UPM Annual Report 2021








Report of the Board of Directors UPM introduction and business model As a frontrunner in forest industry, UPM provides sustainable solutions to the growing global consumer demand. Products are made from renewable materials and are recyclable. UPM invests in sustainable growth and innovates for a future beyond fossils across six business areas: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Specialty Papers, UPM Communication Papers and UPM Plywood. The business areas are competitive with strong market positions. UPM group creates value to its stakeholders by operating separate businesses with a focus on: • Competitive and sustainable wood sourcing, forestry and plantation operations • Value adding, efficient and responsible global functions • Continuous improvement (Smart) programmes • Technology and intellectual property rights • A global platform to build on • Disciplined and effective capital allocation • Compliance with applicable laws and regulations, UPM Code of Conduct and corporate policies Market environment in 2021 The world economy recovered from the severe global recession of 2020. The year 2021 began with rising optimism about growth driven by an upswing in global output and consumer spending, as well as vaccine rollouts in developed countries. Global recovery continued throughout the year despite disruptions in global supply chains, inflationary pressure and the growing uncertainty caused by weakening pandemic dynamics towards end of the year. Global real GDP growth is projected at 5.6% in 2021. In Europe, the economy rebounded from the pandemic recession faster than initially expected. Domestic demand was strong, and the reopening of the economy made good progress. Global supply-chain bottlenecks and disruptions also weighed on activity in Europe, particularly in integrated manufacturing sector. In addition, the sharp increase in energy prices impacted on consumption and investments. Economic growth in Europe is projected at 5.6% in 2021. In the US, accumulated savings, federal stimulus and wage growth provided strong support for economic recovery. Nevertheless, expansion faced mounting headwinds as worker shortages, disruptions in the supply of raw materials and container ship backups threatened to slow down recovery. Economic growth in the US is projected at 5.7% in 2021. China’s economy swiftly rebounded in 2021 with its best growth since 2011. Industrial output, construction and foreign trade surpassed pre-pandemic levels in spite of the power shortages that hit the country’s manufacturing and industrial activities during H2. Growth lagged in retail sales and service industries. Private consumption continued to be impacted by the pandemic due to the increase in household saving and lockdowns limiting opportunities to spend. In China, economic growth is projected at 8.1% in 2021. Multilateral efforts to mitigate and adapt to climate change remained a key global focus and priority. The United Nations Climate Change

Demand for advanced renewable diesel and naphtha continued to be strong in 2021, with continuous growth in demand driven by climate targets. Market prices were at a high level. Finland’s electricity consumption was good in 2021. Electricity sales prices in Finland were at a record high, especially toward the end of the year, due to high commodity and emission allowance prices and the dry hydrological situation in the Nordic market. The growth of global demand for self-adhesive label materials was healthy, especially in consumer goods and e-commerce-driven labelling. Market prices increased in all main markets. The growth in demand for label, release and packaging papers was good and market prices increased. In H1 2021, demand for office paper in the Asia-Pacific region was good but in H2, demand became weaker. Market prices for office paper in China increased sharply in H1 but decreased below the long-term average price levels in H2. Market demand for plywood in Europe was strong. Demand for spruce plywood was driven by high levels of activity in the building and construction industry. Demand for birch plywood was good in panel trading, vehicle flooring and construction-related industrial applications. Market prices increased in many end-uses. Impact of the COVID-19 pandemic The COVID-19 pandemic, the related containment measures around the world and rapid changes in the global economy continue to represent significant uncertainty. Global economy The COVID-19 pandemic and the related containment measures resulted in a sharp decline in the global economy in 2020. During the first phase of the recession, the pandemic containment measures and lockdowns around the world severely limited or temporarily stopped significant parts of the economy. In 2021, the global economy has started to recover, but it is uncertain how long-lasting the recovery will be. Despite progress with vaccinations, additional waves of the epidemic in different parts of the world remain possible. The recovery in the global economy from the deep downturn in 2020, combined with the ongoing pandemic have created tightness and disruptions globally in many supply chains, including logistics and energy, causing rising costs and uncertainty on price and availability of UPM has implemented extensive precautions to protect the health and safety of its employees and to ensure business continuity and the progression of its strategic projects during the pandemic. Despite these efforts, the operation of one or more units or the supply chain and logistics could be temporarily disrupted during the pandemic, the related lockdown measures, or the following economic recovery. In these circumstances some units may need to limit operations or be temporarily shut down. So far UPM has been able to protect its employees and business continuity well. Demand for UPM products Many of UPM's products serve essential everyday needs and have therefore seen resilient demand during the crisis. These products include pulp, specialty papers and self-adhesive label materials. However, even in these businesses, demand is influenced by general economic activity. Demand for graphic papers is more prone to be impacted by the lockdowns and economic cycles. The lockdowns limit a wide range of consumer-driven services and retail, as well as work at the office. This many raw materials and energy. Safety and business continuity

has had a negative impact on printed advertising and graphic paper demand during the pandemic. The lockdowns and the level of economic activity may also influence demand for electricity, plywood and sawn timber. In Q2 2020, graphic paper demand in Europe decreased by 32% from the previous year, as particularly advertising-driven paper consumption and office paper demand being impacted by the lockdowns across Europe. These impacts moderated to some extent as the year progressed, and graphic paper demand decreased by 18% in Q3 2020 and by 14% in Q4 2020 year-on-year. During Q1 2021 the pandemic and the related containment measures continued to impact the business environment, and graphic paper demand decreased by 14% from last year. In Q2 2021, as economies in Europe started to gradually open, graphic paper demand increased by 28% from the low comparison base in previous year. In Q3 2021, demand grew by 6% and in Q4 2021 by 4% from the previous year. Pulp demand has held up relatively well, supported by good demand for tissue and hygiene products as well as for some packaging and specialty paper products. Pulp consumption in graphic paper production decreased in 2020, but improved in 2021. Demand for self-adhesive label materials and specialty papers has grown during the pandemic, as consumers have shifted some of their spending from away-from-home categories to packaged daily consumer goods. E-commerce has continued to grow, supporting some labelling and specialty paper applications. Demand for self-adhesive labels in Europe grew by 7% in Q1 2020 and 9% in Q2 2020 year-on-year, decreased by 4% in Q3 2020 due to destocking in the customer value chain, and resumed growth at 6% in Q4 2020. Demand for self adhesive labels in Europe increased in Q1 2021 by 1% and in Q2 2021 by 9%. In Q3 2021, demand grew by 15% from last year and in Q4 by 3%, somewhat impacted by the supply chain constraints. Adjusting to different scenarios The potential impacts on UPM are likely to differ by business and phase and waves of the pandemic, lockdown measures, changes in consumer behaviour, and the recession and recovery thereof. UPM has used shift arrangements, temporary layoffs, or reduced working hours as required to adjust its operations in different scenarios. During Q3 2020, the company also announced plans to permanently reduce graphic paper production capacity and other plans to improve cost efficiency in different businesses and functions. The UPM Kaipola paper mill was closed in January 2021. Projects and maintenance shutdowns The pandemic and the required health and safety measures add challenges to large investment projects and maintenance shutdowns. UPM's transformative pulp project in Uruguay and biochemicals project in Germany are proceeding with strict health and safety controls. Despite these efforts, some changes to the detailed timeline and costs of the projects are possible during the pandemic, the related containment measures, or due to the tight global logistics and supply chains. In April 2020 TVO announced that fuel loading into the OL3 reactor would not happen as originally planned in June 2020. TVO announced an updated schedule in August 2020, and the fuel loading was completed in April 2021. UPM rescheduled two pulp mill maintenance shutdowns from Q2 2020 to Q4 2020 due to the pandemic. Both shutdowns were successfully completed in Q4 with strict health and safety controls. For 2021, UPM rescheduled the maintenance shutdown at the UPM Kymi pulp mill from Q2 2021 to Q4 2021.

Clear roles and responsibilities


Businesses Business area strategies


Top performance Competitive advantage Value creation Stakeholder and societal value License to operate

Portfolio strategy Capital allocation Business targets Code of Conduct Responsibility targets

Commercial excellence Operational excellence Cost efficiency measures Focused growth project Innovation

Each business area is responsible for executing its own strategy and achieving targets. Group direction and support from global functions enable the businesses to capture benefits from UPM’s brand, scale and integration, while navigating the complex operating environment. Capital allocation decisions take place at the group level. Corporate responsibility is an integral part of all of our operations and a source of competitive advantage. UPM is committed to continuous improvement in financial, social and environmental performance. UPM promotes responsible practices throughout the value chain and is active in finding sustainable solutions, in co-operation with its customers, suppliers and partners. Conference (COP26) finalised the Paris Agreement to limit the rise in global temperature to 1.5C. However, that goal will not be reached without further action and collaboration between governments, businesses and civil society to deliver on climate goals more quickly. Over 90% of global GDP is now covered by net zero commitments. In terms of global biodiversity preservation, the drivers of change are largely the same as for climate change mitigation. The year 2021 saw key developments in terms of the global post-2020 biodiversity framework and its expected adoption. Large economies have shown strong aspirations to put biodiversity on a path to recovery and companies are increasingly working to incorporate targets to tackle nature loss into their strategies. Inflation increased rapidly in many countries, especially in the United States, Germany and some emerging markets. UPM’s input costs were significantly higher in comparison with the previous year, most notably in fibre and energy. The US dollar strengthened against the euro and other major world currencies during 2021. The impact of changing currencies on UPM’s businesses was moderate in 2021. Market demand for UPM’s products was good, particularly in Europe and North America, and sales prices increased in most businesses. Demand for graphic papers in Europe increased by 4% from a low comparison period in the previous year. Market prices increased slightly for most paper grades. The growth in demand for chemical pulp continued good in Europe but slowed in China. The average market prices for both northern bleached softwood (NBSK) and bleached hardwood kraft pulp (BHKP) increased in Europe. In China, market prices reached historic highs in H1 and declined in H2, while remaining at a good level.





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