UPM annual report 2015

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IN BRIEF

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UPM Biorefining

Long-term commitment to eucalyptus

UPM has been planting eucalyptus in Uruguay for a quarter century after new legislation was passed to boost the forest industry. The plantations are managed by Forestal Oriental, a UPM-owned company active in Uruguay since 1990. Most of the harvest from UPM’s eucalyptus plantations in Uruguay is used to make pulp at the UPM Fray Bentos pulp mill. The mill began operations in November 2007. Eucalyptus trees are mature for harvesting within about ten years. UPM has continued developing the species chosen for cultivation through systematic breeding. The ultimate goal is to ensure that the pulp remains as uniform as possible, as this is crucial for customers’ production processes. In addition to pulp, the Fray Bentos mill generates electricity, which is sold to the national grid. The mill generates nearly 9% of the Uruguayan electricity supply. UPM has been co-operating with private landowners since 2005 within the framework of the FOMENTO Programme. Under the programme, UPM Forestal Oriental supplies the tree seedlings and is responsible for planting and harvesting the trees later on. The plantations offer income for agriculture, while the forest industry is expanding its planted areas with the support of farmers.

Clean power from the Finnish forests

The UPM BioVerno renewable diesel project reached its ultimate goal when the product was launched onto the markets at the beginning of May 2015. Finnish energy company St1 has been selling UPM BioVerno as part of their Diesel plus fuel at its filling stations in Finland. Harri Tuomaala, Marketing and Communications Director at St1 confirms that an important share of St1 diesel customers are using Diesel plus containing UPM BioVerno on a daily basis as there are over 100,000 Diesel plus refills in a day. Tuomaala says that the technical properties of UPM BioVerno make it an excellent component in St1’s Diesel plus. A higher cetane number improves the engine performance due to a fast combustion of the diesel fuel. UPM BioVerno has also been granted the Finnish Key Flag symbol. “For consumers this is a clear case as Diesel plus with UPM BioVerno is compatible with all diesel engines, just like traditional diesel. In addition, it is seamlessly compatible with the existing distribution infrastructure.” “UPM BioVerno is delivered from Lappeenranta to our blending terminal located in Hamina. Then it is blended there with our Diesel plus product and delivered to our service stations across the whole country.”

Business development Over the past two years UPMhas made focused investments in expanding production and improving efficiency at the Pietarsaari, Kymi and Fray Bentos pulp mills. The modernisation of the UPMPietarsaari pulp mill was completed in 2014 and the UPMKymi mill expansion investment was completed in 2015. Minor investments have been made in the Fray Bentos mill to increase production in line with the permit received in June 2014. Having successfully completed these projects, focus is turning to releasing benefits of the investments. Production capacity of these mills grows gradually by 340,000 tonnes. In June, UPM announced a EUR 50 million investment in UPMKaukas pulp mill in Lappeenranta. When completed, the work will strengthen the mill’s efficiency, com- petitiveness and optimisation and benefit the entire Kaukas integrated mill. The investment is expected to be completed by the end of 2016. UPM’s pulp mill expansions, part of UPM’s growth investments, are primarily pro- duction debottlenecking investments and thus estimated to be value enhancing with low risk. When all projects are completed, UPMwill have realised full potential of its existing pulp production operations. The investments in the Kymi and Kaukas mills will complete UPM’s strategic decoupling of its pulp and paper businesses. This will enable higher efficiency and separate optimisation of pulp and paper production, while simultaneously maintaining internal synergies at the mill sites. UPMBiorefining offers its pulp customers a multi-fibre pulp product range directly from producers to the global market. From own production or through co-operation, UPMBiorefining provides customers with the most versatile range of northern soft- wood, birch, eucalyptus and semi-chemical pulp. UPMBiorefining’s own pulp sales and technical service experts are located close to customers and in each mill working in close co-operation with UPM’s global R&D network. Demand for chemical pulp continues to increase globally due to its versatility in a broad range of end-use applications. Growth is stable, predominately driven by private consumption. The wide range of pulp end uses with different quality requirements makes select- ing the most suitable pulp quality essential to providing benefits to the customers. In pulp production, the quality of the wood fibre impacts sourcing costs, production efficiency and pulp quality. For UPM’s pulp customers and the production alike, con- sistent product quality is of utmost importance. UPMBiorefining’s multi-fibre offering fits well into the frame of sustainable fibre usage, i.e. optimal fibre for each end use. In wood sourcing for pulp production, UPM meets the highest sustainability demands in the industry. In January, the UPMLappeenranta Biorefinery started commercial production of advanced renewable diesel UPMBioVerno. The biorefinery is the first of its kind in the world. The production process works as planned and the high quality end product fulfils customer specifications. The production ramp-up phase of the biorefinery has included customary new process and production-related challenges. In 2015 efforts targeted improved utilisation and stable production.

Production is based on a hydrotreatment process developed by UPM, and the capacity is approximately 120 million litres of advanced renewable UPMBioVerno diesel annually. The Lappeenranta Biorefinery is the first significant investment in a new and innovative production facility and marks an important step in UPM’s transformation process. InMay, distribution of UPMBioVerno started through St1 and ABC service stations in Finland. UPMBioVerno is a competitive and sustainable alternative to fossil fuels or first generation biofuels, and is well positioned among the few existing advanced biofuel alter- natives available on the market. As an integral part of UPMBiorefining’s value chain, efforts to enhance performance of the wood supply chain continued. Sourcing of high quality logs and pulp fibre as well as full-production in sawmills enabled efficient production at integrated mills and also ena- bled UPMBiorefining to act as a reliable and stable customer on the wood market. UPM increased production at sawmills through several debottlenecking investments, e.g. the modernisation of the log sorting line at Seikku sawmill improved the overall pro- duction efficiency. Markets and drivers • Chemical pulp demand is growing globally by approximately 2-3% annually, driven by growth in private consumption. In 2015, global market shipments increased by 3% compared to the previous year. • Pulp consumption is driven by an increasing use of tissue papers, hygiene products as well as board and specialty papers, for example for packaging and labelling. In develop- ing markets, growth is also underpinned by middle class expansion and fast urbanisa- tion. • Demand for hardwood pulp grows faster than for softwood pulp due its end-use quali- ties and lower production costs. • The global hardwood pulp production capacity is growing, primarily through new pro- duction line installations entering the market. The softwood pulp production capacity is growing mainly through expansion investments. • Chemical pulp demand is also supported structurally as the graphic paper segment supplies fewer white recycled fibres for the growing tissue and speciality segments. • Older pulp capacity has been closed down for financial and environmental reasons. • Demand for advanced biofuels is growing due to stricter environmental standards and sustainability requirements. Regulation developed in favour of advanced biofuels. • Sawn timber demand is driven by the activity of joinery, packaging, distribution and construction industries. In 2015 demand remained stable in Europe, Asia and the Mid- dle East and North Africa.