M-real Moves to Cut Paper Losses and Refocus on Packaging

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Jun 7, 2011

On 4th May 2011, M-real announced plans to make major divestments in its European fine paper business in order to cut heavy financial losses and continue the refocusing of its business towards a packaging board company.

  • Amongst these mills is the Alizay site in France which is known for producing partial tonnages of office paper brands Logic and the newly launched 65gsm paper SAVE! In recent years, this site has also become the plant for producing recycled brands Evolve and EP4 since the divestment of New Thames paper mill in the UK. M-real has had several unsuccessful candidates to divest the Alizay mill in France despite the implementation of various restructuring measures. As the mill remains heavy with losses, it will be closed if a buyer is not found by September 2011.
  • Gohrsmuhle mill in Germany: M-real wants to divest the entire mill or parts of the mill. If divestiture is not possible or successful, M-real will discontinue the uncoated fine and the unprofitable parts of the specialty paper operations.
  • Reflex mill in Germany: M-real plans to discontinue its remaining carbonless paper converting operations.

These are interesting moves. If M-real follows through with all of these actions, tonnages will reduce by 430,000 in uncoated fine paper and 70,000 in coated specialty grades, diminishing the role of the company in the fine paper market. In 2010, M-real’s sales totalled EUR 2,6 billion (US $3.7 billion) and the company had approximately 4,700 employees.

In the Western European cut sheet office paper market, the success of its recycled brands pushed the company up to the #2 spot in 2006 and has come to earn M-real around 25% share of the recycled business paper market in Europe. Sales soared in 2006 with an effective ‘closed loop recycled paper system’ in London and the South East UK and has shown steady growth ever since. The closed loop in this case refers to a system of collection of used office paper from offices in and around London coupled with the delivery of recycled grades back into those offices. However, due to production costs at the original plant in Sittingbourne in Kent, UK and now at Alizay, M-real has decided to stop producing recycled paper.  

Looking at Western European consumption data as InfoTrends measures it, the reduction of Alizay mill will equate to around 9 % of predicted consumption in Western Europe in 2011 including recycled paper. The recycled volume will drop by 25% if Alizay shuts down and no one takes over the production. In the virgin paper business paper market, it depends to what extent the Husum mill will take over the tonnages of Logic and SAVE!. If not then it should reduce the overall volumes targeted at Western European market by around 6%. As far as M-real’s position, it has drifted between being a top 3 and 4 player to top 5 in 2009. It will bring volume down to be top 6 below UPM for the first time.

So if a buyer can be found for Alizay before the end of September this year, that capacity may remain and be redirected into alternative brands or the existing recycled paper brands under that buyer’s name. Whilst the mill seeks an investor that can take over the mill at Alizay, the company is also offering the Evolve brand for sale. While it is unusual to also offer the brand as well as the facility, the point is that the Evolve brand is very strong — 25% of the recycled paper market (including some recycled brand EP4) and could be attractive to another company. Another recycling plant could take over the brand assuming it can produce to the same specification. There are limited contenders in Europe for this but there may be some outside of Europe. The virgin paper brands are produced in the company’s more profitable mill at Husum, Sweden and therefore these are not for sale.

A shutdown of production at Alizay is reported by M-real to reduce cut sheet paper production capacity by 3% to 3.5% in the market and thereby contribute to enhancing the over- supply situation that continues to plague the industry. It will be interesting to see which course of action occurs as the interest in the mill and brand heats up. Even though it has experienced the most successful brand growth in recent years with its recycled product, the company has been doomed largely due to the historic cost burdens of the various mills and the need in the current climate to make all paper mill operations highly efficient. Volatility of paper prices in the cut sheet paper market has also proven challenging. Whilst recycled paper is in theory in demand, successful growth does seem to correlate with a narrowed gap between virgin and recycled paper prices. Paper pricing, as always in the paper industry, seems to be the key to success or failure for the paper mills.

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