UPM Annual Report 2017

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Businesses

In brief

Strategy

Stakeholders

Governance

Accounts

AIMING FOR IMPROVED AIR QUALITY UPM has been testing its wood-based renewable diesel UPM BioVerno on buses in the Helsinki metropolitan area, Finland, since 2016. The tests showed that UPM BioVerno performed as well as the highest-grade diesel in heavy duty city traffic. In 2017, the project continued with the launch of BioSata, an initiative, where buses and the majority of the city’s machinery and trucks are switching to waste- and residue-based biofuels. In addition to UPM Biofuels, HSL (Helsinki Regional Transport Authority), Stara, the Ministry of Economic Affairs and Employment, the Finnish Petroleum and Biofuels Association, the VTT Technical Research Centre of Finland and several energy companies operating in Finland are involved in the project. HSL aims to have buses operating within the Helsinki area using 100% renewable fuels by the year 2020. With the use of renewable fuels, harmful tailpipe emissions, such as nitrogen oxide and particles, can be reduced too. The effects can be seen in the air quality of Helsinki city centre, in particular.

In June 2017, UPM announced it would further improve the efficiency and competitiveness of the UPMKaukas pulp mill with a EUR 30 million investment, increasing annual production capacity by 30,000 tonnes to 770,000 tonnes in 2019. As an integral part of the value chain, efforts to enhance wood supply continued in 2017. A new production record was achieved through several efficiency improving investments in the sawn timber operation. UPM is seeking further improvement in the wood sourcing value chain in Finland. Long-term growth opportunity in Uruguay In November, UPM and the Government of Uruguay signed an investment agreement to establish a competitive operating platform for a possible new pulp mill in Uruguay. The site of the mill would be close to the city of Paso de los Toros, in the department of Durazno in central Uruguay. The agreement brings UPM into the pre-engineering and permitting phase, which is expected to take 1.5 to 2 years. Achieving significant progress in the implementation of the infrastructure initiatives is critically important for the final investment decision. UPM is carrying out an engineering study and permit process for a pulp mill with an annual capacity of about 2 million tonnes of eucalyptus market pulp. The preliminary estimate for a pulp mill investment is approximately EUR 2 billion. In addition, a successful project requires off-site investments in plantation land and forestry, road network and nursery capacity, harvesting and transport equipment, rolling stock for the rail network, export facilities and training. UPMhas consistently increased its plantation base in Uruguay. When in operation, the mill, forestry and related activities would employ 8,000 additional people in its full value chain. The operations would also have a significant positive impact on the central and north- eastern regions. The global megatrends support a strong growth of the market pulp demand. UPM’s customers value the stable quality of the Uruguayan eucalyptus pulp. The possible new capacity in Uruguay would support UPM’s multifibre strategy: to serve customers in growing hygiene, packaging and speciality as well as printing and writing paper end-use segments. The first significant biofuel investment at design capacity UPMhas been producing UPMBioVerno renewable diesel and naphtha fromwood-based residues since early 2015. UPMBioVerno drop-in diesel is a unique, competitive and sustainable alternative to fossil fuels or first-generation biofuels, and is well positioned among the few existing advanced biofuel alternatives available on the market. UPM’s renewable naphtha can be used as a biocomponent for gasoline or for replacing fossil rawmaterials in bioplastics (read more on page 43). UPMBioVerno significantly reduces greenhouse gas and tailpipe emissions. Future demand for sustainable, high-quality advanced biofuels is predicted to be strong, driven by sustainability and stricter environmental standards. In 2017, the UPMLappeenranta Biorefinery reached its design capacity and generated a good financial return. Successful field tests with dedicated fleets, public transportation and shipping enabled UPMBiofuels to expand its renewable diesel customer base in the Nordics and selected EU countries. The first commercial deliveries of renewable naphtha as feedstock for producing bioplastics were launched in 2017. UPMBiofuels was chosen as the Bioenergy Industry Leader at the 2017 Platts Global Energy Awards. The UPMLappeenranta Biorefinery is the first significant investment in a new and innovative production facility. Having proven that the technology and business case work, UPM is evaluating future growth opportunities. The planning includes new alternatives in sustainable liquid feed stocks, waste and residue, as well as wood-based feedstocks for low

carbon biofuels. Newmarkets and customer segments, as well as applications and product development are also being pursued. In February 2018, UPM announced that it is starting an environmental impact assessment (EIA) for a possible biorefinery in Kotka, Finland. UPM continues to develop new process technologies using solid wood biomass. Alongside the planning, UPM is closely monitoring and striving to influence the future prerequisite for the advanced renewable fuels markets. In June, UPMBiofuels announced it is developing a new feedstock concept by growing Brassica carinata as a sequential crop in South America. The carinata crop produces non-edible oil suitable for biofuel feedstock and protein for animal feed. The sequential cropping concept enables contract farmers to take agricultural land into use outside the main cultivation period – i.e. in winter time – without compromising existing food production. It does not cause any land use change, prevents erosion and improves soil quality. Carinata will provide additional income to local farmers, who do not normally have their fields in productive use during winter. Sustainability offers competitive advantages and growth opportunities Sustainability is growing in importance in the pulp and biofuels industry, a trend that is benefitting UPMwith its leading competences both in forestry and industrial operations as well as in environmental and social responsibility. UPM’s modern pulp mills have all main management systems certified and the production technology enables efficient use of rawmaterials, chemicals, energy and water. In wood sourcing, UPM only uses wood from sustainable sources. UPMplays an active role in the local communities in which it operates as a significant employer and as a business partner, bringing prosperity to the surrounding area. UPM is also actively collaborating with local educational institutes. The pulp and biofuels industries globally must meet the standards of responsible business in rawmaterial sourcing, mill technologies and processes, as well as business practices in general. Increasing consumer awareness requires brand owners to be selective when it comes to choosing their pulp suppliers to assure that responsible practices are followed throughout the supply chain. As an example of governmental impact on setting stricter environmental criteria, the Chinese regulatory efforts to clean up the inflow of mixed imported recycled paper is an attempt to protect the environment. UPM continues to engage with its customers to promote sustainability and drive transparent business practices across the value chain.