phased out in the second half of 2023, allowing UPM deliveries to return to potential end-use demand. Increased production at UPM's Paso de los Toros pulp mill and OL3 nuclear power plant unit will increase UPM deliveries in the second half of 2023.
Chemical pulp and electricity market prices are at historic highs in the second half of 2022 and rapidly decline to estimated cycle bottom levels in the first half of 2023. Lower pulp and electricity prices in the second half of 2023 affect these commodity price-driven businesses. Among other businesses, UPM continues to manage profits. Variable costs are expected to decrease in the second half of 2023 compared to the first half of 2023. In addition, UPM is taking steps to reduce fixed and variable costs.
UPM is confident in a profitable biochemical business as well as in the technology used by UPM Leuna. Lessons learned from the first refinery will benefit the expansion of the business in the future. On the commercial side, UPM has successfully established collaborations and partnerships with distributors, customers and global brands. Interest in its renewable products replacing fossil materials has proven to be high. In addition, detailed commercial and basic engineering studies of a potential biofuel refinery in Rotterdam continue.
Beary, another pulp and paper giant based in northern Europe, also reported net sales of 9.95 billion Swedish krona (860 million euros) in the second quarter of its financial year, down 13% year-on-year. Beary attributed its performance to lower sales due to low demand and customer inventory adjustments, which led to further production cuts.
In June, the company said it expected second-quarter results to fall short of market expectations due to lower volumes and a revaluation of finished goods inventories. Christoph Michalski, president and chief executive of Beary, said: "Sales in the second quarter were at an all-time low, with net sales down 18% compared to the same period last year, which was a challenge for us. The largest decline in sales was in North America due to continued destocking resulting in production cuts. This, combined with historically high fiber costs in Europe, led to weak results."
Net loss 481 million SEK (€41.70 million) and operating loss 496 million SEK (€43 million) for the quarter. The company's adjusted EBITDA was 188 million SEK (€16.30 million) and an adjusted EBITDA margin of 2%. It was impacted by low production, higher input costs and revaluation of finished goods inventories, partially offset by higher selling prices, currency effects and implementation of efficiency improvement programs. Beary expects weak market conditions to continue in the third quarter and will continue to cut production. The company noted that a negative mixed impact and some price declines are expected, with input costs likely to decline except for wood raw materials in Europe.