Our challenge is to tackle external factors

We are not satisfied with the results for 2011. Profit after net financial items, but before one-off items, fell from SEK 138 to 28 million. Although it is our task to deal with difficult external factors, it may be observed that this deterioration of our result is actually less than the negative impact attributable to lower selling prices in SEK and increased pulpwood prices. In other words, we have become more efficient than we were in 2010. The outlook for 2012 is uncertain, but there are positive components, such as falling timber and electricity prices and rising pulp prices.

Rottneros and the entire global forest industry can indeed hide behind macroeconomic and political developments and conclude that our immediate future was and is unpredictable. Total global demand for forest fibre is growing, resulting in the price of both timber and forestry land continuing to rise and raw materials consequently becoming more expen-sive. At the same time there has been a change in behaviour in the Western world, which has meant that printed paper, not least for advertising and publicity purposes, is rapidly losing market shares to electronic media. However, there has also been an increase in the number of people throughout the world who read printed products. Increased age and standards of living in all parts of the world is boost-ing demand for cellulosic hygiene products and packaging. This evolution is continuing and favours the forest industry, particularly when combined with the demand for renewable raw materials in an ever increasing number of value chains.

Counter-strike pulp market

The global chemical pulp market was in fact strong in 2011. However, unfortunately for our part, NBSK deliveries in Europe fell by five per cent. This is probably due to non-integrated printing paper equipment continuing to be closed down, but perhaps also the abundance of in comparative terms cheap hard-wood pulp that is stimulating changes to pulp recipes. Global shipments of both hard- and softwood pulp rose by between three and four per cent, which is excellent.

Demand was strong during the first half of the year, with substantial price increases in US dollars at the same time as there was a considerable increase in global pulp stocks. That is to say, actual paper consumption did not rise as much as pulp supplies. During the second half of the year, pulp purchasers were able to get the price trend to turn downwards due to substantial producer stocks, but also because of the general business cycle which was clearly becoming weaker. As usual the price fell quickly and by too much. Then came extremely high shipments to China in December, marking the end of the price drop. 2012 thus started with falling pulp stocks and rising prices, particularly for hardwood pulp.

2011 was not a good year for pulp prices for Swedish manufacturers despite an all time high, with a price of USD 1,025 per tonne for long fibre pulp around Midsummer. The extremely strong Swedish krona, or perhaps rather the weak Euro and US dollar, meant that the average price was actually almost SEK 500 per tonne lower than in 2010. In addition to this, pulpwood was approximately SEK 60 more expensive per cubic metre than it had been in 2010. Taken together, these factors represent a greater suppression of business than the actual deterioriation in Rottneros' result from SEK 138 to 28 million (after net financial items but before one-off items). In other words we actually did a lot better and were much more efficient in 2011 notwithstanding the result.

Segments developing differently

The Rottneros Group operates in three different segments from a market and pricing perspective: groundwood pulp, CTMP and NBSK or chemical long fibre pulp. There is a logic in support of each of these though the links are not always apparent. Rottneros is the only producer of bleached market groundwood pulp for the printing paper segment. This means that we set the prices. Of course the price may become a trade-off between our costs and what customers are able to pay before they are forced to discontinue their products because the market is no longer willing to pay a price that covers costs. This means that the price of groundwood pulp is now higher than the price of CTMP and sometimes higher than chemical pulp as well. We experience problems when volumes fall, forcing us to have further production shutdowns, which was clearly illustrated in 2011. The CTMP price is now geared to a significant extent towards the Chinese market. This is where the Scandinavian and Canadian manufacturers encounter the largest purchasers. The price of CTMP was a couple of hundred Swedish kronor lower per tonne than the price of chemical hardwood pulp during the five-year period preceding the global financial crisis. Price differences were virtually non-existent during the crisis. After the financial crisis, the price difference was more than one thousand Swedish kronor, which made life difficult for all CTMP producers throughout the world.

Following the price drop in the autumn, this price difference is now returning to levels that are more 'normal' from a historical perspective. There was also a sharp increase in the difference between the price of chemical softwood and hardwood pulp in 2011, from around the USD 70 per tonne level to over USD 200 per tonne. At the beginning of 2012 this price difference appeared to be on its way back down, approaching USD 100 per tonne. There are thus large relative changes between the various market segments.

What could we have done better?

External factors during the second half of 2011 did not favour Rottneros, but we could obviously have had more success with certain things. We have worked on several projects to promote deeper cooperation with other companies, but the pieces of the jigsaw have not really fallen into place. However, it shows that we are still a player. We are continuing to give top priority to capitalising our sleeping capital in the CTMP equipment from our closed mill at Utansjö. Active work is underway on a number of different projects in countries both east and south of Sweden. The difficulty for new CTMP projects lies in poor global price trends for CTMP in recent years, despite strong growth in the chemical pulp markets. Although investment decisions have been delayed, we believe that this strong high-yield pulp product will enjoy a renaissance due to its unique properties combined with the fibre shortage in China, which is driving global fibre costs.

Purpose of the new share issue achieved

The financial transformation of Rottneros in 2009 brought with it a number of objectives. Probably the most important of these objectives were: the release from the restrictive bank loan terms caused by an excessive level of debt; the reintroduction of a share dividend after several years of austerity; and the financial capacity to satisfy the new environmental requirements imposed on Vallvik Mill by public authorities. We have now met these objectives and are ready for the next phase of our development.

Active work on sustainability

As an integral part of our operation, we conduct active work relating to responsibility and sustainability issues throughout the entire value chain. Each stage of our production and distribution systems has the objective of minimising adverse effects on the environment and everyone else affected by Rottneros' operation. We are striving for good communication with everyone affected by our oper-ation, that is, customers, shareholders, employees and everyone around us.

Important issues from both a sustainability and financial perspective are the use of resources (for example how we use and secure raw timber and its setting), energy efficiency and also that we offer our employees a safe work environment.

Outlook for 2012

The global macroeconomy is unusually uncertain. However, the pulp market really appears to be strong for 2012. No new capacity has been added for soft-wood pulp, and normal productivity improvements do not compensate the closures that have recently taken place or the numerous conversions to viscose prod-uction that are underway. The cost of pulpwood is clearly going to be lower, but conversely the strong Swedish krona is impairing competitiveness and net price income for manufacturers in Sweden such as ourselves.

We are continuing to keep an open mind when reviewing the various cooperation possibilities that are already available and the new opportunities that will arise in a year of increased activities, consolidations and regroupings.

Possible bioenergy projects are continuing to be analysed both at Rottneros and Vallvik Mill. So far we have done well in our endeavour to get support via the EU emission rights funds, where two out of the five remaining Swedish applications in the final process have been submitted by us. We are focussing on the possibility of producing vehicle fuel using forest cellulose. Rottneros will, as regards both projects, only take part in these investment projects if we secure the right partners and provided the anticipated profitability is good.

I would like to thank our employees for their good work in 2011 and for loyally supporting the development of Rottneros.

Ole Terland
President and CEO