RESTRICTED

ReportN 0. TO-201a

This report was prepared for use within the Bank. In making itavailable to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF

FINNISH WOODWORKING PROJECTS

FINLAND

March 5, 1959

Department of Technical Operations

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CURRENCY EQUIVALENTS

$1.00 - Fnk 320Fmk 1 - $.003125Fmk 1 million - $3,125All tons are metric tons

APPRAISAL OFFINNISH WOODWORKING PROJECTS

TABLE OF CONTENTS

Paragraphs

Sumaary and Conclusions

I. Introduction 1 - 4

II. The Borrower 5 - 6

III. The Finnish Woodworking Industry 7 - 28General 7 - 12Technical Level of the Industry 13Management 14Labor 15Industry Organization 16 - 18Northern and Southern Mills 19 - 22Postwar Growth of the Industry 23 - 26Financing of Recent Development 27 - 28

IV. The Expansion Program 29 - 31

V. Resources 32 - 38Wood and Chemicals 32 - 34Power 35 - 36Labor 37Transportation 38

VI. Market Prospects 39 - h1

VII. The Projects 42 - 60General 42Financing Requirements 43 - 45Availability of Domestic Equipment 46Domestic Financing 47Description of the Projects 48 - 52Economic Benefits 53General Aspects of the Projects Sh - 60

VIII. General Conclusions 61

Appendices

1. Mortgage Bank of Finland Oy

2. Market Prospects for Finnish Pulp and Paper

Map showing location of projects.

APPRAISAL OF

FINNISH WOODWORKING PROJECTS

SUl,ARY AND CONCLUSIONS

The Bank has been asked to consider making a loan to finance theuncovered capital needs of a number of projects of the Finnish woodworkingindustry, which represent a major part of the industry's investment programover the next three years.

These projects have been investigated, and nine have been foundsuitable for Bank financing in the total amount of $36.7 million equiva-lent. The projects selected and the amounts of the proposed loan alloca-tions to each of them are as follows:

Million $eauivalent

Sulphate PulpKemi 3.26Oulu 8.34Metsaiiiton Selluloosa 4.69

lymia 4.97PMrllykoski 3.81United Paper Mills 4.81

Dissolving PulpEnqvist 2.19Kaukas 1.50Rauma Repola 3.10

Total $26 L

The projects selected have been investigated in the field byBank staff members. They are all of high economic priority. They wouldresult in increases of 205,000 tons in annual capacity for the productionof pulp and 180,000 tons in annual capacity for the production of newsprint.Sufficient pulp wood is available to cover the proposed planned expansionof capacity. World demand for Finnish pulp and paper products is expectedto grow sufficiently over the next few years to absorb the bulk of the ad-ditional production.

The projects are all well planned. The estimates of their costare reasonable. Their engineering is in good hands. The managements ofthe companies involved are efficient. Satisfactory arrangements have beenmade to provide the funds which will be needed in addition to the proposedBank loan. The financial structure of each of the companies is sound.The subsidiary loans would be secured by mortgages.

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Contracts for major items would be placed on the basis of inter-national bids. The amounts recommended for Bank financing in some casescover, in addition to the estimated cost of equipment which is expectedto be imported, the estimated cost of some equipment which would be pro-cured in Finland. On present estimates, the locally produced equipmentwould not amount to more than about 13% of the proposed loan. The exactamount to be made available for locally produced equipment would not bedetermined until firm orders are placed.

It is proposed that the loan be made to the Mortgage Bank ofFinland Oy, a subsidiary of the Bank of Finland, with the guarantee of theFinnish Government. The Mortgage Bank would in turn conclude a loan agree-ment with each of the companies concerned. The terms and conditions ofthese loan agreements would be subject to Bank approval. The Mortgage Bankwould bear the commercial risk but the industrial concerns would bear theforeign exchange risk. The Bank of Finland has undertaken to arrange forfunds to be made available to the companies, if necessary, to complete theprojects and to cover any possible shortfall in working capital.

In appraising the selected projects, it has been assumed that thesubsidiary loans would be for terms of 15 years including 3 years' graceperiod (except in one case where 21 years has been assumed). On that con-dition, forecasts based on reasonable assumptions show that the companiesconcerned would earn a satisfactory return on their equity investments afterpaying interest on borrowed funds, and would generate sufficient cash tomeet repayment installments of debt and distribute normal dividends withoutimpairing their liquidity position. If, as is proposed, a loan to theMortgage Bank of Finland were to have a grace period of 3 years, the fin-ancial position of one company would be slightly improved.

The nine projects are a suitable basis for a Bank loan of about$37 million equivalent to the Mortgage Bank of Finland for a term of 15years including 3 years of grace.

I. INTRODUCTION

1. Between 1949 and 1956, the Bank made loans totalling 931.3 mil-lion to the Finnish woodworking industry (Loans 16, 61, 70 and 112-FI).This is about half the total amount loaned to Finland to date. The Bankloans were used to finance essential imports of equipment and materialsfor the leading branches of the woodworking industry, including 26 majorprojects in the pulp and paper industry. These projects have all beencompleted.

2. In March 1958, the Bank of Finland reauested the Bank to considerfurther lending to the Finnish woodworking industry. In May, a Bank eco-nomic mission visited Finland, and in July, the Bank informed the Bank ofFinland that it was prepared to examine projects in the woodworking indus-try suitable for Bank financing. The Bank proposed that if possible itslending should be concentrated on a few concerns of key importance to theFinnish economy, and indicated its willingness to consider financing ex-penditures in Finland, if it should be found impracticable to apply theproposed loan exclusively for imported equipment.

3. Initially the Bank of Finland submitted 14 projects for Bank con-sideration. Four were subsequently withdrawn. In September, the Bank re-ceived preliminary information on the remaining 10 projects. In October/December these projects were investigated by the Bank's staff, and in thecourse of further joint screening by the Bank and the Bank of Finland, oneof the projects was replaced by one that had been previously submitted, andone project was dropped.

4. The remaining nine projects have been found suitable for Bankfinancing in the total amount of 036.7 million. These projects, whose totalcost is estimated at $87.5 million equivalent, represent a substantial partof the woodworking industry's proposed investment program for pulp and news-print. They provide for an expansion of 150,000 tons per year in capacityfor sulphate pulp, 55,000 tons per year for dissolving pulp, and 180,000tons per year for newsprint, or 38%, 80% and 75% of the industry's plannedexpansion for these items. The total planned investments in fixed assetsof the companies whose projects are proposed for Bank financing representabout 50% of the total planned investment. in fixed assets by the industry,which is estimated at about $235 million equivalent. The modernizationand expansion of chemical recovery installations, and the expansion ofstorage and power facilities provided for in certain projects would resultin important savings in fuel, transportation and power costs and in an in-crease in overall operating efficiency.

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II. THE BORROWER

5. The borrower would be the Mortgage Bank of Finland 07, a subsidiaryof the Bank of Finland, established in 1956, as the channel for Bank loans,because the Bank of Finland believed it inappropriate to engage in long-term lending. If the loan is granted, the Bank of Finland would make thenecessary arrangements for an increase in the equity capital of the Mort-gage Bank, to enable it to assume the proposed additional loan commitmentwithin its statutory borrowing limitations. (Details on the Mortgage Bank'spowers, operations and financial condition are given in Appendix 1.)

6. The Mortgage Bank would be the instrument through which the Bankloan would be channeled and administered. It would relend the proceeds ofthe loan for the projects approved by the Bank and enter into loan agree-ments with the ultimate loan beneficiaries in approved amounts and on termssatisfactory to the Bank. These loans would be secured by mortgages (inamounts not exceeding 60% of the appraised value of the relative properties)and, where necessary, by supplementary guarantees of commercial banks. Theforeign exchange risk would be carried by the ultimate borrowers. The Bankloan would be guaranteed by the Finnish Government.

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III. THE FINISH WOODWORKING INDUSTRY

7. The forests play a dominating role in the Finnish economy. Forestproducts bring in four-fifths of the country's export income. About 7% ofthe employed population are engaged in forestry and another 3.5% in thewoodworking industry; additional workers are employed in floating logs fromthe forests to the mills and in road and rail transportation of wood andwood products. Work in the forests , carried on mainly in the winter months,provides an outlet for labor at a time of the year when unemployment ishigh. In addition, the forest owners (about 70% of the forests are pri-vately owned, for the most part by small farmers) depend upon their holdingsfor a large fraction of their incomes.

3. About 45% of Finland's export income comes from the pulp and paperindustry alone. Finland is the second largest producer and exporter of pulpand paper in Europe (ranking after Sweden) and the largest European exporterof newsprint and kraft paper and board. In 1957, it produced over 20% ofthe total output of woodpulp in the OEC countries plus Finland, close to20% of the newsprint and 7% of the output of all other paper and board. Inaddition, Finland is the leading exporter of roundwood (pulpwood and pit-props) and plywood in Europe, ex the Soviet bloc (accounting for 75% and65% respectively of the total exports of these products by OEEC countriesplus Finland) and a major exporter of sawnwood (25%).

9. The woodworking industry dates back to the last century when pri-vate individuals began to set up small sawmills in southemFinland. Thesawmill owners expanded gradually into other branches of woodworking, and,in some cases, into other industrial activities--mechanical engineering,shipbuilding, the production of glass, glue, fertilizers, household appli-ances, etc. A few of the companies have become relatively large, but mostof them are medium sized, are engaged mainly in woodworking, and still de-rive a large fraction of their income from the operation of sawmills.

10. Most of the companies are privately owned; in many cases they arestill owned or controlled by the families of the founders. Government in-terest in the industry is limited to the ownership of two companies and par-ticipation in two others.

1. Most of the companies are integrated producers, manufacturingpaper and board as well as mechanical and/or chemical pulp. In addition,they produce some or all of the following: timber for export as well asfor company use; sawn goods, plywood, and prefabricated houses; and chemi-cals, as a byproduct of pulp production. Integration makes possible opera-ting economies, for example, firms operating sawmills as well as pulp plantscan use sawmill waste in pulp production; moreover, it makes for stabilityin company earnings.

12. The industry produces mainly for export, and although it marketsthe bulk of its output in western Europe, it sells its products all overthe world. Its major markets outside of western Europe are the U.S., LatinAmerica and the U.S.S.R. and other countries in eastern Europe.

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Technical Level of the Industry

13. The mills producing paper-grade chemical pulp (sulphite and sul-phate), which account for over 90% of total chemical pulp production, areup to date technically and produce high quality pulp. The units are largecompared with those in the other Scandinavian countries (average annualcapacities are about 125,000 tons for sulphate pulp and about 60,000 tonsfor sulphite pulp). The present program provides for a further increasein the scale of operations and for improvements aimed at further reductionsin cost and improvements in quality. The mills producing dissolving pulp(bleached pulp for rayon) are not as up to date as mills in other countries,and the present program is designed to bring this branch of the industry upto a higher technical standard, although two of the three projects also pro-vide for increases in capacity. The four largest newsprint mills are fairlyup to date and efficient.

Management

14. The managements are efficient, and the technical skill at alllevels is high. The industry keeps abreast of technical developments inall countries; young engineers are commonly sent abroad for training.Technicians in the industry keep in close touch with each other, and theirnot infrequent movements from one company to another help to spread infor-mation about technological advances through the industry.

Labor

15. Wages, which include large fringe benefits, are about at the levelof the other Scandinavian countries, although lower than in North America.Labor relations in the industry have been good since the general strike in

1956.

Industry Organization

164 The woodworking industry has a strong voluntary central organiza-tion, the Central Association of the Finnish Woodworking Industries, whichplays z important role in the formulation of industry policy and acts asa channeL between the industry on the one hand and the Government and pro-ducers and consumers in other countries on the other.

17. The organization of the industry's sales differs from that ob-taining in other countries in that sales.are made by trade associations,each covering one branch of the industry, and all affiliated with the CentralAssociation. Besides maintaining representatives all over the world, theseassociations make the necessary arrangements for financing exports, thus re-ducing the working capital requirements of their members. Centralization ofmarketing serves also to spread the effect of any fall in demand among allthe producers. The services of the associations are provided at cost.

18. The industry maintains central research laboratories which workon problems submitted by individual members as well as on basic researchfor the industry as a whole. This is by far the most important researchactivity carried on by the industry; research carried on by individualcompanies is on a small scale.

Northern and Southern Mills

19. The pulp and paper mills are scattered widely through southernFinland where the industry is mainly concentrated. There are relativelyfew mills in the north.

20. The southern mills have a number of advantages as compared to thenorthern, especially in transportation. They have easy access to loggingareas through the wide-branching inter-connected and slow-running river andlake systems over which logs can be floated for great distances at relative-ly low cost. Water transport is economic over distances as great as 300 kms.as against a limit of no more than 150 kms. for truck hauls. It is thusfeasible for the mills to locate close to good export harbors, even if theydraw their wood from forests that are some distance away from these harbors.In addition to lower transportation costs, the southern mills have lowerlabor costs both in the forests and in their plants.

21. The northern mills draw their wood from slow-growing forests andneed a larger area to supply a given quantity of wood than do the southernmills. The waterways running through the forests are narrower and swifterrunning than those in the forests supplying the southern mills. For bothreasons, more land haulage of logs is required than in the southern forests.The floating season is relatively short and the mills must build up largestocks of wood for the winter months. The volume of wood in transit is alsofairly large, because movement of wood to the mills is relatively slow; thenorthern mills hope to cut this time down by an increased use of motor trans-port. Finally, although the northern mills are for the most part locatedon export harbors, these harbors are closed in the winter and mills mustthen either accumulate large stocks of finished products or ship their fin-ished products to ice-free harbors by costly rail haul. For the same reason,the cost of transporting chemicals (whose weight is as much as one-quarterof the weight of the finished product) is relatively high.

22. The disadvantages of the northern mills are offset in part by thepreferential treatment afforded them by the government in the interest ofencouraging industrial development in the north to provide increased employ-ment opportunities there. Northern tax rates are lower. The Export Levyimposed on all wood products after the devaluation of September 1957 simi-larly discriminated in favor of the northern mills. The government programto use icebreakers to open up a number of ports now ice bound in the wintershould result in some reduction in the transport costs of northern producers.

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Post-War Growth of the Industry

23. The Finnish woodproducts industry emerged from the war seriouslycrippled as a result of the peace settlement with Russia. The territoriessurrendered to Russia represented about 12% of Finland's pre-war area, andincluded about 10o of its pre-war population. The ceded territories in-cluded a great deal of valuable forest land, and contained about 25% of thenation's pre-war chemical pulp capacity, 25% of its capacity for cardboardand two large power stations. The industry sustained little direct wardamage, but it emerged from the war with its equipment worn, and technicallybehind the industries in other countries, in particular,7Sweden.

24. In the years immediately after the war, the Finns concentrated onresettling the 500,000 people who had lived in the territory ceded to theSoviet Union and re-establishing their industry in their new borders. Inthe pulp and paper industry, reconstruction provided an opportunity formodernization and some expansion of capacity. By 1951, production in theindustry had reached pre-war levels and in some lines,such as board andpaper, substantially exceeded them.

25. In response to the upsurge of demand that followed the outbreakof war in Korea, the industry embarked on a second program of rationalizationand modernization. Progress was slowed down by the post-Korean recession(mid-1952 to late 1953) but between the end of 1953 and 1957, there was aspectacular advance. Capacity was expanded, facilities were modernized andoperations were rationalized. By 1957 the second program was practicallycompleted. The rapid growth of the industry since the war, and especiallysince 1951, is shown in the following production figures:

Production

Increases or Decreases1936/38 1951 158 1936/38-1951 1051-1958(Thousand metric tons) - - - (Per Cent) - - - -

Sulphite Pulp 961 822 1,104 - 14 + 34Sulphate Pulp 463 561 974 + 21 + 74Newsprint 397 410 623 + 3 + 52Cardboard 123 201 424 + 64 + 111Kraft Paper 47 83 216 + 77 + 160Other Paper 122 192 324 + 57 + 69

1/ Annual rate based on first 10 months.

26. Expansion was particularly marked in sulphate pulp, board, kraftpaper and newsprint, the bulk products in which Finland has a competitiveadvantage in the world market because of its large resources of softwoodand its relatively large production units. Production of sawn wood, plywoodand other sawn wood products increased much less than pulp and paper, andthe relative importance of these products in Finland's exports has declined.

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Future development will probably be along the same lines, with more andmore of the country's wood resources going into pulp and paper, becausedemand for pulp and paper is rising, while demand for sawn goods is level-ing off.

Financing of Recent Develoment

27. The expansion programs were financed in different ways, dependingon the financial strength and earning power of the individual enterprises.Companies with large incomes from their own forests or with cheap power re-sources were generally able to cover the greater part of their requirementsfrom retained earnings; companies lacking one or both of these advantageshad to rely more heavily on borrowings. For the most part, these consistedof loans from commercial banks, either directly or through the IndustrialMortgage Bank which they own, and the insurance companies, and from suchpublic sources as the Postal Savings Bank, the unemployment funds,the PriceEqualization Fund, etc. Most of the long-term loans are secured by mort-gages and tied to a price index or the pound sterling rate. Suppliers'credits played a not unimportant role in the financing of some projects.In several cases, where the companies were unable to raise all the moneyrequired on long term, they obtained substantial amounts of short-termcredit from their own banks. These are being gradually repaid and have inpart been consolidated.

28. The IBRD loans were of key importance in financing the import offoreign equipment and supplies, essential for the execution of the programs.The woodworking industry received $10.5 million equivalent from the firstIBRD loan of 1949 (16-FI). About half was for new paper capacity including110,000 tons per annum for kraft paper and liner board, and 11,000 tons ofgreaseproof :aper; the balance was mainly for modernization of pulpmakingcapacity. Under three subsequent Bank loans, granted between 1952 and 1956(61, 70, and 112-FI) a total of $20.8 million equivalent was allocated forwoodworking, mainly for 20 major projects for the modernization and expansionof facilities for pulp and papermaking and for additional power facilities.These projects, whose total cost was approximately $120 million equivalent,accounted for the bulk of the additional capacity installed during the in-dustry's second construction phase: 85% of the total increase of 553,000tons in the nation's capacity for chemical pulp (mostly sulphate), and 74%of the additional capacity for board, newsprint and other paper (the totalincreases were 125,000 tons of board, 235,000 tons of newsprint and 138,000tons of kraft and other paper). The Bahk loans aided in the financing of twonew newsprint mills in southeast and middle Finland with a combined initialcapacity of 200,000 tons per year.

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IV. TE EXPAJSION PROGRAM

29. The Finnish pulp and paper industry is now proposing to embarkon a new expansion program. Although the pulp and paper market weakenedin 1958, Finnish exports remained at 1957 levels (there were increases insome products) and industry earnings increased as a result of the rise inprices in markkas of exported products following the devaluation in Sep-tember, 1957. The industry did not receive the full benefit of these in-creases, which were partly absorbed by an Export levy imposed on all woodproducts after devaluation, as one of the measures taken by the governmentto minimize the effect of devaluation on prices. The Export Levy rateswere gradually reduced and the levy was eliminated in September 1958. Theproceeds of the Levy were accumulated in an Export Levy fund, earmarked forfinancing long-term investment in the woodworking industry. This fund andother funds for investment from government sources will provide part of thefinancing required for the program. Investment has been encouraged bychanges in the tax regulations relating to depreciation adopted in the pasttwo years that permit depreciation over a six-year period of plant andequipment installed after January 1, 1956.

30. The program, which includes the projects submitted to the Bankfor financing provides for an expansion of about 610,000 tons per year inchemical pulp (25% of 1958 capacity) including 400,000 tons per year ofcapacity for sulphate pulp, 140,000 tons per year for paper-grade sulphiteand 70,000 tons per year for dissolving pulp. Newsprint capacity would beincreased by 240,000 tons., or about 30% of 1958 capacity, and there wouldbe increases of 50% in capacity for cardboard and of 107-20% in capacityfor other paper. Aside from expanding capacity, the industry is adaptingproduction to market trends through the installation of additional facili-ties for bleaching pulp and for the production of glazed newsprint. Theprogram would, moreover, result in substantial reductions in costs and in-creases in operating efficiency. The program is scheduled for completionby 1962 (except for dissolving pulp where the expansion would be completedby 1964), but the new facilities could probably not reach capacity levelsuntil 1963.

31. The following sections discuss the resource basis for this ex-pansion program and the market prospects of the industry on its completion.

V. RESOURCES

Wood and Chemicals

32. The Finnish forests, which cover about 70% of the land area ofthe country, have an annual growth at present of an estimated 46 millionsolid cubic meters. Although the forests are well managed and modernsilvicultural methods are being progressively introduced, further improve-ments are possible, and forest growth is expected to rise as a result ofintensification of culture, reforestation, and drainage of swamps (aboutlC% of the forest swamps have been drained to date) to 50-54 million solidcubic meters by the mid 1960s and to close to 60 million solid cubic metersby 1970. About four-fifths of the wood is coniferous, which is the mostsuitable raw material for papermaking with present techniques. The balanceis hardwood, mostly birch.

33. About 70% of the forest land is privately owned, but privateforests, located mainly in the south where climate and soil favor growth,account for 81%o of the total annual forest growth: 72% is accounted forby the small holdings of farmers (about 116 acres on the average) and 9%by forests owned by woodworking companies. About 16% of total annual for-est growth is accounted for by State-owned forests, and the balance by for-ests owned by communes and churches. The percentage of forest lands ownedby the woodworking companies is relatively small, compared with other for-estry countries (only one-quarter as great as in Sweden, for example) butthe forests are of great value to the companies, particularly as a sourceof income in poor years. The State forests, located mainly in the north,contain large resources and are particularly rich in old trees, larger thanaverage in size, but growth is slow. Cutting in these forests, which arerelatively inaccessible, is below annual growth.

34. The latest National Forest Survey of 1953, subsequent studies offorest growth and a consequently revised cutting plan, indicate that thereis enough pulpwood available to cover the increased requirements of thewoodworking industry after the completion of the present expansion programs.There may be shortages of wood in certain areas which would make it neces-sary for the mills to reach into more distant and less accessible forestareas. Only one of the projects to be financed by the Bank draws its woodfrom a region where the future expanded demand is likely to exceed supply,and, in that case, the estimates of wood costs make an adequate allowancefor possible higher transportation costs. Any regional shortages that mightoccur would be confined to pine pulpwood. These regions have ample suppliesof spruce wood, and although virtually all Finnish sulphate pulp is madefrom pine wood at present, and the estimates of available resources assumethat this practice will be continudd in the future, there is no technicalobstacle to the use of spruce in any quantity (even up to 100%). Abouthalf of the chemicals required for the manufacture and bleaching of pulpwill continue to come from abroad. The industry should have no difficultyin obtaining the amounts required.

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35. The woodworking industry consumes about 45% of all the ]_werconsumed in Finland, but generates almost three-quarters of the power itconsumes (over one-third of the total power generated in the country).The industry's independence of purchased power will increase further inthe next few years, on the one hand because of the substantial expansionof pulp production which will provide increased amounts of steam (to alarge extent from waste liquor) for utilization in back-pressure turbines,and on the other because of an increase in the industry's hydro-power pro-duction from plants now nearing completion or firmly planned.

36. For the country as a whole, plants already under construction orfirmly planned wo.ld result in an increase in annual capacity of one bil-lion kwh per year to the end of 1961, compared with increases of 0.33 bil-lion kwh per year during the period 1945/1955 and 0.78 billion kwh peryear during the period 1956-1959. This would meet the increased require-ments of the woodworking industry and of all other power users, even assum-ing that the requirements of the latter will increase more rapidly thanthey have in the past.

Labor

37. Additional labor requirements created by the operation of theproposed Bank-financed projects would amount to about 700 workers in thefactories and about 16,700 workers in the forests, assuming for the lattera 100-day working season during the winter months. No shortages of skilledand unskilled labor are anticipated; indeed, one of the benefits expectedfrom the program is that it would reduce present unemployment, particularlyin the winter when it reaches a seasonal peak.

Transportation

38. The woodworking industry's expansion program is expected to in-crease the annual traffic volume of the Finnish railways by about 400 mil-lion net ton kilometers, or about 9.4% of the average annual traffic volumein the three years 1955-1958. During that period, however, the railwaysutilized only 85% of their traffic capacity, and were it not for the factthat the raiuirements of other users are also expected to rise, existingcapacity would be adequate to meet the requirements of the woodworking in-dustry after the completion of the program. In the last few years, railwayinvestment has made possible an increase of something over 2% a year inannual cazcity. A similar increase is provided for in the proposed budgetfor 1959, and this level of investment is expected to be maintained after1959. This should provide enough capacity to meet the total expected traf-fic volume in the foreseeable future, especially because of an expected in-crease in the use of trucks for short hauls.

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VI. NARET BROSPECTS

significantly39. As a result of the failure of world consumption of paper to rise/since 1956 and the completion since that date of expansion projects initia-ted in the preceding boom period, the pulp and paper industry finds itselffor the first time in a number of years with excess capacity. However, growthprospects are promising. (See Appendii 2 and 0-69*) On the basis ofreasonably conservative estimates, it appears that the growth in demand forFinnish pulp and paper should be great enough to absorb a large part of theoutput from the capacity that the industry plans to add by 1962. Thereshould be sufficient demand for products made mainly from chemical pulp(paper and board, other than newsprint) to permit the operation of the ex-panded capacity for paper-grade chemical pulp at a satisfactory rate withina year or two after the completion of the program. By that time, also, theoperating rates for newsprint could approach the level of 1958, when thecompanies for which Bank financing is proposed operated at a profit.

40. The market prospects for Finnish dissolving pulp (bleached pulpfor rayon) depend upon two factors about which it is difficult to predictat present: (1) the future levels of demand from the U.S.S.R. and Poland,which now take about 100,000 tons of Finnish dissolving pulp or 6010 of totalexports in 1957 and 70% of the smaller volume exported in 1958, and (2) thefuture level of western European demand for imported dissolving pulp whichin turn depends mainly on the future level of demand for rayon textiles andtire cord. Finland's competitive position in the western European marketshould improve as a result of the modernization of its facilities and itsinitiation of the production of tire-cord quality pulp, and its now smallshare in western Europe's imports should rise with any increase in westernEurope's imp'rt demands, since Sweden and Norway, now the principal suppliersof the western European market, apparently plan no expansion of capacity inthe near future. However, if the demand for Finnish dissolving pulp in allmarkets should fall short of potential production, the facilities could beused profitably for the production of paper-grade bleached pulp. The re-sulting increase in production of paper-grade pulp would be small comparedwith total Finnish production and would have only a minor effect on theoperating rate.

41. Scandinavian prices of pulp and paper have been reduced since 1957,but the declines have been limited by voluntary curtailments of output. Al-though both commodities are likely to be in easy supply, barring a suddenupsurge in demand, any further decline in prices is expected to be modest.U.S. prices have remained firm and, in real terms, are not much above his-toric lows.

* "Prospective Growth in World Pulp and Paper Consumption and Trade"

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VII. THE PROJECTS

General

42. At the time of the loan application, detailed information wassubmitted by the Bank of Finland concerning the projects and the opera-tions and financial condition of the proposed borrowers. During subsequentfield investigations, Bank representatives visited existing plants and thesites of the proposed new constructions or extensions. In meetings withrepresentatives of the proposed borrowers, the Bank of Finland and theFinnish Woodworking Association, all the additional information requiredfor forming a judgment on the soundness of the projects and the credit-worthiness of the proposed borrowers was obtained.

43. Of the 14 projects originally submitted, four were subsequentlywithdrawn and one was later replaced by one that had been previously with-drawn, leaving 10 projects for Bank consideration. Of these, nine projectswere selected as suitable for Bank financing as follows:

Net In- Estimated Per cent Previouscrease in Total IBRD_Titang __ of Total IBRD Fin-

Proiects aq:L±X _C__ Recomended Cost ancin-('000 t.) (mil. Fmk) (mil. Fmk) ('000 $ ('000 $

equiv.) equiv.)Sul-.±ate Pulp

Kemi 10 2,160 1,040 3,260 49 1,010Oulu 70 6,850 2,670 8,340 39 1,600MetsaliitonSelluloosa 70 4,280 1,500 4,690 35 310

KyiIn 47 3,530 1,590 4,970 45 5,700Myllykoski 63 2,850 1,220 3,810 43 950UnitedPaper Mills 70 3,290 1,540 4,810 47 3,160

Dissolvinf: PulpEnqvist 10 1,180 700 2,190 59 -Kaukas - 1,300 480 1,500 37 1,200Rauma-Repola 45 2.6 0 3100 38_-

2L,040 !L7 36,670 42 13,930

2/ Including F.mk 50 million financed from Loan 142-FI.2/ The first stage of an expansion program which would,

if carried out, increase capacity by 70,000 tons by 1964.

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44. IBRD loan allocations correspond with the uncovered capital needsof the companies concerned. Allocations recommended for three projects(Oulu, Kymin and Kaukas) are somewhat lower than those initially proposedbecause conservative financial forecasts indicated that the companies shouldbe able to finance a larger part of their projects from current earningsthan was originally estimated.

45. Of the proposed $37 million IBRD loan, an estimated 87% would bein foreign currencies for imported equipment and services, and the balancewould be required for equipment and materials to be procured from domesticsuppliers. The exact amount to be made available for domestically produceditems will not be determined until firm orders are placed.

Availability of Domestic EQuivment

46. Since the devaluation of the Finnish mark, domestic suppliers ofequipment for the pulp and paper industry have become increasingly competi-tive, and it seems likely that foreign exchange requirements for investmentsin this field will shrink further. Finnish manufacturers can produce stand-ard equipment for pulp and paper mills, and have already sold paper machinesabroad as well as at home. They have not yet supplied machines with thespeed and width required for the three newsprint projects. In the field ofordinary and waste liquor boilers, the Finns are already producing well con-structed, reliable and economical medium-capacity boilers and are steadilyincreasing the size of the units produced.

Domestic Financing

47. More than half of the cost of the projects would be financed byloans, incLing the proposed IBRD loan; the balance would be covered byretained earnings. The most important single source of domestic borrowingwould be the Industrial Mortgage Bank. That bank expects to raise Fmk 8billion during the next two years, for lending to the entire woodworkingindustry, by the issue of bonds to be taken up in equal amounts by each ofthe two leading commercial banks, the insurance companies and the Bank ofFinland. Governmental institutions, including the Export Levy Fund, theunemployment funds,the National Pension Fund, and the Postal Savings Bankwould be the next largest domestic source of financing. Additional loanswould be provided by the smaller commercial banks, savings banks, and co-operatives.

1escrintion of the Projects

48. The companies to which allocations would be made under the Bank'Loan are widely distributed geographically; they include two operating inthe north of Finland (Kemi, Oulu), two in central Finland (United PaperMills, Metsaliiton Selluloosa), three in southeast Finland (Kymin,]vllykoski and Kaukas), and two in southwest Finland (Rauma-Repola, Enqvist).(See map attached.)

- 14 -

49. The proposed borrowers are private corporations. The Governmenthas a large financial interest in two of the companies (Kemi, Oulu); owner-ship of two is widely dispersed among corporate and private shareholders(Kymin and Rauma-Repola); four are family or small-group enterprises(United Paper Mills, Kaukas, iyllykoski) including one'that is foreignowned (Enqvist); and one is owned by a cooperative association of forestowners (Metsaliiton Selluloosa).

50. About 45% of the proposed IBRD loan allocations ($16.28 million)would be for three sulphate pulp projects. One of these projects, Oulu,would receive over half the total allocated for sulphate pulp ($8.34 millionequivalent); the project provides for the expansion of capacity of an exist-ing sulphate mill by 70,000 tons per year, substantial increases in bleach-ing and drying capacity, and expansion of a chlorine plant by 30,000 tonsper annum to meet the requirements both of Oulu and of its two parent com-panies. The Kemi project is primarily for the modernization and expansionof chemical recovery and drying facilities and of warehouse space. Itwould result in substantial savings in fuel and transportation costs, pro-vide an additional 10,000 tons per year of sulphate pulp capacity, and laythe basis for a future expansion of pulp operations at a relatively lowcost. The Lf_gliiton SPlluloosa po&t_ is for a new mill with a capacityof 70,000 tons per year of bleached sulphate to be erected adjacent to anexisting sulphite pulp and paper mill. The mill would be the first inFinland to use birch, which is in surplus in the country, as well as pine,for woodpulp making on a large scale.

51. About 36% of the proposed IBRD investment ($13.59 million) wouldbe for the installation of three modern high-speed newsprint machines inexisting mills. The United Paper MilS project provides for the installa-tion of an 1'0,000 ton newsprint machine in a modern paper mill (Kaipola),already financed out of previous IBRD loans. It would increase that mill'scapacity by 60% and make possible a further expansion of production ofglazed newsprint. The proposed new 70,000 ton newsprint machine for NYmiwould release two smaller machines for the production of higher grade paperand would increase overall capacity for regular and glazed newsprint by47,000 tons per annum, and capacity for fine paper by 18,000 tons. The pro-posed 70,000 ton newsprint machine for Mvllvkoski would increase the news-print capacity of an existing mill by more than 50% and make possible con-siderable economies in operation.

52. The balance of the proposed IBRD loan (19%) would be for financingthree projects for the modernization and expansion of dissolving pklp capa-city. The Bauma-Renola project is part of a six-year rationalization andexpansion program designed to increase operating efficiency, reduce fuel andpower costs and raise the capacity of an existing rayon pulp mill from 70,000tons per year to an eventual 130,000 tons per year. The project includesimportant additions to all major departments and provides the possibility,if market developments make this desirable, for expansion at a future dateinto paper production, utilizing part of the pulp output. Rauma-Repola de-rives its income at present mainly from its large sawmills and from mechani-cal engineering and shipbuilding. The project would increase the profit-ability of the company's pulp operations, and reduce its dependence on its

- 15 -

large but unstable revenues from other production lines. The Enqvist pro-jjct covers a new waste liquor boiler and back-pressure turbine for anexisting dissolving pulp plant, which, together with other investments,would increase operating efficiency, reduce costs and raise productioncapacity for dissolving pulp by 10,000 tons per year. Enqvist, which isowned by French interests, is in the process of a corporate reorganization,following recent changes in the company s ownership, but this does not seemto pose any special problems. The Kaukas proiect is for a new waste liquorboiler and back-pressure turbine, the latter to be financed from the balanceof an earlier Bank loan (142-FI). This project, together with other im-provements presently under way or planned, would improve the technical stan-dards and operating efficiency of the mill, make possible substantial savingsin power costs and increase the profitability of the company's industrialoperations.

Economic Benefits

53. The potential annual foreign exchange earnings and savings fromthe projects are estimated at $50.5 million equivalent, as compared to anestimated annual foreign exchange requirement of about $9.2 million equiva-lent, including $4.2 million equivalent for the service of the proposed IBRDloans and $5.0 million equivalent for imported chemicals, fuel and replace-ment parts. When in normal operation, these projectswould provide employment for 700 persons in the plants and another 16,700persons in the forests during a 100-day felling season.

general Aspects of the Proijts

54. The projects have been considered as integral parts of the over-all construc`ion programs of the several companies over the periods coveredby the projects, taking account of all firm investment plans. The financialforecasts, in accordance with normal Bank practice, have taken account ofthe companies' total requirements and sources of financing during the con-struction period and the one or two following years of normal operations ofthe projects.

55. With only minor exceptions, the following observations apply toall projects:

a) The projects are carefully planned and well engineered, andthe construction schedules are realistic. In most cases, theborrowers have ample experience in construction work or inthe supervision of construction and machinery installation.Wherever necessary, consultants have been retained or additionalstaff hired for advice and supervision during constructionand the initial operation of the projects. Assistance in theerection of equipment will be provided by suppliers, and onall questions of steam and power by EKONO, the Finnish Associa-tion for Power and Fuel Economy, which has wide experience inthis field. Performance guarantees, where applicable, will beasked from the suppliers.

- 16 -

b) Some orders have been placed for three of the projects.For the remaining projects, design work is far enoughadvanced to make it possible for orders to be placed withintwo or three months after financing had been arranged.

c) The comoanies have competent and experienced managements,well qualified to carry out the projects and bring theminto operation.

d) Methods of procurement are satisfactory, and orders for allmajor items of equipment have been or will be placed on thebasis of competitive bids from foreign and local suppliers.

e) The cost estimates are reasonable and include adequateallowances for escalation, contingencies and interestduring construction, and the est-imates of financial re-quirements include adequate allowances for working capital.

f) The "normal capacity" assumed in the forecasts includesallowances for repairs and maintenance. In all cases itwill be possible to operate the projects for short periodsat higher than the assumed normal rate.

g) The working capital requirements have been projected fromthe present position, taking into account increases neededfor the estimated increases in sales volume and makingallowance for seasonal fluctuations and other factorsaffecting production and sales.

h) 1'_ earnings forecasts have been based on the assumptionthat sales volume will remain constant or rise graduallyin the next two to three years, and that sales will increasegradually after the completion of the projects, in line withthe conclusions of the market analysis.

i) It has been assumed that production costs and sales priceswill generally remain at current levels. In some casesadditional cushions have been included in the form of esti-mated declines in sales prices or increases in operatingcosts.

j) Depreciation allowances have been estimated conservatively,in most cases at maximum rates permitted under existinglgislation for accelerated depreciation of new equipmentand other fixed assets over a six-year period.

k) Adequate financing, in addition to the Bank loan, has beenassured from local sources, although in some cases formalagreements with the prospective local lenders have yet tobe concluded.

(from Report No. TO-201a -"Appraisal of Finnish Woodworking Projects"March 5, 1959)

57. As a rule, the Finnish companies follow rather conservativedividend policies. Their published income statements are usuallyadjusted in order to minimize fluctuations in reported annual netprofits, with the larger part of any unreported surplus usually setaside in hidden reserves, mainly in inventories. These reserves areused to cover fluctuations in raw material prices and operatinglosses in bad years. In a limited way, also, they are a potentialsource for financing capital investments, in part compensating forthe inadequate depreciation allowances permitted on equipment pur-chased before 1956, which do not provide for past inflation.

- 17 -

56. Net earnings throughout the construction period are expected topermit distribution of dividends in amounts varying from company to company,depending on their earning power and financial strength. After the comple-tion of the projects, some companies would accumulate considerable cash sur-pluses in excess of requirements. These funds could be used for additionalworking capital, new capital investments or debt repayment, depending on thecompanies' requirements and management policies.

57. As a rule, the Finnish companies follow rather conservative divi-dend policies. Their published income statements are usually adjusted inorder to minimize fluctuations in reported annual net profits, with the:Larger part of any unreported surplus usually set aside in hidden reserves,mainly in inventories. These reserves are used to cover fluctuations inraw material prices and operating losses in bad years. In a limited way,also, they are a potential source for financing capital investments, inpart compensating for the inadequate depreciation allowances permitted onequipment purchased before 1956, which do not provide for past inflation.

58. The actual as well as the reported financial position and pros-pects of the prospective borrowers have been reviewed in detail. Generalagreement was reached on the methods of financing the programs, and on thecompanies' dividend and reserve policies.

59. The Bank of Finland has agreed that, if the proposed Bank loanis granted, it will undertake to make adequate arrangements for funds tobe provided to cover any shortfall in the financing of the projects or,during the life of the Bank loan, any possible shortages in the workingcapital of the companies. i

60. Fo'r the purpose of calculation, it was assumed that the interestrate on the proposed loans from Bank funds would be 6j% (including a $fee of the Mortgage Bank) and that the terms of the loans would be 15 years,including grace periods of 3 years, except in one case where a grace periodof 21 years has been assumed. For loans or proposed loans from local sources,it was assumed that interest rates would be 7% to 8%, and the terms of the:Loans would be between 10 to 20 years, including grace periods of up tothree years. The interest rate on loans from the Export Levy Fund is 5%.

VIII. GENERAL CONCLUSIONS

61. The nine projects selected would form a suitable basis for a Bankloan to the Mortgage Bank of Finland 0y of about $37 million equivalent,f'or a term of 15 years (including a three-year grace period), to be relentby the Mortgage Bank to the companies.

APPENDIK 1Page 1

MORTGAGE BANK OF FINLAND OY

Purpose and Organization

The Mortgage Bank of Finland Oy is a public institution set up in1956 under the Finnish Mortgage Credit Bank Law by a decision of the StateCouncil of December 23, 1955 to replace the Bank of Finland as a channelthrough which foreign long-term loans could be re-lent to Finnish enter-prises. It was felt to be inappropriate for the Bank of Finland to continueto act in this way.

The Mortgage Bank is owned, staffed, and managed by the Bank ofFinland. Of the Bank's board of five, the Chairman and three other membersare representatives of the Bank of Finland (including a representative of theTervakoski Paper Mill, a subsidiary of the Bank of Finland). The fifth mem-ber represents the National Pension Fund, which has a minority interest (16)in the Mortgage Bank.

Powers

Under its Articles, the Mortgage Bank is authorized to grant loansfor not more than 20 years, against mortgages, in amounts not exceeding 60%of the appraised value of the mortgaged real estate. It may also acceptadditional liens in the form of guarantees of the Finnish Government, banksor corporations.

The bank obtains its funds mainly from long-term foreign loans andmust secure itself against losses arising from fluctuations in foreign ex-change by protective arrangements in its own loans. The bank's total loansand other commitments must not exceed 20 times the total amount of its sharecapital, reserve fund and debentures. The bank may also contract short-termcredits up to twice the amount of its own funds.

Under Section 5.04 of the IBRD Loan Agreement of May 22, 1956(12-FI), the Mortgage Bank may not, without IBRD agreement, borrow or engagein operations other than the relending of the proceeds of the Bank loan.Excepted from that provision is the sale by the Mortgage Bank to its share-holders of debentures, which are junior to all other liabilities of that bank.It is proposed to repeat these provisions in connection with the loan underconsideration.

Capitalization

The Mortgage Bank has a subscribed and fully paid up share capitalof Fmk. 200 million, represented by 200 shares of one million marks each, ofwhich 99% are held by the Bank of Finland, $% by the Tervakoski Paper Companyand !% by the National Pension Fund. In addition, the Mortgage Bank hasissued Fmk. 150 million in 5% debentures, all held by the Bank of Finland.Under its present authority the bank can issue an additional Fmk. 100 millionin share capital and Fmk. 150 million in debentures. In connection with theexisting IBRD Loan Agreement 142-Fl, the Bank of Finland has taken on a

APPENDIX 1Page 2

commitment, that it will not, during the life of the IBRD loan, without theBankfs consent, dispose of any part of its holdings of the Mortgage Banktsequity capital, nor take or permit any action which would deprive it of ef-fective control of the Mortgage Bank, nor permit the capital of the MortgageBank to be reduced. It is proposed to obtain a similar commitment in respectof the loan under consideration.

.perations

In the past three years of its operatiois, the Mortgage Bank hasreceived two foreign loans ecouivalent-to Fmk. 9,280 million, i.e. an IBRD loanof $15 million (142-FI of May 22, 1956) at h-3/A% for five power projects anda loan of $1h million from the Export-Import Bank (as agent for ICA-PL 480funds) of February 17, 1958 for two projects in the power and woodworkingsectors (Kemijoki and Tampella). The Export-Import Bank loan is at 3% interestfor 6 years, free of interest in the first four years, repayments starting May1, 1962.

To date, the Mortgage Bank has invested Fmk. 80 million of its ownfunds in medium term loans (five years) for oil storage projects. An addi-tional loan of Fmk. 20 million to a power company (Etela Pohjanmnaan Voima Qy)is under consideration.

The Mortgage Bank charges 7-N on loans from its own funds, and amark up of 1j% to 2p"a on loans from EKport-Import Bank funds, and of 0.2/0*3%on loans from IBRD funds, plus a fee of 0.15% on the total amount of theBank loan.

Earnings

In 1957 the Mortgage Bank reported a net profit of Fmk. 6.1 millionor 3% on its share capital. Of this amount, Fmk. 2.4 million was used tocover the loss of 1956, FWk. 3.0 million was set aside to Reserve and thebalance, FMnk. 0.7 million, was carried forward. Because of the availabilityof large interest-free funds under the Export-Import Bank loan, the MortgageBank's earnings may be expected to rise considerably in the next three years,increasing the bank's net profits to several times the 1957 figure.

Financial Position and Prospects

A summary of the Mortgage Bank's financial position as at November 29,1958 is given below (in million Flk.):

Assets Liabilities

Bank of Finland Foreign loans 6,337Deposit of Kemijoki funds - - Debentures 150(per contra) 2,462 Deposit (Kemijoki) 2,462Other deposits 42 Transitory items 73Other banks 80 Share capital 200Irvestments in securities 131 Reserve and surplus 4Loans outstanding 6,418Other assets 93

Total Assets 9,226 Total Liabilities 9,226

APPENDIX 1Page 3

Its foreign indebtedness, reported as Fmk. 6,337 million, included the entireExport-Import Bank loan of Fmak. 4,48o million and the withdrawals from theIBRD loan, amounting to Fmk. 1,857 million. When the IBRD loan has been fullyutilized, the Mortgage Bank's indebtedness will have increased to Fmk. 9,280million. Its present debt ceiling is Fmk. 7,053 million.

Steps are being taken (which should be completed before a Bank loanis signed) to increase the limit on borrowings by Fmk. 5,000 million throughthe issue to the Bank of Finland of Fmk. 100 million new shares and Fmk. 150million debentures. Taking into account the increase in earned surplus ex-pected to accrue during the next three years, the steps now being taken toincrease the debt ceiling appear adequate to cover drawings under the existingand proposed Bank loans.

If later there appears to be any doubt about the prospective adequacyof the debt ceiling, it would be a simple matter without delay to increase theequity basis.

APPENDIX 2Page 1

HARKET PROSPECTS FOR FINISH PULP AND PAPER

Summary aud Conclusions

The investment program of the Finnish pulp and paper industry,besides making possible significant reductions in cost and improvementsin quality, would increase capacity by about 25% in chemical pulp and 30%in newsprint by 1962/1963, compared with 1958. Although the failure ofworld consumption of paper to rise since 1956, while additional capacityhas continued to come in, has resulted in the emergence of excess capacityfor the first time in a number of years, growth prospects appear good.

On the basis of reasonably conservative assumptions as to thepotential growth in demand for Finnish pulp and paper, it appears that theFinnish chemical pulp industry could operate at satisfactory rates withina year or two after the completion of the program. In newsprint, the op-erating rates could approach those of 1958 by the same time. Althoughnewsprint production in that year amounted to only 74% of theoretical ca-pacity, the rate would have been 82% if the capacity of small marginalmachines were excluded and the mills for which Bank financing is requestedall operated at 80% or over and earned a profit. The reductions in costthat are a major aim of the investments to be made in this branch of theindustry should further improve their financial position.

The market prospects for Finnish dissolving pulp (bleached pulpfor rayon) depend upon two factors about which it is difficult to predictat present: (1) the future level of exports to the U.S.S.R., Poland andother eastern European countries which now account for 60lo-70% of totalFinnish exports, and (2) the future level of exports to western Europe,which, in urn, depends mainly on the future level of demand for rayontextiles and tire cord. The modernization of dissolving pulp facilitiesand the installation of capacity for the manufacture of tire cord pulpwould improve Finland's competitive position in western Europe, whereFinnish exports of dissolving pulp are now small. However, if the increasein demand for dissolving pulp were insufficient to absorb the additionaloutput on completion of the program (70,000 tons by 1964), the facilitiescould be used profitably for the manufacture of paper-grade bleached pulpuntil demand for dissolving pulp had risen further.

In spite of the emergence of excess capacity for pulp and paperin the principal producing countries, price declines in Europe have beenmodest, and no significant further decline is expected. U.S. prices haveremained firm, and in real terms are little above historic low points.

APPENDIX 2Page 2

Expansion Propram

The projects in the Finnish pulp and paper industry for whichBank financing has been requested constitute a substantial part of theinvestment program that the entire industry expects to carry out over thenext few years. The total increases expected from the industry's entireprogram (taking account of all projects that can be regarded as reasonablyfirm) and the increases expected from projects proposed for Bank financingare shown below. Further details are given in Table I.

Ttala eiy _ _ qg2_ Increase, IBRD Projects128 1962/63 (th.tons) () (th.tons) (% Total- (th.tons) - Program)

Chemical Pulpi 2,340 2,950 610 26 205 33Newsprint Y 840 1,080 240 29 180 67Other Paperand Board 1,109 1,460 352 32 - -

The program is scheduled for completion by 1962", but takingaccount of possible delays in the starting and execution of projects andthe time required to get new facilities into operation, it seems safer toassume that the new equipment would not be able to operate at normal ca-pacity until 1963.

This paper will consider the prospects for the main products ofthe Finnish pulp and paper industry. In attempting to arrive at a judgmenton demand for these products when the program is completed, it takes accountof estimates of prospective growth in world demand for pulp and paper setforth in EC-69.

Maior Characteristics of the Finniah Industry

The ability of the Finnish industry to dispose of a substantialpart of the additional output it will be capable of producing after com-pletion of the program depends, of course, on developments in the worldmarket. The industry operates very largely for export. About 50-55% ofits output of chemical pulp is exported as pulp and 70% of the balance(which is retained for processing) is exported as paper. Most of itsmechanical pulp output is used for the production of newsprint, but 90%of the newsprint is exported. (Table IV)

l/ The additional pulp would be used in part for the additional paper andboard to be produced, and the balance would be exported as pulp.

2/ Newsprint capacity includes small machines that operate only in periodsof peak demand; these account for roughly 10% of the total. Part ofthe increase of 240,000 tons would come from a machine that beganoperating in 1958, but will not reach full capacity until this year.

1/ Except for 15,000 tons of the 70,000 tons of capacity for dissolving pulp(bleached rayon pulp) to be added which would not come into operationuntil 1964.

APPENDIX 2Page 3

Finland's principal market is western Europe which takes about75% of its exports of paper-grade chemical pulp, 50%-55% of its exportsof newsprint, over 60% of its exports of kraft paper and 35%-45% of itsexports of other paper and board. (Table V). In this respect, the Finnishpulp and paper industry resembles those of Sweden, Norway and Austria.The forest resources of Europe (ex. the Soviet bloc) are concentrated inScandinavia and, to a lesser extent, Austria, and the latter countriesproduce the bulk of western Europe's woodpulp (94- million tons out of atotal of 12 3/4 million tons in 1957), besides exporting sizeable quanti-ties of pulpwood to the other western European countries for their manu-facture of woodpulp. In addition, in spite of relatively high tariffs onpaper and board in the pulp importing countries (except for newsprint whichis admitted free and kraft paper which takes lower than average duties)Scandinavia and Austria produce about 30% of the region's paper output (5.2million tons out of a total of 17.1 million tons in 1957).

Although the pulp and paper surpluses of Scandinavia and Austriaexceed the deficits of the other countries in western Europe, and the latterrely most heavily upon Scandinavia and Austria for imports, western Europealso imports pulp and paper from North America. In turn, western Europeexports pulp and paper to North America, also a net surplus area. NorthAmerica and western Europe, which account for roughly 90% of the world'sproduction and consumption of pulp and paper (about 57 million tons in 1957),together make good the deficits of the rest of the world.

Finland, which ranks second to Sweden in Europe as a producer andexporter of pulp and paper and is the leading European exporter of newsprintand kraft paper, has a very diversified market. (See Table V). Outside ofwestern Europe, its leading markets are the U.S., Latin America and theSoviet bloc. Exports to the U.S. have declined (in tonnage terms) sincethe mid-1950s but still represent a large fraction of total Finnish exportsof newsprint (17%) and kraft paper and board (13%). Latin America alsotakes about 17% of Finnish exports of newsprint, as well as 11% of paperother than newsprint and kraft and around 10% of the chemical pulp. Ex-ports to Latin America have been rising. Finnish exports to the Soviet blochave increased markedly in the last few years and in the first 10 months of1958 represented 70% of the total in dissolving pulp, 40% in cardboard and25% in paper other than newsprint and kraft. Finnish exports to other mar-kets consist mostly of paper.

Post-War Growth

The rapid post-war growth of world paper consumption (6-2% per yearcompared with about 4V11 per year for the entire period since the early1920s) and particularly in western Europe (9.5% per year since the war)provided the basis for an equally rapid expansion of Finnish pulp and paperproduction. Chemical pulp capacity, reduced as a result of territorialcessions to the U.S.S.R., from about 1.87 million tons pre-war to about 1.4million tons, increased to 2.34 million tons by 1958. (Table III). Pro-duction of board and of kraft paper have each increased more than threefoldsince 1950, production of other paper (except newsprint) has more thandoubled, and production of newsprint has increased more than 50%. (Table III)

APPENDIX 2Page 4

From 1954 to 1957, the Finnish industry, like the pulp and paperindustries in other countries, operated very close to capacity (Table III).In 1958, when for the second successive year, world demand for paper failedto show any increase while projects started in the boom period continued tocome in, Finnish operating rates fell. Nevertheless, the operating ratesfor chemical pulp, cardboard, and paper other than newsprint were around90% in that year. In newsprint, production in the first 10 months of theyear represented only 74% of theoretical capacity. (Table II). However,if the capacity of small marginal machines is excluded, the operating ratefor the industry would have been 82%, and the mills for which Bank finan-cing is requested all operated at 80% or over and earned a profit.

Current Situation in the World Pulp and Paper Market

sign ,ficantThe failure of world demand for paper to rise/since 146, whileadditional capacity has continued to come in, has resulted in the emergenceof a surplus of productive capacity for the first time in a number of years.The study of prospective growth in world pulp and paper consumption referredto above concludes that, although the problem of excess capacity seems lessserious now than at the beginning of 1958, pulp and paper are likely to bein easy supply in the early 1960s, barring a boom comparable to that of1955-1957. Nevertheless, the study also concludes, the prospects for growthin demand for pulp and paper by the mid-1960s are such as to make it seemprobable that there will be a substantial increase in world trade (whichis of course the major concern for Finland) by that time. The estimatesof growth in demand for pulp and paper given in that study are based onpost-war relationships between growth in demand for paper and economicgrowth and on estimatlq of growth in gross national product prepared bythe Bank's economists . For the world as a whole, the 1955-1965 growthrate in paper consumption is estimated at 4.41-4.8% per year, compared witha growth of about 6)-% per year in the post-war period. This estimate isderived from estimates of growth in paper consumption in the various regionsof the world. The estimated rate of growth for Europe, Finland's principalmarket, is 4.6%-5.9% per year, compared with 9.5% per year in the post-warperiod. Although the growth rate is expressed as a range, the study con-cluded that it would be prudent to take the minimum estimate as the basisfor projections.

These estimates form the basis for the more detailed estimatesof prospective demand for the major products of the Finnish pulp and paperindustry which follow.

I/ Report No. EC-68, World Economic Growth, 1955-1962.

APPENDIX 2Page 5

PulD

Paper-Grade Chemical Pulp

In 1958, Finland's total annual capacity for the production ofchemical pulp amounted to 2.34 million tons. This included 2.15 milliontons for the production of paper-grade pulp (sulphite and sulphate). Theprogram calls for an increase of about 540,000 tons per year in capacityfor paper-grade pulp. From 1955 to 1957, the industry operated at wellover 90% of capacity; in 1958, the operating rate was just under 90%. Ifsales increased by 400,000 tons, the industry would be able to operate at85% of capacity after completion of the program; an increase of 500,000tons would make possible an operating rate of 90%.

The principal market for the bulk of this output would be westernEurope. In estimating the magnitude of the potential increase in westernEuropean demand for chemical pulp, it has been assumed that in the nextfew years demand for paper and board other than newsprint (i.e. paper andboard made mainly from chemical pulp3 would increase at roughly the same rateas newsprint, i.e. about 4.6% per year. In the post-war period, westernEuropean demand for newsprint increased somewhat more rapidly than demandfor other paper (10.5% per year as against 9.5%). An CEEC study suggeststhat with the spread of modern packaging methods, demand for paper and board,other than newsprint, will increase more rapidly than demand for newsprint(in the U.S. the post-war rates of growth in consumption of newsprint andother paper and board were respectively 3.4% and 5% per year). The mostreasonable assumption for the near future would seem to be that demand forboth categories of paper in western Europe would increase at roughly thesame rates.

An increase of 4.6% per year in the demand of the western Europeanimporting countries (i.e. western Europe ex Scandinavia and Austria) forpaper and board, other than newsprint, would mean an increase in their re-quirements compared with 1957 of 2.0 million tons by 1962 and 3.3 milliontons by 196/4. In terms of pulp, at current conversion factors, theirincreased requirements would amount to 1.1 million tons in 1962 and to 1.8million tons in 1964. The study of prospective world demand for pulp andpaper referred to above concluded that the pulp importing countries of wes-tern Europe could probably not increase their production of all grades ofpulp (mechanical, paper-grade chemical and dissolving) by more than 185,000tons a year on the average between 1957 and 1965. Assuming that the expan-sion would be distributed among various grades of pulp in the same propor-tions as in the past few years, these countries could probably not increasetheir production of paper-grade chemical pulp by more than 100,000 tons peryear. Their import requirements for paper-grade chemical pulp and papermade mainly from it might thus be expected to increase, compared with 1957,by 615,000 tons (pulp equivalent) by 1962 and 1.40 million tons by 1965.

APPENDIX 2Page 6

Finland shoi1d have no difficulty in maintaining its presentshare in this market (roughly 25%). The OEEC has expressed doubts as tothe ability of Norway to continue to expand its output of forest productsat the same rate as in the past, and Austria, too, has a limited raw ma-terial base for expansion. If Finland maintains its share in this marketit would be able to increase its sales, compared with 1957 by close to300,000 tons (pulp equivalent) by 1964.

Finland's market prospects outside of western Europe are moredifficult to assess. Finnish exports to the U.S. have declined, and pro-jections of demand and potential production in the U.S. suggest that itwould be prudent to assume that there will be no increase from 1958 levelsand possibly even a further decline. The Soviet bloc market which israther important for cardboard and paper other than newsprint and kraft isunpredictable. Finland's exports to other markets are small, and the in-dustry may meet competition, particularly in Latin America from domesticproducers and from the U.S. However, in view of the expected large in-creases in demand for paper throughout the world, it should be possiblefor the Finnish industry, with its world-wide market connections, to in-crease its exports of paper-grade chemical pulp and paper to all marketsother than western Europe by 1965, by say 10% compared with 1957. Exportsto these markets (in pulp plus pulp equivalent of paper) amounted to 460,000tons in 1954/1956 and to 475,000 tons in 1957.

An estimate of demand in 1962-1964 for Finnish paper-grade chemi-cal pulp which takes account of the potential increases in exports discussedabove and of an increase in domestic consumption, is compared below with ex-pected capacity on the completion of the prsposed expansion program (milliontons):

Capacity Production Operating Rate

ActMA11954-1956 1.69 1.59 94.11957 1.98 1.87 94 71958 2.15 1.90 88.5

Estimated1962 ) 2.13 791963 ) 2.68 2.21 821964 ) 2.29 85

1/ Annual rate based on first 10 months.

APPENDIX 2Page 7

On reasonably conservative assumptions, therefore, the industryshould be able to operate at 85% of capacity (a satisfactory rate) by 1964,only a year after the new facilities may reasonably be expected to be ableto operate at normal capacity. If western European demand for paper shouldincrease more rapidly than the minimum rate which has been assumed, or if--as is not improbable-Finland can increase its share in western Europeanimports, the operating rate could be higher.

Sulphate and Sulphite

Qf the proposed increase of 540,000 tons in Finnish paper-gradechemical pulp capacity, 400,000 tons would be for sulphate pulp, and140,000 tons for sulphite. The outstanding development in the paper in-dustry since the war has been the very great increase in consumption ofkraft paper and board, made from sulphate pulp. In the OEEC countries,production of sulphate pulp increased by 77% between 1950 and 1957, com-pared with an increase of only 30% in paper-grade sulphite. A number offactors have contributed to this development: on the one hand, lower pro-duction costs for sulphate, both because the process permits utilizationof a wider range of woods than does the sulphite process and because untilrather recently only the sulphate process made possible the industrialutilization of waste liquor or the recovery and further utilization ofchemicals on a large scale; and, on the other, the greater strength of sul-phate paper and board which makes them especially suitable for use as pack-aging materials. In spite of recent improvements in the sulphite process,sulphate production costs are still somewhat lower, and these advantages,plus the expected continued spread of modern merchandising and packagingmethods in Europe should lead to continued greater than average growth indemand for sulphate papers and pulp.

Finland has been in the forefront of this development. Between1950 and 1958, Finnish capacity for sulphate pulp doubled, as against anincrease of less than 50% for sulphite. The Finnish pulp and paper industryfinds its greatest advantage in the production of bulk items; its sulphatemills are large and efficient; and it should have no difficulty in meetingcompetition in this rapidly expanding market.

Bleaching Capacity

Another feature of the program for the chemical pulp industry de-serves special mention--the proposed expansion of bleaching capacity by 75%to raise it from 22% of total paper-grade chemical pulp capacity in 1958 toone third of the total in 1962. This expansion is a response to a growingdemand for higher quality papers which require bleached pulp. In the U.S.,bleached pulp accounts for about 45% of total consumption at present. InEurope, there has been a striking increase in the use of bleached pulp inrecent years: between 1952 and 1957, bleached pulp consumption increasedfrom 32% to 44% in Germany and from 25% to 38% in the U.K. That consumptionof bleached pulp might have risen even faster is indicated by the fact thatin 1957, when the pulp market eased and bleached pulp became more readilyavailable, British consumption of bleached pulp jumped to 38% from 30% in1956.

APPENDIX 2

Page 8

A U.3. Department of Commerce study indicates that U.S. consump-tion of bleached pulp is likely to increase further, and European consump-tion may be expected to show a parallel development. The bleaching capa-city of the Finnish industry is relatively small (22% compared with 36% inSweden, 40% in Austria, and 60% in Norway) and the proposed expansion wouldenable Finland to share in the growing market for bleached pulp.

Dissolving Pulp

In dissolving pulp (bleached pulp for rayon) the present programhas the following main aims: modernization of the somewhat out-of-datefacilities and expansion of capacity by 70,000 tons a year by 1964. Themarket prospects for Finnish dissolving pulp depend mainly upon two factorsabout which it is difficult to predict at present: (1) the future levelof exports to the U.S.S.R., Poland and other eastern European countrieswhich now take about 100,000 tons of Finnish dissolving pulp a year (60%of total Finnish exports in 1957 and 70% of the smaller volume exported in1958), and the future level of exports to western Europe.

About 60% of the dissolving pulp requirements of western Europeex Scandinavia and Austria are met by imports at present, and if their de-mand should rise, as a result of an increase in demand for rayon textilesand tire cord, they would probably find it economical to cover a largefraction of the increase through imports. Finland's competitive positionin this market should be improved by the modernization of its facilitiesand the initiation of the production of tire-cord quality pulp, and itsnow small share in western Europe's imports should rise with any increasein their magnitude, since Sweden and Norway, now the principal suppliersof this market apparently plan no expansion of capacity in the near future.

If the demand for Finnish dissolving pulp should fall short ofpotential production, however, Finnish facilities could be used for the pro-duction of highly bleached paper-grade pulp with only a small reduction inprofit margins. The resulting increase in production of paper-grade pulpwould be small compared with total production and would have only a minoreffect on the operating rate for the latter.

APPEIM T 2Page 9

Price Prospects - Pulp

Although Scandinavian woodpulp prices have been falling sincethe beginning of 1957, the decline has been relatively modest. By thethird quarter of 1958, the price of unbleached pulp had declined by about1$, that of bleached paper-grade pulp by about 7.5%, and the price ofdissolving pulp by about 6% compared with 1956. (See T,ble VI). Paper-grade pulp prices were reduced by another 2% in the fourth quarter of 1958,but were maintained at that level in the first quarter of 1959. Dissolvingpulpprices were reduced by about 4% in the first quarter of this year. IfEuropean consumption fails to rise in 1959, some further reduction in pricesmay occur, but the decline would Probably be limited, as it has been since1957, by continued restrictions of pulp output by the Scandinavian producers.

During this period, U.S. prices have shown no decline (Table VII),and assuming a continued economic recovery in the U.S., no decline in U.S.prices is expected. In real terms, the U.S. price of bleached pulp isroughly the same as it was in 1954 when the market was depressed, and theprice of unbleached pulp about 10% above that level. Compared with 1926-1929, the earliest period unaffected by depression or war for which dataare available, there has been no change in the price of bleached pulp andan increase of about 20% in the price of unbleached. As demand for paperand pulp grow, however, it becomes necessary to tap more and more remotesources for wood, and real prices may be expected to show a rising tendency.In the near future, if the growth of demand for pulp and paper is in linewith present expectations, real prices are unlikely to fall below 1954 levels.

APPENDIX 2Page 10

Paper

Newsprint

Of the expected increase of 240,000 tons per year in annualproductive capacity for newsprint (compared with 1958), 60,000 tonswould come from a machine completed in 1958 which is expected to reachcapacity this year. The balance would come from three new machines,one of which would replace an existing smaller machine which would beconverted for the production of another type of paper. Of the new ma-chines, two are being installed by companies which now have only older(rebuilt) machines that are below best modern standards in speed andin the width of paper that they can produce. Their installation wouldenhance the ability of the companies installing them to meet currentcompetition. The third machine would be installed to expand the capacityof a modern plant at a relatively low cost because many of the ancillaryfacilities are already in existence. The expansion of capacity is, there-fore, in part incidental to modernization, on the one hand, and to a ful-ler utilization of existing facilities, on the other.

As in paper-grade chemical pulp (though to a lesser degree)western Europe is Finland?s principal market for newsprint. In estima-ting Finland's prospective exports to western Europe, it has been assumedthat western European consumption of newsprint will increase at a rate of4.6% per year, that the bulk of this increase will be covered by domesticproduction in the importing countries (the estimated increase in produc-tion of newsprint is in line with the estimate in the world market studycited above - EC-69 - that total pulp production in Europe ex Scandinaviaand Austria is unlikely to exceed 185,000 tons per year), and that Finlandwill supply about 30% of total import requirements. Finland's share inwestern Europe's newsprint imports was about 25% up to 1957, but rose toan estimated 30% after devaluation, and it does not seem unreasonable toassume that it can continue to supply about 30% of these import needs, es-pecially in view of the improvement in the competitive position of theFinnish newsprint industry that should result from the present program.That program would not only reduce costs and make possible an increasedproduction of maximum-width paper, but also, through the installation ofsupercalenders, substantially increase capacity for the production of glazedrewsprint. There is a growing demand for glazed newsprint in western Europefor the production of special picture and magazine supplements to newspapers,and the program will enable the Finnish producers to take advantage of thisgrowiig market,

On the above assumptions, Finland's exports of newsprint towestern Europe could increase (compared with 1957) by about 85,000 tonsby 1962 and 125,000 tons by 1964. This estimate appears conservative, inview of the fact that Finnish exports to western Europe increased by 55,000tons (20%) in 1958 - based on data for the first 10 months of the year.

APPENDIX 2Page 11

In spite of the fact that Finnish exports of newsprint to theUS have declined since 1957, and it seems prudent to expect no significantrecovery, it should be possible for Finland to increase its total exportsto all countries outside of western Europe by a modest amount by 1962-1964.,say an increase of 15,000 - 25,000 tons over the 290,000 tons exported tothese countries in 1957. An estimate of demand for Finnish newsprint in1962-1964 which takes account of the estimated increases in exports notedabove and of an increase in Finnish domestic consumptions is compared be-low with expected capacity on the completion of the present expansion pro-gran (in thousand metric tons):

Theoretical Capacity excluding OperatingProduction Caacity Marginal Machines Rates ()

(A) (B) (A) (B)

Actual 1956 5241957 6261958 623 843 760 74 82

Estimated -1962 735 ) ) 68 761963 765 ) 1,080 ) 970 71 791964 800 ) ) 7h 83

The estimates indicate that, on reasonably conservative assump-tiLons, the Finnish newsprint industry could operate at a rate roughly equalto the 1958 rate. In that year, the mills for which Bank financing is re-quested all operated at a rate of 80% or over, and earned a profit.

Newsprint Prices

Although the price of Scandinavian newsprint, like that of wood-pulp has been declining since the beginning of 1957, the decline has beeneven more modest than in the case of woodpulp. In the second quarter of1958, prices were about h% lower than in 1956 (see Table VI); a further re-duction of 3% was announced for the first half of 1959. Demand for news-print shows little response to changes in prices, and the industryts prac-tiLce of marketing newsprint in long-term contracts makes for great stabilityin prices. US prices have shown no decrease in the past two years, and nosignificant decline is expected. In real terms, US prices are only slightlyhigher than they were in 1926- 1929 immediately preceding the depression.

Paper other than Newsprint

The companies for which Bank financing is requested produce varioustypes of paper other than newsprint but little board, and the following com-ments are therefore limited to the market prospects for paper.

The proposed expansion in capacity for other types of paper ismodest, and the Finns should have little difficulty in marketing their in-creased output. In kraft paper, the increase would amount to about 32,000

APPENDIX 2Page-1r

tons (12% of 1958 capacity of 275,000 tons). In the period since 1955,when demand for kraft paper rose very slightly, the increase amounted to8% (1955/1956 to 1957/1958). If the increase in demand for Finnish kraftpaper over the decade 1955-1965 should be no greater than 4% a year, theindustry would be able to operate its expanded capacity at 85% in 1962and 90% in 1963.

The proposed increase in capacity for paper other than news-print and kraft (which includes writing and printing paper, sulphitewrapping paper, glassine, etc.) amounts to about 80,000 tons, or 23%of 1958 capacity of 350,000 tons. Finnish production of these papershas been growing rapidly, and the industry operated at over 90% of ca-pacity in 1958. An increase of 60,000 tons in sales would suffice toenable the industry to operate at 90% of capacity by the time the expan-sion program is completed. In the three years 1954-1957, exports in-creased by over 70,000 tons (25,000 tons to western Europe, 30,000 tonsto the Soviet bloc, and about 15,000 tons to other markets). In 1958,the Finns increased their exports of these types of paper to westernEurope by another 5,000 tons. It should not be difficult for them toincrease sales both to export and domestic markets by another 60,000tons over the next four to six years.

The Free Trade Area

The market prospects of the Finnish pulp and paper industryare not expected to be affected significantly by the establishment ofthe European Common Market of the "Six" since tariffs on pulp and paperin these countries are already fairly uniform. The establishment of theproposed Free Trade Area would also probably not affect materially itssales to we2'ern Europe of pulp and newsprint, the most important of itswood products exports, since these items are subject to little or no pro-tection by importing countries. On the other hand, its participation ina Free Trade Area, if one were established, would afford it an opportunityto increase its sales of paper and board, other than newsprint, since theseproducts are now rather highly protected in western Europe. In the eventthat such an Area were established, and Finland did not participate, itstands the risk of becoming a residual supplier of these items in the wes-tern European market.

L A P LA N D

LOCATION OF FINNISHWOODWORKING PROJECTS

0 25 50 75 100 Miles

0 25 50 75 100Km.

I (KEMI KEMI

SULPHATEPULP j

U. S. S.R.NE WSPRINT

DI SSOLVI NG O

PULP PULP RAAHE

RAILWAYS

KOKKOLA

PIETARSAARI-

UUSIKAARLEPYY mi

VAASA

Lok

M T TAJOENSUU

KASKINEN ELLUL A S ANE

KRISTilNA JYVA YLA å

KAIPOLA IL)

P IRMVILILN SAVONLINNA

MÅNTYLUOTO ENOVIS MIKKEL

PORI TA PR

RAJMA HEINOLA

DRA A -R POLA AHIKY MENýAPPEENRANTA

UUSIKAU PUNKI )HAMEENLINNA AH D KAUKASLYKOSKI,

M LYKOSKI N

IIIRKIIHAMINATUK BO PORVOO . KOT KA

L VIlSA

TAMMISAARI

HELS11NK1

BA4L TIC SEA HAKGU,i

FEBRUARY 1959 IBRD-555R

TABLE I

PROPOSED EXPANSION OF FINNISHWOODWORKING CAPACITY, 1958/1962

(Thousand metric tons)

Theoretical Capacity Increase 1958/19621229 Tons .

Mechanical Pulp 1,300 1,500 +200 *38

Chemical PulSulphite Pulp:Dissolving Pulp 195 26%j + 70 +36Paper Grades 1,020 1,160 +140 +14

Sulphate Pulp 1,125 1.25 +400 +35

Total Chemical 234 0 +610 +

Newsprint2/ 840 1,080 +240 +29Kraft Paper 274 306 + 32 +12Other Paper 350 430 + 80 +23Board 485 725 +240 +49

Paver Grade Chemical Pul

SUlDhiteBleached 273 468 +195 +71Unbleached Z47 69 -5 --'Total Sulphite 1,020 1,160 +140 +14

SulphateBleached 200 430 +230 +115Unbleached M-M+162 +_Total Sulphate 1,126 1,525 +399 + 35

Grand Total +. +2

/ Epansion to be coupleted by 1964. In 1962 the additional capacitywould amount to an estimated 35,000 tons; in 1963, to an estimated55,ooo tons.

2 Includes capacity of small machines operating only in peak periods whichaccount for at least 10% of the total.

TABLE II

FINLAND: PRODUCTION OF PAPER AND PULP, 1936-1938, 1950-1958(Thousand metric tons)

Paper-GradeMechani- Chemical Dissol- Sulphite Sulphate News- Kraft Othercal Pulp Pulp ving Pull p PP prit Paer PaSg Boar

1936-1938 average 766 1,424 591/ 902 463 397 47 122 123

1950 644 1,194 65 654 475 403 67 158 1311951 699 1,383 80 742 561 410 83 192 2011952 640 1,156 85 629 442 431 80 174 1371953 690 1,125 100 545 480 438 109 193 1921954 715 1,582 143 733 706 445 167 228 2481955 780 1,831 163 846 822 526 202 276 2791956 845 1,859 160 842 857 600 203 300 2941957 2 847 2,076 188 886 1,002 626 222 319 3871958 n.a. 2,078 179 925 974 623 216 324 424

Increase per annum (%)1950-1957 4.0 8.2 16.7 4.4 11.3 6.5 18.7 10.4 16.81954-1957 5.8 9.5 9.5 6.5 12.4 12.0 10.0 11.9 16.0

Capacity, 1958 1,300 3 2,341 195 1,020 1,126 N 275 350 485Operating Rate 65 89.8 91.8 90.7 86.5 73.9 78.5 92.6 87.4

Source: Central Association of Finnish Woodworking Industries.

1/ 1935-1938 average./ Annual rate based on first 10 months.

/ Includes old grinding capacity unused since the regulation of Finnish rivers and lakesmade it unnecessary to use extra grinders in the high water season.

4 1957.Includes capacity in small marginal mills operating only at peak periods, estimated at

about 10% of the total.

TABIE III

FINLAND: CHMICAL PULP CAPACITY AND PRODUCTIONPREWAR. 1950/1958

Chemical PlCapacity 1,870 1,418 1,433 1,514 1,520 1,662 1,893 1,992 2,168 2,341Production 1,424 1,193 1,385 1,158 1,132 1,572 1,818 1,851 2,062 2,078

Operating Rate 76.1 84.1 96.7 76.5 74.5 94.6 96.0 92.9 95.1 88.8

Sulphite PulnCapacity 1,150 860 854 879 885 936 1,030 1,076 1,144 1,215Production 961 717 821 713 651 866 995 994 1,060 1,104

Operating Rate 83.6 83.4 96.1 81.1 73.6 92.5 96.6 92.4 92.7 90.9

Sullphate PulpCapacity 720 558 579 635 635 726 863 916 1,024 1,126Production 463 476 564 443 481 706 823 857 1,002 974

Operating Rate 64.3 85.1 97.4 69.8 75.7 97.2 95.4 93.6 97.9 86.6

Bleached SulWhite PulpCapacity 350 286 281 295 295 309 340 390 447 468Production 297 225 271 224 233 293 338 358 436 n.a.

Operating Rate 84.9 78.7 96.4 75.9 79.0 94.8 99.4 91.8 97.5

Unbleached Sulohite PuleCapacity 800 574 573 584 590 627 690 686 697 747Production 678 492 549 488 419 573 658 636 623 n.a.

Operating Rate 84.8 85.7 95.8 82.7 71.0 91.4 95.4 92.7 89.4

Bleached and Semi BleachedSulphate Pulp

capacity 69 - 17 35 60 85 125 152 163 200Production 63 8 16 30 55 81 120 132 160 n.a.

Operating Rate 91.3 - 94.1 85.7 91.7 95.3 96.0 86.8 98.2

Unbleached Sulphate Pubcapacity 651 558 562 600 575 641 738 764 861 926Production 437 468 548 413 425 625 703 723 842 n.a.

Operating Rate 67.1 83.8 97.5 68.8 73.9 97.5 95.3 94.6 97.8

Bleached PulaCapacity 419 286 298 330 355 394 465 542 610 668Production 360 233 287 254 288 374 458 490 596 n.a.

Operating Rate 85.9 81.5 96.3 77.0 81.1 94.9 98.5 90.4 97.7

Unbleached PulvCapacity 1,451 1,132 1,135 1,184 1,165 1,268 1,428 1,450 1,558 1,673Production 1,115 960 1,097 901 844 1,197 1,361 1,359 1,465 n.o.Operating Rate 76.8 84.8 96.7 76.1 72.4 94.4 95.3 93.7 94.0

Dissolving Pulp (BleachedSulphite for Textiles)

Capacity n.a. n.a. .n.a. n.a. n.a. 150 165 175 190 195Production 73 65 80 85 100 143 163 160 188 179Operating Rate 95.3 98.8 91.4 98.9 91.8

Total Paner-Grade WhloCapacity 1,512 1,728 1,817 1,978 2,146Production 1,429 1,655 1,691 1,874 1,899

Operating Rate 94.5 95.8 93.1 94.7 88.5

Sources: Finnish Cellulose Assn. and Central Assn. of Finnish Woodworking Industries

,Capacity = 1939, Production = 1936-1938 Average.2/ Production figures are annual rates based on first 10 months.

TABLE TV

Finnish Exports of Pulp and Paper, 1936-38 av.; 1950-58(Thousand Metric Tons)

Mechanical Chemical Dissolving Paper Grade Sulphate Kraft OtherPul Pulp Pulp Sulphite Pulp Pulp Newsorint Paper Paper Cardboard

1936-38 av. 264 1,094 n.a. 7501/ 344 361 25 93 89

1950 177 878 43 470 365 379 37 90 891951 210 982 52 542 388 382 46 124 1h91952 143 722 68 409 245 392 49 107 851953 204 787 87 377 323 h02 74 133 1431954 193 955 117 463 375 392 l9 155 1831955 183 1,129 144 538 447 h70 1h1 188 2101956 186 1,131 137 542 452 537 142 211 2101957 165 1,171 160 537 474 551 170 229 2901958W 140 1,200 149 576 475 575 160 215 310

Exports as % of ProductionAv. 1955-57 21.6 59.5 86.3 62.8 51.2 88.9 72.2 70.2 74.0

Source: Central Association of Finnish Woodworking Industries.

1/ Includes dissolving.

2 Annual rate, based on first 10 months.

Finnish Exports of Pulp and Paper, by Regions, 1950-58

- - - - - -Thousand Metric Tons - - - - - - - - - - - - - -Percent of Total- - - - - - - - - -1950 1954 1955 1956 1957 1958/ 1950 1954 1955 1956 1957 1958L/

Mechanical Pulp

Western Europe 146.4 145.0 140.8 143.0 122.1 107.3 82.6 75.1 77.0 77.1 74.1 76.8USSR & E.Europe 10.9 3.4 5.2 10.5 19.8 13.2 6.2 1.8 2.8 5.7 12.0 9.4Europe 157.3 18. I6.0 153 11. 1205 8 793 7 9 ¯ ¯

USA 16.0 19.8 19.6 11 6.7 7.9 ¯9.3 10.2 10.7 ~7 ~71¯ ¯3.Latn Merica 3.5 21.3 13.8 14.6 11.2 3.5 2.0 11.0 7.5 7.9 6.8 2.5Asi 0.5 1.9 0.7 0.5 2.1 1.0 0.3 1.0 0.4 0.3 1.3 0.7Africa - 1.8 1.9 2.3 1.4 9.3 - 0.9 1.0 1.2 0.8 6.7Australia - - 0.9 0.6 1.5 0.6 - - 0.5 0.3 0.9 0.4

Total 177.3 193.2 II~3 8~¯ 13U7 139.8 10 0 100.0 10.0 TT50 100.0

Chemical Pulp (incl.Dissolving Pulp)

Western Europe 593.3 653.4 742.8 734.3 796.2 806.9 71.0 68.3 65.7 64.7 67.6 68.0USSR & E.Europe 13.0 67.8 87.7 112.5 163.6 176.8 1.6 7.1 7.8 9.9 13.9 14.9Europe 6. 721.2 30.5 U¯6¯U 9159.8 93.7 726 75~T~ 73.5 7¯-~7 ¶ -7 99

USA 16. =0.7 117.1 120.1 88. 62. -9¯." rö6 1¯5¯¯ I5~6 ¯7~ ~~5Lati Merica 59.7 107.3 148.2 136.6 97.0 105.2 7.1 11.2 13.1 12.0 8.2 8.8As 4.8 13.4 19.6 19.9 20.6 23.1 0.6 1.4 1.7 1.8 1.8 1.9Africa - 2.5 1.8 2.8 1.4 - - n.3 0.2 0.2 0.1 -Australia 4.7 11.2 13.5 9.5 11.1 11.5 0.5 1.2 1.0 0.8 0.9 1.0

Total 835.9 9573 1131.0 11376 1178.3 1175.9 100.0 / 10.0 ro0.o 100.0 100.0 10.0

Dissolving Pulp

Western Europe 45.2 57.8 46.2 53.2 36.6 38.0 39.6 32.5 32.0 24.7USSR & E.Europe 56.8 65.3 77.1 97.3 102.7 47.7 44.8 54.3 58.5 69.2Europe 102. 123 123.3 15 139.3 77 B77 ¯ 9¯ 9~7

USA n.a. - - - - - n.a. - - - - -Lati erica 8.7 15.0 14.5 9.5 7.7 7.3 10.3 10.2 5.7 5.2Asi 5.8 5.9 3.5 5.5 1.4 4.9 4.0 2.5 3.3 0.9Africa 2.5 1.8 0.8 0.9 - 2.1 1.2 0.6 0.5 -Australia - - - - - - - - - -

Total 43.0 119. 142.0 166. 1T8.. 1S0.0 100.0 100.0 100.0 100.0

Paper Grade - Sulphite Pulp

Western Europe 349.4 337.8 373.9 361.2 389.0 414.4 74.3 72.9 69.5 66.7 72.4 72.0USSR & E.Europe 11.4 6.7 14.5 28.7 37.7 37.7 2.4 1.4 2.7 5.3 7.0 6.6

Europe 360.8 3WJJ.5 T 38. 39.9 W26.7 452.1 767 74~'3 72.2 72.0 79.-5 78~TUSA 58.8 33.4 45.3 53.5 39.1 36.5 12.5 7.2 8.h 9.9 7.3 6.3Latin America 45.6 78.6 92.2 80.1 59.5 63.1 9.7 17.0 17.1 14.8 11.1 11.0As 12 4.8 4.8 7.7 12.7 8.0 19.1 1.0 1.0 1.4 2.3 1.5 3.3Africa - - - 1.7 0.5 - - - - 0.3 0.1 -Australia 0.5 2.0 4.8 3.5 3.8 4.7 0.1 0.4 0.9 0.6 0.7 0.8

Total >70.5 63.3 738. gur. 537.-6 57. 100.0 100.0 100.0 100.0 100.0 100.0

Sulphate Pulp

Western Europe 243.9 270.4 311.1 326.9 3>4.0 355.9 66.7 72.1 69.7 72.3 74.6 77.0USSR & E.Europe 1.6 4.3 7.9 6.7 23.6 36.4 0.4 1.1 1.8 1.5 6.0 7.9Europe 245.5 27U.7 319.0 333.6 32.6 392.3 E7~T 7T¯- 71. 73-7¯ B¯6 .9

USA 101.6 68.3 72.1 66.6 49.3 25.9 27.8 18.2 16.1 14.7 10.4 5.6Lat4 erica 14.1 20.0 41.0 42.0 28.0 34.4 3.9 5.3 9.2 9.3 5.9 7.4Asia - 2.8 6.0 3.7 7.1 2.6 - 0.7 1.4 0.8 1.5 0.6_Africa - - - 0.3 - - - - - 0.1 - -Australia h.2 9.2 8.7 6.0 7.3 6.8 1.1 2.5 1.9 1.3 1.5 1.5

Total 365. 375.0 WC6.8 452.2 47.3 W6- . 100.0 1n0.0 150.0 10.0 in.0 .0

TABLE V

1950 1954 1955 1956 1957 1958L/ 1950 1954 1955 1956 1957 19581/

Newsprint

Western Europe 123.5 159.4 204.5 236.0 263.2 319.1 32.6 40.7 43.5 4.40 7.8 54.4USSR & E.Europe 3.7 14.8 10.3 12.1 12.9 14.2 1.0 3.8 2.2 2.3 2.3 2.4Europe U7 7 EfV. 7T17 TW 76T 3333 336 7 W7 4T 7.1 5.7

USA 132.4 110.7 125.3 149.2 125.5 99.2 34.9 28.3 26.7 27.8 22.8 16.9Latinmerica 78.0 59.6 69.5 81.2 97.9 98.6 20.6 15.2 14.8 1q.1 17.8 16.8Asia20.3 32. 2.1 41.2 37.5 33.7 5.3 8.3 9.0 7.7 6.8 5.7Africa 11.6 6.1 9.1 9.2 7.5 13.1 3.1 1.6 1.9 1.7 1.4 2.2Australia 9.3 8.7 9.2 8.0 6.1 8.8 2.5 2.2 1.9 1.5 1.1 1.5

Total 7.79 077 536-. 55 67 In"" ITM-7 1 T 10.0

Kraft Paper and Board

Western Europe 26.0 105.9 148.3 148.9 213.1 201.2 70.4 52.7 61.2 60.4 65.3 61.8USSR & E. Europe 0.3 30.7 29.2 31.1 31.1 42.5 0.8 15.3 12.1 12.6 9.5 13.0

Europe Z TfI r .77 185.7 . 243.7 -7= -6 73.3 73.0 -.T -7T-.USA 3.6 40.7 37.0 35.4 42.7 43.5 9.7 20.3 15.3 14.4 13.1 13.4Latin merica 4.2 3.9 3.3 4.6 3.2 4.5 11.4 1.9 1.4 1.9 1.0 1.4As J 0.8 5.3 10.1 11.4 16.6 12.5 2.2 2.6 4.2 4.6 5.1 3.8Africa 1.7 12.6 13.2 14.9 19.4 2L.6 4.6 6.3 5.4 6.0 5.9 6.6Australia 0.3 1.7 1.1 0.3 - - 0.8 0.8 0.4 0.1 - -

Total 36.9 Tif8 M= 2W I 6 T FT 5 IT iTTY 1T"0 li0 15

Other Paper

Western Europe 41.3 55.4 62.0 62.6 80.2 85.2 45.5 35.0 32.2 29.4 34.6 37.1USSR & E. Europe 7.5 31.9 40.4 52.6 60.8 60.2 8.3 20.2 21.0 24.7 26.2 26.2

Europe 17. B7J lif. nT.7 la-7 17-. 777 5797 7" -5I -T.-g T7USA 1.4 4.5 6.4 18.5 9.3 7.3 1.5 2.8 3.3 8.7 4.0 3.2Latin America 11.8 17.7 21.2 26.3 32.4 26.2 13.0 11.2 11.0 12.3 14.0 11.4Asia 2 13.3 26.2 35.5 28.2 27.5 25.8 14.7 16.6 18.4 13.2 11.9 11.2Africa -8.8 12.5 13.3 16.3 12.4 16.4 9.7 7.9 6.9 7.6 5.3 7.1Australia 6.6 10.1 13.7 8.7 9.2 8.6 7.3 6.4 7.1 4.1 4.0 3.7

Total r E87 17 nT.? T T7 227 7.0 10.0 100 U ro0. 0 10. 100.0

Cardboard other than Kraft

Western Europe 62.0 65.2 67.6 53.6 55.1 67.1 70.0 64.5 61.7 50.8 41.0 46.5USSR & E. Europe 0.2 18.8 20. 36.5 58.0 60.7 0.2 18.6 18.9 34.6 43.2 42.0

Europe 4I7 -m8u 47 90)-T I 4.7 lT3-.T -M--6 -13-. -M-.T B1USA 6.8 4.2 5.1 3.7 4.0 3.9 7.7 4.2 4.7 3.5 3.0 2.7Latin rica 7.6 1.7 2.1 2.3 4.3 4.2 8.6 1.7 1.9 2.2 3.2 2.9Asia 2.8 5.2 7.2 4.4 5.8 3.5 3.2 5,1 6.6 4.2 4.3 2.4Africa 5.4 4.1 4.8 4.1 6.3 4.2 6.1 4.1 4.4 3.9 4.7 2.9Australia 3.8 1.9 2.1 0.9 0.8 0.8 4.3 1.9 1.9 0.9 0.6 0.6

Total " 6rT iMT g I If3- 14U, l.0 10.0 W@-" li7 i= 1655

Source: Official StatistLcs, 1958 Preliminary Report of the Custom House Boardpublis hed in Suomen Puutalous.

Based on first 10 months.!/Includes China.

TABLE VI

Prices of Swedish Woodpulp and Newsprint

Bleached Unbleached DissolvingSulphite Sulphate Pulp Newsprint- - - - - -(Kr.per m.t.)- - - - - - -- per m.t.)

1950 650 486 686 90.60

1953 688 480 898 111.501954 781 560 913 117.401955 806 604 936 125.701956 806 616 936 135.101957 791 606 924 134.40

1 Q 1957 795 621 928 134.972 Q 1957 786 612 926 133.873 Q 1957 798 599 920 134.004 Q 1957 787 586 918 133.97

1 Q 1958 774 575 909 129.502 Q 1958 757 556 883 129.503 Q 1958 746* 550* 870*

Source: German Statistical Office - Preise, Lohne, Wirtschaftsrechnungen,Grosshandelspreise im Ausland.

* July - August

TABLE VII

ACTUAL AND REAL PRICES OF DOMESTICPULP AND NEWSPRINT IN THE U.S.

(Dollars per short ton)

Bleached Sulphite Unbleached Sulphate NewswintActual Actual haM Actal Rol

1900 54.90 150.411901 45.10 125.631902 47.00 122.721903 49.00 126.611904 52.90 136.341905 47.00 120.201906 43.10 107.211907 49.00 115.571908 49.00 119.801909 41.15 93.741910 41.15 89.851911 41.15 97.511912 43.10 95.991913 45.10 99.341914 45.10 101.81

1922 75.90 120.671923 80.00 122.321924 77.95 122.181925 75.90 112.781926 82.50 126.92 62.54 96.22 71.80 110.461927 82.50 133.06 58.08 93.68 71.80 115.801928 82.50 131.16 57.50 91.41 67.50 107.311929 80.00 129.24 56.75 91.68 62.00 100.161930 72.62 129.45 51.88 92.48 62.00 110.52

1931 55.30 116.67 51.67 109.00 57.00 120.251932 41.70 99.05 37.42 88.88 50.39 119.691933 49.10 114.72 33.92 79.25 41.25 96.381934 56.55 116.12 37.50 77.00 40.00 83.331935 52.60 101.55 34.42 66.19 40.00 76.921936 53.20 101.33 39.12 74.51 41.50 78.101937 62.90 112.12 60.96 108.66 42.50 75.761938 57.80 113.11 50.83 99.47 50.00 97.851939 52.00 103.80 38.83 77.50 50.00 99.80

1947 138.88 144.07 112.56 116.76 88.58 91.891948 130.50 125.00 128.12 122.72 97.53 93.421949 124.25 125.25 104.06 104.90 101.00 101.811950 122.50 118.82 96.25 93.36 101.63 98.571951 138.75 120.86 147.50 128.48 110.50 96.251952 140.00 125.44 125.00 112.00 120.25 107.751953 140.00 127.16 112.50 102.18 125.50 113.991954 140.00 126.93 112.50 102.00 125.75 114.001955 143.75 129.85 113.75 102.76 125.94 113.771956 150.00 131.23 128.75 112.64 130.10 113.821957 151.25 127.42 131.25 110.57 133.60 112.551958 155.00 129.17 135.00 112.50 134.40 112.75

Sources: Pulp - U.S. Pulp Producers Assn., Inc. - Woodpulp StatisticsPrices are from "The Paper Mill" from 1910 to 1914 and thereafterfrom the "Daily Mill Stock Reporter", averages of high and lowprices for the first week of each month.Sulphate prices are for Northern pulp. Prices of Southern pulpwere $120 in 1957 and 1958.

Newsprint - U.S. Bureau of Labor Statistics

Real prices are actual prices deflated by the U.S. Wholesale Price Index,1947-1949 = 100.