Dear audience, welcome to UPM's Full Year 2021 Result Webcast. My name is Jussi Pesonen, I am the CEO of UPM. I'm here with our CFO, Tapio Korpeinen.
Hello to everybody.
Today, I would like to highlight two key messages. First one, our earnings are fully back on the strong pre-pandemic levels. This is a case both in full year 2021 and for the fourth quarter. We expect 2022 to be another good year for the company. Secondly, our transformative growth projects continue to make progress. Most importantly, the investment cases in both are very much intact and highly attractive. 2021 was a strong year for UPM. The world's economy recovered quickly from the previous year's deep slowdown. Demand for our products was strong in all business areas. We improved our margins despite the significant raw material and energy cost increases and bottlenecks on the global supply chain. All in all, we succeeded well in the exceptional and fast-changing operating environment, delivering performance that exceeded our financial targets.
Our sales grew by 14% and returned into a rough EUR 10 billion level. Comparable EBIT grew by 55%, and our full year EBIT margin reached 15%. Operating cash flows strengthened, and our financial position continue to be very strong. The reliable cash flow and the consistently strong balance sheet are a significant advantage for us, especially in the light of the ongoing transformative growth projects and unpredictable operating environment. As you remember, our focus has been clearly during the pandemic and during this time, related to really cope with the unpredictable operating environment. First, we have focused on ensuring strong performance, and that will continue for the future as well. In this, we have succeeded very well in my opinion. Our second focus area has been successful implementation of our transformative projects.
Successive waves of pandemic and the tight global supply chain and logistic networks have certainly posed severe challenges for the projects. Despite this, we can confirm the attractive investment cases in both projects, and they are intact. Ladies and gentlemen, I will come back to these projects later in our presentation. This slide is perhaps the best way of putting our 2021 performance into a perspective. Through our transformative transformation, we have been able to show an improvement trend in our earnings, returns, and balance sheet. As you can see, our 2021 earnings were back on the strong level we had reached before the pandemic. Our return on equity is back above the targeted 10% level. Our balance sheet is very strong, as you can see from this picture.
Looking business by business, the returns, five out of our six business areas exceeded their long-term return targets. Raflatac, return on capital employed was 40%, and in Plywood, 25%, are our high return businesses or were high return businesses last year. Biorefining performed strongly as well, 18%, especially taking into account a capital that has been used for the growth project in Uruguay already. Communication Papers had a very challenging year 2021. Even so, the business continued to contribute free cash flow to the company, but that was related to asset sales, especially the Shotton newsprint sales in the U.K. With all of this, we are very confident of our financial position and the future cash generation. UPM board has now decided today to propose a dividend of EUR 1.30 per share for the year 2021.
Now I will hand over to Tapio, for the analysis of the fourth quarter. Tapio, please.
Thank you. Thank you, Jussi. If we take a closer look at the fourth quarter results, one can say that, also fourth quarter results were back on the strong, pre-pandemic levels. Sales for the quarter grew by 22%, mainly driven by higher sales prices in all business areas. Comparable EBIT increased by 83%, to EUR 461 million. In the fourth quarter, demand for our products was good, and the upward trend in sales prices and also in variable costs continued. Compared to the record quarter, Q3 of 2021, our business' performance was impacted by higher maintenance activity and also by the unprecedented energy market situation. The scheduled maintenance shutdown at the Kymi pulp mill affected Biorefining's EBIT by EUR 37 million in the fourth quarter.
The extremely high energy prices enabled energy business to reach its best quarterly result ever. At the same time, the high energy prices added to the other businesses' costs, especially in the two paper businesses. On net terms, the high energy prices had a negative impact on UPM's fourth quarter EBIT. EBIT in the fourth quarter includes EUR 103 million increase in fair value of our forest assets. We have increased the estimates for wood volume and growth in our forests. Higher wood prices also contributed to the fair value estimate. On this side, this slide on the left-hand side, you can see our fourth quarter EBIT compared with the same quarter of the previous year. You can see clearly how large the changes in sales prices and variable costs have been over the past year.
Sales prices increased in all businesses. In the same way, variable costs increased in all main categories, energy, fiber, logistics, and so on. On the right-hand side, you can see the sequential comparison to the third quarter. In this time period, variable costs increased somewhat more than sales prices. This mainly comes from the already mentioned increase in energy costs. Fixed costs were EUR 69 million higher compared to the third quarter, which is due to seasonal reasons and due to the maintenance shutdown in at our Kymi mill that I already mentioned. It of course impacted the volumes in the fourth quarter compared to the third quarter. In both graphs, the fair value increase in our forests contributes to the last bar of the chart.
Looking at the quarter-by-quarter performance for the six business areas, starting with Biorefining. Biorefining reported solid fourth quarter results, even though they were held back by the scheduled maintenance shutdown at the Kymi mill. Average pulp prices decreased by 2% from the third quarter. Timber and biofuels prices remained at good levels as well. Energy business benefited from the exceptional situation in the energy markets and therefore achieved its best quarterly results ever by far. This was the result of both record high prices of electricity and successful hydropower optimization in the very volatile markets. As you can see, Communication Papers continued to make losses in the fourth quarter, and the main reason for this was the exceptional increase in energy costs.
Due to existing customer contracts, we could not adjust paper prices at the same time or at the same pace during the fourth quarter, despite the current tight paper markets. The average paper price of our deliveries increased by 6% from the third quarter, which was not enough to offset the additional energy costs. In previous years, we have booked energy related refunds in our fourth quarter Communication Papers results. This year, we changed the accounting of these refunds from accrual-based to cash payment-based practice. As a result, we did not book the refunds in the fourth quarter 2021 results. Instead, they will be booked in our 2022 results when the payments are received.
On the other hand, we sold some of our excess CO2 allowances during the quarter for a gain of similar magnitude as the refunds would have been. On net terms, the changed accounting of the refunds and the sold CO2 allowances did not materially impact Communication Papers' fourth quarter performance. Earnings for Specialty Papers were also affected by high cost of fiber and energy. Demand for label and release and packaging paper remains strong, driven by fast-moving consumer goods and e-commerce. Fine paper markets in Asia remain soft. For Raflatac, profitability once again was good and well above the pre-pandemic levels. Demand continued to be strong and sales prices increased. However, performance was somewhat held back by the unexpectedly rapid cost inflation and supply chain bottlenecks. Plywood achieved a record quarter and a record year in earnings.
Demand was strong and sales prices increased. In Finland, we have a new labor market situation as the forest products companies are for the first time carrying out negotiations directly with the unions. We at UPM have a unique portfolio of versatile businesses in Finland. Therefore, we aim to negotiate business specific agreements in order to support long-term growth and competitiveness of each business. Our focus is not on the next month or next year, but rather on pursuing mutually beneficial outcomes that will enable each business and the employees to prosper well into the future, into the 2030s. At UPM Plywood and UPM Timber, agreements benefiting both the employees and the businesses were signed for each of the businesses with their own agreements with Industrial Union in December 2021.
Meanwhile, the Paperworkers' Union is aiming to negotiate a single group level agreement with the corporation. Unfortunately, this has led to a strike lasting several weeks. The strike affects the Finnish units of UPM Pulp, UPM Communication Papers, UPM Specialty Papers, UPM Raflatac, and UPM Biofuels. During the strike, we have been serving our customers from our mills outside Finland as much as possible. We do not disclose estimates of the economic impact of the strike. However, our best estimate of the impact is included in our outlook statement for 2022 and the earnings guidance for the first half of 2022. The outlook is shown here. We expect 2022 to be another good year for the company. We expect good demand to continue for our products.
In the early part of the year, the strike in Finland is affecting our production and earnings in five businesses. Sales prices are expected to increase in the beginning of the year, most notably the graphic and specialty paper prices. Sales prices for pulp and energy are expected to continue at good levels in the early part of the year. Similarly, variable costs are expected to either increase or stay at elevated levels. All in all, we expect our comparable EBIT in the first half of 2022 to be on similar level compared to the first half of 2021. Here, I would also note that, as is detailed in our quarterly release, the year 2022 is a relatively maintenance heavy year for us.
We have planned three maintenance shutdowns at our pulp mills this year, and a turnaround shutdown at our Lappeenranta biorefinery as well. Obviously then we have the annual shutdowns in the Olkiluoto power plant as well. Of the three pulp mill maintenance shutdowns, two, Kaukas and Pietarsaari are planned for the second quarter of this year, so that is obviously also in this guidance for the first half of the year. Here I'll hand it back over to Jussi for the update on our transformation and growth projects. Jussi?
Yeah. Thank you, Tapio. Let's deep dive into the transformation which is proceeding at full speed. Here you can see our transformation slide updated with the numbers and figures from the year 2021. From 2009 to 2021, our growth businesses have grown at the compound annual growth rate about 6%. Over the same period, our Communication Papers business has rightsized significantly. Over the past five years, the average EBIT margin in our growth businesses has been 17%. Communication Papers achieved on average EBIT margin of 5%, including two very difficult pandemic years. In this way, the changing business mix is driving our earnings growth structurally over time. On top of that, we have been able to improve performance of each business over time, supported by operating model and group synergies of course.
Now we are in a more growth-focused phase of our transformation. Our spearheads for growth are expected to add to the top line and more importantly, to be even more profitable than the past performance of the growing businesses. The transformation drives our earnings and our shareholder value. Let's deep dive into or go to the large investment projects. The construction of Paso de los Toros pulp mill is now at the point where we can fine-tune the project completion plan. The main equipments and key resources have arrived Uruguay, and so most material uncertainties have been resolved. At the same time, successive wave of pandemic and tight global supply chain has continued to challenge the project.
A minor delay in startup schedule is inevitable, and the mill will start production by the end of first quarter 2023, with a 10% increase on investment estimate. In such large and complex project in the current very challenging operating environment, I'm very proud of the work that the project team has done in Uruguay and here in Helsinki. We are also fortunate that our project got a good start before the pandemic began. If you remember the FID, Final Investment Decision was made in the middle of 2019 . Most importantly, the investment case remains very strong. We can confirm that the cash cost level of approximately $280 per ton, delivered ton of the pulp is intact.
Basically, Paso de los Toros will be one of the most competitive mill in the world. Here you can see some pictures from the various sites in Uruguay. There are now more than 6,000 workers at the construction site in our mill site in Uruguay, and also in the harbor. At the pulp mill site, the installation phase is with the mechanical erection continues. Majority of the last civil work has been now completed. Power boiler pressure tests were done successfully in December, and commissioning works will proceed in the coming months. Proceeding as stated here. Let's move to Leuna. The business preparation for the UPM Biochemicals is moving at a good pace.
There is keen interest in various products of the new Leuna biorefinery. This really confirms the business opportunity and long-term growth strategy in biochemicals. The biorefinery construction started just before the corona lockdown, therefore we were a bit unfortunate in the decision phase when the decision was made in late January 2020. The pandemic slowed down the completion of the detailed engineering and in the early part of the work. In normal operating environment, this was recoverable through the mitigation action. We put after that lockdown a clear good mitigating action plan. However, the successive waves of the pandemic and the disruption of the global supply chain have now made this unfeasible.
As a result, we are now updating our schedule, and estimate that the startup will take place in the end of 2023. In this picture here you can see construction at the biorefinery site in Leuna, and how it is progressing. Meanwhile, as we see in the picture, the R&D facilities on site are being extended, and the application development center for rubber and glycols are now operational.
This enables us to continue the commercial activities and testing at the full speed with our future customers in various end uses. All in all, our CapEx is totaling in 2021, it was EUR 1.5 billion, and we expect that to be in 2022 on the same level, about EUR 1.5 billion. 2023 will see our CapEx coming down, as you can see from this picture. Moving on with the projects. Now let's take a short update on biofuels growth plan. We do have two clear messages.
The basic engineering of our next generation biofuels biorefinery has now reached to that point where we have completed a site assessment in Kotka and Rotterdam, and now work is continuing in Rotterdam, where the operating environment is more favorable for the biofuels business. The current investment environment, however, when we talk about costs, resources, and timescale and time kind of horizon, is very challenging for making and taking a new decision as we speak, and therefore, we are not aiming to take the decision before the end of this year. The cost environment especially is so high, but also when it comes to resources and when it comes to still continuing logistical constraints. Ladies and gentlemen, meanwhile, we continue to build the business platform for our new innovation-driven businesses.
As the next step or first step, we are forming a new business unit by combining biofuels, biochemicals, biomedicals, and biocomposites to a one and under one business unit. The aim is to speed up the business growth and to leverage the capabilities and competencies across the project efficiently. The new unit will inherit the name of UPM Biorefining and will be reported as part of our other operations for time being. As the name Biorefining is now taken, UPM Pulp and Timber will be reported as a new BA called UPM Fibres business area. These changes will take place in the beginning of 2022. You can find our restated financial figures in the result report as well as in the background slides of the presentation. Finally, we are here on very familiar picture of a spearhead of growth.
These are the focus areas where we seek significant growth in the coming years, specialty packaging materials, Fibres, and Biorefining. Last but not least, I will actually go into 2021 stakeholder interests mitigating climate change and fostering biodiversity, which has now reached a new level. At UPM, we have ambitious science-based targets and strong track record in taking tangible actions in both areas. During the first half of 2022, we will publish our new, even more ambitious Global Forest Responsibility Program. Ladies and gentlemen, I will summarize now the presentation by saying that the year 2021 was strong in returning back to the pre-pandemic profit levels, and our performance exceeded, and in our businesses, we exceeded the financial targets. 2022, as said already, is expected to be another good year for UPM.
Of course, the labor negotiations in Finland, where we are aiming a mutual benefit outcomes for supporting future growth and competitiveness. Finland is a good platform for growth as well, but we need to also have kind of business-specific CLAs and support for growth in that respect as well. It's one of the key cornerstones of the success. The investment cases for UPM Paso de los Toros and Leuna Biochemicals project remain very attractive for the future. UPM also updates completion schedules owing the successive wave of the pandemic and global supply chain bottlenecks. Ladies and gentlemen, this concludes the prepared part of the presentation. Dear operator, we are ready for the questions.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press zero one on your telephone keypad, and you will enter a queue. After you are announced, please ask your question. Please hold until we have a first question. Our first question comes from Robin Santavirta with Carnegie. Please go ahead.
Yes. Thank you very much, and good afternoon, everybody. Now I have two questions. The first one is related to the guidance for H1. When I look at the H2 2021 comparable EBIT, and if I exclude the forest valuation gain, and then I compare it to the performance in H1 2021, obviously your H2 earnings were quite significantly higher last year. Now you expect the H1 earnings this year, the underlying earnings to be at the similar level than H1, so quite a significant drop from last year's H2. I do understand the strikes, but are there any other key moving parts that we should understand when it comes to profitability in H1 this year other than the strikes?
It would be helpful if you would highlight the key moving parts. Thanks. The other one is related to the Olkiluoto 3. When do you expect that to start to contribute into your P&L? So those two. Thanks.
Maybe I'll take those two. Robin, to your first question, and perhaps for the benefit of the others as well, kind of perhaps preempting some questions that might still further come on the same topic. On the strike, I hope it's clear for everyone that what we have done in contemplating the guidance that we give for the first half of this year is that as we always do, we look at sort of scenarios on various verticals, variables, moving parts as you kind of call them. Then both up and downsides, and then based on that, we give the guidance this time. Of course also the strike has been one where we have considered various scenarios.
Based on that then we have now given guidance on what our comparable EBIT as we will report it then after the first half of the year by the current estimate would look like based on compared to the first half of last year. In that sense as said it includes our best estimate at this time also concerning the strike. I would say on this other moving parts of course you can let's say note what I mentioned about the maintenance shutdowns that we have actually now as we have detailed in the report two pulp mill shutdowns planned for the second quarter.
You can sort of compare that to Kymi pulp mill shutdown in the fourth quarter I mentioned, impact was EUR 37 million. Maybe that's on the guidance. As Jussi said, we think and expect that this year is another good year for UPM, meaning that the sort of underlying business performance for UPM is continuing, if you look at UPM as a whole, at a good level as what we saw during last year. On your question on Olkiluoto 3, of course right now we are close to the point in time where the power plant will be connected to the national grid for the first time.
You can find it on the Teollisuuden Voima TVO website where they actually on a daily basis update the timing that there will be some power output then before June from the test runs which will also mean that we will get our share of that power to be sold to the market. In June as has been publicly stated before still on track to start commercial operations so running the nuclear power plant at full power. Obviously also the impact or let's say the volumes flowing to UPM and impacting our energy business area result will be obviously more meaningful during the second half of the year if everything goes as it is now announced by TVO.
Thank you, Tapio. Can I add a third one, a quick one? You have previously frequently provided an indication of how the graphic paper prices have evolved for your in your contracts portfolio in Europe. Are you willing to do that this time too? Shed some light on the prices that we should look at for H1 or start of the year.
Of course, you know, not all, but maturity of the deals are done and there is a significant increase in prices in various businesses. We do not give guidance, a particular number, but it is actually an increase that we have not seen in at least during my 15 years being here in CEO position, that kind of magnitude. It is a significant increase. As we all know, the significant has been the cost escalation as well when it comes to fibers, when it comes to energy prices especially.
Thank you, Jussi and Tapio.
Our next question comes from Lars Kjellberg with Credit Suisse. Please go ahead.
Thank you. I'll just jump back onto the pricing. I appreciate you may not want to comment exactly on the price directory, but what we can see from the outside, prices for publication papers are up, broadly speaking, 50% in the published prices, with some surcharges maybe in that you may or may not charge. Can you give us any sense of how you view the spread for you, price versus cost? You talked about 6% up in average prices in the fourth quarter, which of course was insufficient. To your point, you see this is unprecedented price increases we're seeing. Again, a bit curious about that guidance because these prices certainly seems to jump out strongly versus what you saw in cost development during the fourth quarter.
That is correct.
So any-
Yeah, that is correct, Lars. This is a good question, but of course, you know, it is very much related to, you know, how the power prices, i.e., the electricity prices are. Yes, six percent was not sufficient. It was inefficient, you know, to cover the costs. This is more doing so, that is for sure, that we are seeing a sufficient, you know, kind of or better balance in between costs and prices. Especially as you have seen that the December energy prices were rocketing here in Finland but also especially in Central Europe as well, and paper business, if any of our businesses is very much, you know, kind of related to energy prices as well.
Basically the margin is very much dictated by how the energy prices and the fiber prices will continue to develop.
Tapio, maybe you can share with us what you saw in the net negative impact of energy in Q4. I'd like to have or hear your view on what's happening in China, 'cause of course you are a bigger operator in China. What are you seeing there? Any change in trends that we should be aware of, positive or negative?
Well, yes, of course. Let's say if we look at the energy, the question on energy, of course, what we saw was that, let's say in November, December, the energy prices continued to go up, and that of course also explains, and sort of, let's say has enabled the exceptionally good performance of the energy business in Finland. It was, let's say, at least as high sort of development in Germany, which of course affected our German paper business in particular, or paper mills in Germany in particular.
I would say, as was pointed out, that on one hand, this accounting changes that we implemented here, shifting some of these items that we typically book in the fourth quarter, and let's say there's sort of downside short-term surprises on the energy costs, we have been then able to, on the other hand, compensate for or cover through the sale of excess CO2. In that sense, roughly speaking, that has been kind of counterbalancing all these factors all together, each other in the fourth quarter when you look at Communication Papers as such.
As said, overall, UPM level, the net impact of energy price increases or cost increases and price increases in the fourth quarter was negative. No sort of figure to sort of disclose on that as such. Maybe I can shortly comment on China that we have, like you can see in the pulp markets, for instance, or even for graphic fine paper prices in China, which are public information. We have seen, let's say some pickup in the sort of business and business activity in China here in the short term. In that sense, there are some green shoots, so to speak, that are visible also in our businesses.
Maybe adding what Tapio said that in Specialty Papers, Fine Papers, Pulp, and Raflatac, which are most relevant businesses for us, you know, the demand outlook is more solid as Tapio already said. You know, it is actually positive development that we see.
One final question from me just on the big price increases, again, in publication paper. Last time we saw good pricing, I guess late 2019, or 2018, 2019, we saw deterioration of demand. What is your sense that your customers are doing now in terms of coping with, you know, such huge price increases?
That is-
Are you seeing anything in your order flow or anything that has changed?
No, that is not typically even happening so fast. It is a slow process. Hard to say. It is typically, you know, you are. You know, if you are having very high costs in any business, you are basically sometimes seeing that it cuts even solid business for the future, i.e., some publications or so. You know, typically there is also new publication coming as well, so difficult to say, Lars. That is the kind of paradigm or always said that, you know, higher the price is, more it cuts the demand. It's very difficult always to find a correlation that what is coming from what kind of reasons.
Mainly, I believe that it is our readers' behavior that is driving the kind of demand, but also, in some cases, if the costs are escalating and paper in some publications is high-cost factor. Basically it is a kind of combination of various things.
Got it. Thank you very much and good luck.
Our next question comes from Johannes Grunselius with DNB Markets. Please go ahead.
Yes. Hello, everyone. It's Johannes here. I have a question on Paso de los Toros. Now, you're keeping the all-in OPEX guidance intact to $80 per ton. I mean, it's quite high inflation in most areas these days. Could you just elaborate why you're still you know you remain confident in that guidance?
It is for the reasons that what the whole project was built on. It was built on a forest that we own, maturity of the forest land. It is long-term, kind of, logistical, kind of operations. It is self-sufficient when it comes to energy or oversupplying energy. Basically, there has not been any factor that has moved. That was the reason that it took so long to develop this project because we wanted to have very few variables, whatever the kind of changes in the global economy is to be always on the low cost.
That's the reason that, you know, it has been all of the parts, which is of course forests and wood supply, the mill itself, then the whole, you know, inbound, outbound logistics, is very relevant, on that. Yeah. That has been the name of the game ever since 2010 when we started to develop this project, so almost 10 years or more than 10 years ago. Happy to say that we—it is absolutely kind of intact, you know, number, this $280 per ton.
Very clear. I was just thinking about how we should expect volumes ramping up in this mill. I of course understand you cannot provide exact details. Just roughly speaking, in Q2, for example, next year, what kind of capacity utilization is realistic and then for the second half of 2023?
That I do not have the information. I don't know if Tapio is having any view on it, but of course, pulp mill is pretty known technology, and therefore, the ramp-up is pretty fast.
Yeah. I was thinking about if there should be a meaningful earnings contribution, 2023 from this project.
Absolutely.
Yeah. Yeah.
There will be a meaningful contribution.
Yeah.
Absolutely.
I mean, could you help us, but maybe it's just to think about capacity utilization for the full year 2023 or something like that?
That is something that we don't disclose, unfortunately.
Okay. Fair enough. I was also curious about plywood, normally not in focus in UPM so much, but now the earnings trend is very favorable. It starts to be a good contributor for UPM, of course. Is this a new normal, and how should we think about 2023 and onwards, in terms of, you know, earnings from that division?
Plywood actually has done a tremendous job in UPM from all respects. You know, it's the cost structure. We have been over time investing in low-cost countries like Estonia and Russia, where we have now significant operations that are on full speed. What we have done here in Finland now, which is great, you know, the CLA, this labor agreement is really enhancing the earnings potential because we are getting more capacity out of the mill and the people are having better annual earnings. The CLA especially has been opening some issues that we have had actually in the past, the CLA. In this front, plywood actually has taken a step to a kind of.
I don't know whether this is a new normal, but it is not just, you know, one year. It is a gradual improvement over many, many years now. Efficiencies, cost base, the end uses that we provide, we have all the time targeted to the high end of the quality, which means higher prices. So basically it is coming from all fronts, commercially successfully implemented, kind of thing, operationally low cost, even the organizing the work, which is the CLA type of thing. Happy with the Plywood progress and therefore we already made an investment decision to even improve the cost efficiency of one of our Plywood mills here in Finland. Good progress.
Okay. Understood. Thanks a lot for your answers.
Our next question comes from Linus Larsson with SEB. Please go ahead.
Thank you and hello to everyone. You disclose pretty well your variable cost development in the fourth compared to the third quarter. I wonder on the first compared to the fourth quarter, on a group level and maybe on a unit cost level would be easier, given the strike. How do you see variable cost development in the first compared to the fourth quarter? Is it still rising? Is it even accelerating or something completely different?
Well, if I comment on that, what we saw last year was, let's say, the prices for many sort of variable cost inputs, sort of, continuing to rise throughout the year and, then of course energy, as mentioned many times here already, having this kind of, unexpected, jump then, in the end of the year on top of everything. Obviously we are starting, I would say, as an overall picture, this year at a relatively high-cost level, across many or most sort of supply markets.
While the sort of bottlenecks that we have seen during the last year and are in many cases, let's say, behind these sort of cost increases, while we don't see those bottlenecks to sort of disappear all of a sudden here, as I'm sure the commentary in general now in the world is, we will continue to see these bottlenecks in place at least during the first half of this year. Therefore, I would not at this point at least see acceleration by any means, but not a deflation setting in either in the shorter term here. Of course, there are some items like, once again, coming back to energy.
If we look at sort of the forward curves for most energy items, they are kind of pointing downwards toward the summer, and we have seen some downturn in some of the energy fundamentals from the very high peaks. But I would say also that remains to be seen. We are at the moment in a relatively high-cost environment, and that is something that in a sense we need to be able to manage during the first half of the year. I think as we have commented here, we have good results on that, let's say from last year, perhaps Communication Papers being the exceptions here there, but that we have already discussed.
Okay. You're not expecting a further increase than Q1 and Q4 if I understand you right?
Well, again, won't go into forecast. As said, I don't expect sort of any sort of acceleration in a sense, at least based on what we know today. But, well, let's say overall we're in a high-cost environment and it's let's say of course possible that for certain inputs the prices continue to go up. Again, if you look at kind of a comparison, sort of a first quarter or first half, of course, given the development during last year, we are at a high-cost, higher-cost environment now than we were a year ago.
Sure. Sure. No, that's clear. Thank you. Maybe, which is partially related I guess, if you could give us an update on your energy hedge situation because there are some changes. One question would be, to what extent, if any, have you hedged your share of Olkiluoto 3? Also, to what extent have you hedged your electricity consumption now that you're presumably consuming a lot less electricity with the ongoing strike? Maybe, for the first quarter and I guess for the remainder of the year, if you could just give us a brief update as to what degree you are hedged on energy, please.
Well, let's say we can't and we don't disclose exact numbers on that. To your first part as far as Olkiluoto is concerned, of course, what we have considered in our hedging portfolio which again we build up over several years' time is then the Olkiluoto 3 volumes as part of our total output and the, let's say, volume or share of that that we want to hedge so that we have been building over time. Of course allowing for any uncertainty as far as the volumes are concerned for the Olkiluoto 3 because we don't want to be over-hedged. That is of course, in a sense, how we have been looking at it.
Building up then to this point where the connection to the grid is soon taking place. I think we have earlier stated that our consumption of electricity has been around 50% hedged. Of course, now we have been, without again going to the numbers as such, anticipating in a sense the estimated impact of the strike to sort of manage those hedges.
That's very helpful. Thank you very much. I think I'm fine. Thank you.
Our next question comes from Justin Jordan with BNP Paribas. Please go ahead.
Thank you. Good afternoon, everyone. I've got two very separate questions. Firstly, I guess on spearheads for growth. Yeah, fully appreciate we're in a major global pandemic with huge inflation that we haven't seen for many decades. I just wanted to double-check just on the existing two major spearheads clearly in Uruguay and Germany. The board's hurdle rate of 14% return on capital employed, that still is clearly applicable despite the delays and the costs implications that that has led to. Then I suppose just thinking about the board decision perhaps at the end of 2022 on the biofuel refinery, I'm assuming that, you know, I sympathize with any board trying to make a major investment decision in the current climate.
I'm assuming that returns discipline that UPM has had for many years still applies to any future investment decision that the board would be taking in 2022, 2023. Then separately, a separate question completely, on, shall we call it, Raflatac and shall we call it the European specialty paper business, so the non-Asian portion. Clearly, those businesses have been a star within UPM in 2020, 2021, enjoying stellar margins. I'm just noting that EBIT margins or comparable EBIT margins in both, specialty paper and Raflatac have been easing successively in recent quarters. Are those businesses now sort of past their peak in margins? Do you believe they're now sort of past their peak in margins?
You know, if we think about something like Raflatac, where pre-2020 you were talking about high single digit comparable EBIT margins, you had 13%+ EBIT margins in 2020 and 2021. Easing to 10% in Q4 2021. Was 2020, 2021 a sort of exceptional period for those businesses? Really what I'm asking I suppose is, what is their pricing power against what is clearly an inflationary cost environment as we think about 2022, 2023 for both Raflatac and specialty paper? I'm sorry, two very separate questions, but I'll appreciate your answers.
Yeah. I guess that if I start, then Tapio will add on. You know, spearhead of growth returns for these two projects are intact. The 14% is the same for these two projects. As we said, the cash cost for the Paso de los Toros is intact as well, so they will have a very good return. That is intact. When it comes to biofuels, you know, it is, you know, if I am only looking at the numbers by the way that you can almost calculate yourself after this restatement what the biofuels was returning for UPM in last year.
We are talking about the numbers that are very much on the level that we were doing in 2019 and previously that we were kind of commenting those numbers. Like I said, you can really calculate those and, you know, if I help you in that respect, that the sales for the Lappeenranta Biorefinery was EUR 203 million
EBITDA EUR 55 million, 27% of the sales. EBIT EUR 37 million, 18% of sales, and return on capital employed was 23%. Basically, yes, this is a highly attractive, but, like I said, in current kind of cost environment, you know, it is difficult also resources and what have you. It is difficult to take any decisions and therefore as we guided that, you know, before the year end, we are not most probably taking any decisions. When it comes to Raflatac and Specialty Papers, the fourth quarter definitely was. In Specialty Papers we saw quite a significant power and electricity price increase, so that was affecting Specialty Papers business here in Europe. And Raflatac, of course, the cost inflation has been there.
Raflatac now reported 10% margin in quarter four, but it is significantly higher than that of, you know, previously in this kind of circumstances we would have been falling from that 7%-8% downwards. Basically I think that we have been taking firm steps of, you know, higher profitability going forward actually in these two business areas. Why it has happened, there's multiple actions, you know, investments, cost-cutting, commercial success on commercial strategy. There's multiple actions that we have been taking in both. I wouldn't draw any big conclusions out of our fourth quarter result.
Maybe just to sort of add on that.
Okay. Thank you, Jussi.
To sort of Justin's question, which we have discussed earlier as well, the unusual or exceptional year was 2020 for this sort of self-adhesive value chain, meaning Raflatac and the label paper part of Specialty Papers where demand was very strong and high, but that did not impact the supply markets for the input. The input costs remained very benign. The kind of negative impacts of the COVID restrictions were keeping the input costs low. I would say that last year performance has been excellent in that area that now we have seen because of the increased activity in the world and bottlenecks and everything else that we have discussed, a totally different cost environment for these businesses.
Still, if you look at Raflatac, we are for the full year, like you pointed out, at similar level of EBIT margins. Perhaps not to extrapolate from the best quarters of 2020, but not to focus on one single quarter at the end of the year last year either. I think as has been pointed out by Jussi and earlier as well, I think we think that we have a new level of, let's say, margin performance for Raflatac in particular.
Thank you, Tapio. I remind you that if you do wish to ask a question, please press zero one on your telephone keypad.
Operator, I might actually. We do have the press conference coming after this, so I might thank you all and say goodbye for now and see you soon. Thank you.