Stora Enso/Billerud: on paper, forestry companies must cut capacity

Sometimes investors cannot see the wood for the trees. But in Scandinavia the message is clear: forestry products are struggling.

Sweden’s Billerud warned on Thursday that profits and sales would be lower this quarter. Finnish peer Stora Enso chipped in with bad news too. It will close factories and will make more than 1,000 redundancies. Shares in the two companies fell around 5 per cent on the day.

Demand for paper and packaging materials is down. A bust has followed the boom during the pandemic lockdowns, then driven by a surge in online shopping. Cardboard volumes are now flat or falling in most categories as destocking continues. Prices have followed.

Excess capacity is now a concern. Earnings expectations for the two companies have halved since the end of last year. The scale of further supply cuts will help decide how much further earnings drop. Billerud has noted a slowdown in demand mostly in its North American markets. It will take action on costs and capacity.

Stora Enso is also trying to rebalance the market, closing down any unprofitable sites. Its pulp capacity will fall by 375,000 tonnes annually, about 13 per cent of the company’s total. It is also shutting down three containerboard lines equal to 500,000 tonnes of annual output, alone about 1 per cent of Europe’s total capacity.

More of this is needed. Some 10 to 15 per cent of European recycled containerboard capacity looks uncompetitive at current prices, thinks Cole Hathorn at Jefferies. The situation is worse in Stora Enso’s native Finland. Costs have risen sharply following the loss of raw materials from Russia.

There are some early positive signs, though. Pulp prices show tentative signs of having reached a trough. In China they have touched bottom. European prices tend to lag these by a few months. Some valuations suggest these cyclical groups offer value. Both shares trade consistently below book value for the first time in over a decade.

Even so, expect more capacity reductions at older and costlier European box factories. Only then can the bear market in forestry shares begin to reverse.