Dream firm fighting for survival

Photo: Erik Prozes

Like the current tussle over whether Estonia gets its LNG (liquefied natural gas) terminal and where it is supposed to stand, a decade ago souls were stirred by a pulp mill. This, they said, would be an investment of dreams to switch our economy into new gear.

Repeatedly, the government deliberated what kinds of benefits builders of the plant should be awarded: VAT exemption on imported equipment, allotment of suitable state land for the factory, support to training qualified staff. In the end, just one benefit survived – the state secured raw material (aspen wood) at fixed price mechanism.

The aim of the benefits was to help Estonia compete with Latvia. Then, media said two pulp mills would be too much for the region – whoever gets the investment, the other neighbour must bid a plant goodbye.

Constant loss

For starters, the plant built in Kunda, Lääne-Viru County, had three owners: initiator of the project, the Norwegian pulp producer Larvik Cell; European Bank of Reconstruction and Development (EBRD); and the Austrian family business Heinzel Group. The latter being a rather large pulp group incorporating six companies with last year turnover €1.3bn and profits €57m.

The plant took €153m to build – it was, and still is, the largest direct investment into Estonian industry. Now, Estonian Cell having operated for seven years, the company is struggling to survive. Since 2007, the plant has earned profits in one year only; as at last year, cumulative loss amounted to €22m.

In 2010, €7.4m worth of profit was earned; even that came about by happenstance i.e. bad luck striking the competitors. Chile had an earthquake, meaning that lots of companies of this sort were wiped off the market and all others got their one-off profits as demand greatly exceeded supply, pushing prices up.

As the original business plan failed to take off – the three investors not arriving at agreement regarding extra investments as neither EBRD nor Larvik had the will/faith to inject additional money, Heinzel bought the other two’s holdings.

«Despite this being a very new plant, it was obvious that without changes it would never come out of the red,» said Siiri Lahe, board member and finance director at Estonian Cell.

In the years that followed, six million euros were invested to clear smaller bottlenecks. Last year and the year before, the owner gave €17m extra, as the company isn’t generating positive cash flow on its own.

«Among ourselves, we call it the plant bailout programme,» said Ms Lahe.

As for the poor financial results, the company cites the 2.5-fold rise of electricity and gas price since the mill was launched. For the mill, electricity and gas are the largest cost items, amounting to 40 percent of product unit running costs – according to the finance director, the plant’s monthly electricity bill is to the tune of €1.2m.

Power guzzler

«As the investment was being made, our investors were promised three things. Firstly, Estonia is rich in forests – this still stands. Secondly: Estonia has competitive and qualified labour resource, which still holds true. The third promise was that Estonia has competitive electricity prices. This is a promise not kept,» said Ms Lahe.

Estonian Cell is no chemical cellulose mill, it needs to be explained – all it produces is mechanically crushed pulp.

«As the Kehra plant, for instance, uses conifers as raw material with chemical boiling applied, we are mechanically making pulp which makes production very energy-intensive,» explained Ms Lahe.

The only chemical treatment happening is bleaching with hydrogen peroxide. These are the same chemical and process as ladies (and gentlemen) use to bleach their hair.

Depending on what kind of paper is desired, various celluloses and pulps and other stuff are combined. Aspen has short fibre and is therefore unfit for strong paper. Therefore, Kunda’s produce is not used in Kehra as they make kraft (sack) paper.

The larger part of pulp produced in Kunda goes into making printing paper, followed by cardboard and a smaller selection of soft and special papers. 

Fivefold added value

Beholding the sad financial state of the company, one is prompted to ask: did Estonia actually need the large investment into the resource-intensive industry? Economy ministry insists the Estonian Cell investment was very important for Estonia, and the ministry considers it important for the company to continue in Estonia. Still today, the state is striving towards such foreign investments which boost productivity and create jobs with greater added value.

Estonian Cell employs 85 people; however, when also considering collecting of wood, logistics, and the entire production chain, about 500 people are employed by the company. Labour productivity per employee is among the highest in Estonian industry: net sales turnover is €709,000 a year per person.

Were aspen wood sold as logs, export turnover would amount to €13m; thanks to the plant, added value is increased five times. «13 million becomes 67 million euros,» said Ms Lahe.