Audience, welcome to UPM's first quarter 2022 result webcast. My name is Jussi Pesonen, I'm the CEO of UPM. I'm here with our CFO, Tapio Korpeinen.
Hello to all of you on the line.
Today, we will cover three topics. First of all, the first quarter result, and then the collective labor agreement in Finland, and finally we talk about the very important projects that we have, the transformative projects. Ladies and gentlemen, welcome to this meeting and let's have a productive, good meeting. First we will really discuss about the first quarter result, and the outlook for 2022. Our first quarter performance was very strong, and our result were on par with the last year. All in all, we expect this year to be another good year for UPM, with full year of 2021 result on similar or level or higher than last year. Second, we have now achieved business-level, collective labor agreements for all our businesses, also in Finland.
This increases flexibility and the competitiveness of our mills and operations, while at the same time offering competitive terms for our UPM employees. This is laying an excellent foundation for the future growth also here in Finland. UPM has about 6,000 employees and total assets of about EUR 10 billion in Finland. We have responsibility to enable our people and businesses prosper, and for our assets to generate attractive returns for the shareholders. This is actually very important for all of us as we speak. Thirdly, as I said, we talk about the major growth projects and they are continuing with good pace. The projects are an important part of the strategy of UPM, enabling significant future value creation and earnings growth for the company.
Let's move on to the last quarter or quarter one results, market demand for our products was good, and the markets were tight during the whole quarter. Sales prices increased significantly in all of our businesses, more than offsetting the rise of the variable costs. The strike in Finland lasted 16 weeks until 22nd of April and affected our first quarter production delivery volumes. Russia's war in Ukraine had some impact on our operations as well. In this context, our first quarter results is an excellent achievement. Sales grew by 12% from that of last year, and our comparable EBIT was on par with the last year. Comparable EBIT margin, as you can see from here, was 11%. Ladies and gentlemen, we...
At this point I would like to hand over to Tapio for more analysis on the result. Tapio, please.
Thanks, Jussi. Here once again, you have the EBIT bridge and on the left-hand side, the bridge year on year, first quarter compared to first quarter last year. Sales prices increased in all business areas, and the largest impact was in Communication Papers in this sense. Variable cost increased in all businesses, too. Energy costs in particular increased significantly despite of hedging. It is obvious here that the magnitude of both sales price and variable cost increases have been unusually large over the past 12 months. Nevertheless, we have been able to manage our margins well. In the first quarter of 2022, delivery volumes decreased in most business areas due to the strike in Finland. Fixed costs were lower than last year, again impacted by the strike.
All in all, we estimate that the strikes affected the first quarter results by about EUR 180 million-EUR 220 million, considering the lost sales, volumes lost, fixed costs, lower fixed cost on the other hand, and then various dynamic impacts affecting margins. On the right-hand side you can see the sequential EBIT bridge, fourth quarter last year, and to this first quarter of this year. Also in this comparison, sales prices and variable cost increased significantly, with sales prices more than offsetting the increase in variable costs. Deliveries were clearly lower, again due to the strike. Fixed cost decreased due to the seasonal reasons, more maintenance that was taking place in the fourth quarter, the comparison period, and then the impact of the strike during the first quarter.
Finally, in the fourth quarter last year, we increased the fair value of our forest assets by about EUR 103 million, whereas in the first quarter, now this year, this value increase was only EUR 12 million. This is visible in the right-most bar in the EBIT bridge. Here on this slide, we see the comparable EBIT by business area. Starting with UPM Fibres, prices for pulp and sawn timber were at healthy levels, and our pulp operations in Uruguay and the timber business performed very well. The business area EBIT was lower than in the comparison quarters, however, as two-thirds of our pulp capacity, the three mills in Finland were down during the strike. Communication Papers returned to solidly positive profitable numbers thanks to the tight market and successful commercial execution.
The business experienced a steep rise in input costs, particularly energy, but was able to increase sales prices accordingly. A third of our graphic paper capacity was down because of the strike in Finland, but the business was able to cover deliveries partially from existing stock and from the mills outside of Finland. Looking at Specialty Papers, the market for release liner and packaging paper continued to be good and prices increased. However, our delivery volumes were lower than usual, again, due to the strike in Finland. Fine paper prices increased in Asia. For Raflatac, the underlying demand and margins continued to be healthy despite significantly higher raw material, energy, and logistics costs.
It's also good to note that in the first quarter comparable EBIT, we include a EUR 13 million provision for expected credit losses related to the Raflatac business in Russia. Raflatac's delivery volumes decreased as the strike in Finland caused raw material shortages and production curtailments. Plywood achieved another record quarter in earnings thanks to strong demand and high sales prices. The new business-specific collective labor agreement signed in December improved flexibility in production in our Finnish mills. This is particularly important in the current strong markets and also considering declining Russian volumes. Energy reported strong first quarter results thanks to continued high prices in the Finnish price area. However, Finnish prices and the business area result came down from the record high levels of the fourth quarter. The market for advanced renewable fuels continued to be strong.
UPM Biofuels, however, had no production or deliveries in the first quarter because of the strike in Finland. As you remember, Biofuels was moved to other operations at the beginning of this year, as part of the biorefining unit, and thus is not visible on this slide. On this slide, we see our cash flow. During the first quarter, operating cash flow was low at EUR 12 million. Working capital increased during the quarter by EUR 258 million. Partly this is inflation-related in a sense due to higher prices in general, which is increasing working capital. Partly also included here is the working capital needed for energy hedges in the current volatile markets. Our balance sheet continues to be very strong.
Net debt was EUR 837 million at the end of the quarter, and net debt to EBITDA was at 0.46x. Liquidity was EUR 2.9 billion at the end of the first quarter. As we all know, the geopolitical environment in Europe has changed dramatically after Russia's attack on Ukraine. Our primary concern are the people suffering from the war, and we have started delivering humanitarian and material aid to Ukraine. The war and the related sanctions and counter-sanctions have significantly increased uncertainties related to European and world economy, also, in the energy markets in Europe. UPM businesses have been impacted as well. We decided to cease all deliveries to Russia, and we also ceased wood sourcing in Russia. We have decided to suspend production at our Chudovo Plywood Mill.
Fortunately, our Russian exposure has not been very high, as you can see on the right-hand side of this slide. Nevertheless, in the first quarter, we have booked EUR 95 million of impairment charges related to assets in Russia. These are items affecting comparability, so not affecting the comparable EBIT. The first quarter comparable EBIT does include EUR 17 million provisions for expected credit losses in Russia. As mentioned earlier, most of this was recognized in Raflatac and the rest booked in Communication Papers. Here we have our outlook for 2022. As you remember, in 2021, our earnings recovered back to the strong pre-pandemic level. Even though there are significant uncertainties, we expect 2022 to be another good year for the company. We expect good demand to continue for most of our products.
During the first half of the year, our production and earnings are affected by the strike in Finland and the following, ramp-up of production now as the strike has ended. In the second quarter, we also have scheduled large maintenance shutdowns at two of our Finnish pulp mills, Kaukas and Pietarsaari. We expect that these, shutdowns will affect our, second quarter EBIT by about EUR 80 million given the extent of the works and also given the attractive margins in the pulp business. Sales prices and variable costs are expected to increase in most businesses in the first half of the year, and we will continue to manage margins in the inflationary business environment.
We reiterate our earnings guidance for the first half of the year, meaning that we expect the first half comparable EBIT to be on similar level compared to the last year's first half. We also now introduce a full year 2022 guidance. That is, we expect our full year comparable EBIT to be on similar level or higher than in 2021. Now I'll hand it back over to Jussi for some more longer-term topics.
Yes. Thank you, Tapio. This was good, you know, and proud of the result that we have made. You know, our focus areas are clear, no change on those. This slide is summarized by clear focus on actually ensuring the performance and of course the transformative projects that are growth projects for UPM to enhance our kind of earnings. The pandemic still continues, while the Russian attack on Ukraine cause also new uncertainties. Our focus is very clear, as I said, already, in the beginning. We have really today reported a strong first quarter result considering that most of our Finnish mills were not producing during the quarter.
The labor negotiations themselves were all about ensuring the performance in long term, and I'm very pleased with the negotiation result. We achieved all targets we set for the negos. As mentioned in the beginning, we have about 6,000 employees in Finland, and our assets in Finland are totaling EUR 10 billion. It is therefore very important that we ensure productivity, flexibility, and competitiveness of our mills and operations, and therefore attractive returns on assets. It is also important when considering the future investments and the Vision 2030 in Finland. UPM's long-standing goal has been to take the collective bargaining to the level where the conditions of the work are best known, i.e., in the individual businesses, mills, and operations. In the most of our operating countries, this has already been the case.
However, in Finland, there has not been an extensive and rigid collective labor agreement in place that originated back to the 1940s and did not recognize the major differences in our versatile portfolio of businesses and the rapidly changing nature of the business environment. Last week, we were able to settle the collective labor agreements in five of our businesses in Finland with the Paperworkers' Union. The 16-week-long strike finally ended. Earlier in December, we signed two more business-specific agreements, i.e., the plywood and timber with the Industrial Union. I'm happy to say that we reached our goals. The negotiations led to an agreement that benefits both businesses and the employees and strengthens our premises for success well in the future.
We are looking long-term Vision 2030 in Finland. Now we have seven business-specific labor agreements in Finland, which will improve the flexibility and competitiveness of each of the businesses. Our employees got also competitive terms for their employment. Finally, our businesses are now responsible for their own labor agreements. Work will be organized and will continue on the same level as where the business strategies, commercial decisions, and sourcing decisions are made. This is how the UPM operating model works. We do have the six businesses in our portfolio and hopefully in the future there will be a seventh based on these biomaterials. I believe this is yielding a good returns and good decisions in rapidly changing business environment.
To kind of give a quick win or quick actually glimpse on what has already happened, like Tapio already mentioned, that in Plywood we were able to sign the deal in December last year with the new CLA where we can effectively and efficiently move into 24/7 operating model that was not feasible before and with the old CLA. This means for this year, I mean 2022, more than 70,000 cubic meters of more production from our plywood mills in Finland. And this year it means also close to EUR 25 million, even could be higher improvement to BA's EBITDA.
This is a great example of that it shows how these business-specific CLAs are working and contributing to the future competitiveness of the business. Ladies and gentlemen, let's move on to the spearhead of growth investments and the projects. This slide you have seen quite many times. We have attractive major growth projects under construction in Uruguay and in Germany, and under consideration in our biofuels business in Netherlands. The projects are an important part of our strategy enabling future value creation, earnings growth, and illustrating this which is now illustrated in this familiar slide to you.
Considering Paso de los Toros, the pulp mill project, is progressing well towards its start up by the end of first quarter 2023 with a very competitive cash cost level of $280 per delivered ton of pulp. The mill will bring significant earnings growth once it's up and running. More than 7,000 people are currently working on the projects at the various construction sites, reaching the peak activity before commissioning work starts. The construction activity will then start to decrease. In here, you can see the pictures as we speak, you know, from various locations. Let's jump into the Leuna, and the pictures are pretty illustrative as well. The biochemicals refinery project in Leuna is now also progressing well.
We have finalized our new investment estimate, which is now EUR 750 million for the project considering the scheduled ramp up by the end of 2023 and the current high-cost environment. Supported by high customer demand, the investment case for the project is still very attractive and the long-term growth strategy for the business, biochemicals business, looks increasingly appealing. Thus, we are already having a team in place planning for the next growth steps beyond the first refinery in Leuna in Germany. Our CapEx estimate for 2022 is unchanged, there being EUR 1.5 billion. In terms of CapEx, 2021 and 2022 will be the most intensive years on this, as you can see from this picture in the transformative projects.
Like, 2023, it starts to come down, and 2023 or 2024, we are then prepared to move on considering that the balance sheet is strong as it is today, taking new decisions. In biofuels, which is the basic engineering phase of the potential new bio-refinery, and it is continuing with the full pace, now focusing on the site in Rotterdam. Basically, the work is now very dedicated work in Rotterdam. The demand for climate solutions is clearly on the rise. At the same time, the dramatically changed geopolitical situation has further underlined the need to rapidly find alternatives for the fossil fuels. I believe that the UPM can play an important role in decarbonizing society and creating future beyond fossils.
Once again, this is one of the topics that now is very positive to UPM. The Olkiluoto three nuclear power station unit was connected to the national grid in March, and production is rising steadily step by step. Once the unit starts regular commercial operations in third quarter this year, it will markedly increase UPM's CO2-free electricity generation. In addition, this will improve Finland's self-sufficiency regarding electricity and raises the share of Finnish carbon neutral electricity generation to about 90% level. As the kind of latest example of UPM's commitment to sustainability, in March we published our Forest Action program, which is highlighted here. This program will steer our global wood sourcing operations and covers our forest in Finland and in United States, as well as plantations in Uruguay.
Forest action pushes us and our sustainable forestry practices well beyond current standards that we have had and those requirements, and we will have a positive impact on all fundamental aspects of the sustainable forest, climate, biodiversity, soil, water, and social contribution. This program builds on and further expands all our existing commitments, such as climate positive forestry and net positive impact on biodiversity. With these words, ladies and gentlemen, you see the summary. I'm not going to repeat it, but we are now prepared to take questions. Dear operators, we are ready to Q&A session.
Thank you. Our first question comes from the line of Justin Jordan from Exane. Please go ahead.
Good afternoon, everyone. I've got three different questions if I could, please. Firstly, I appreciate this is a very delicate situation, but can I suppose, just try to understand the impact as you see it from the ongoing Ukraine-Russia conflict? You've talked about it as being potentially positive, I suppose, for plywood demand because of less Russian competition. Do you see similar positive potential impacts in terms of sawn wood and then wood for construction pricing environment in, shall we say, ex-Russia Europe? Secondly, just within the EUR 95 million impairment that you've taken, I just want to clarify, have you written down the Chudovo, Russia plywood mill to zero in doing that?
Perhaps secondly, more positively, can you just talk through the positive impact of the new labor agreement that you've agreed from April 22nd? What sort of more flexibility does this give you, and how should we think about this as potentially a catalyst for future capital allocation to Finland going forward? Thank you.
Well, if I actually start with the first and maybe the last one, and Tapio will come to the impairment. Justin, I think that, you know, the markets will then decide what will be the balance of supply-demand. Obviously, Russia has been quite big on plywood and in timber deliveries in even the global market. We'll see how the demand-supply balance will move. You know, nothing to comment on that. Of course, it is in plywood and in timber, Russia has been quite a significant player.
When it comes to CLA, of course, first of all, therefore, I discussed about the plywood kind of quick win where you can see that, you know, the first year after the signing of the deal will yield EUR 25 million EBITDA contribution. The old CLA was not able to actually get that kind of results. Similar goes with all businesses. We do have different businesses where like if I start from pulp, where you have the continuous run needs here, where you run, you know, 365 days, and then you have every second year an eight-month kind of phase, we have the major shutdown.
Basically, we have that kind of agreement now that we do not have a Christmas or Midsummer shuts. We are having a full run and then allocating resources to the major shutdown. That's a kind of where actually we are getting a lot of efficiency and hopefully, as I said, you know, good contribution on, you know, kind of competitiveness. In the paper, which is totally different type of business, where there's seasonality, cyclicality, and a lot of volatility on demand is happening. There's much more different type of flexibilities. We do not run the kind of Christmas and Mid-summer breaks. And if we were in some year to do so, then the cost will be lowered.
There will be extra hours worked in that business to get the flexibility on how to organize the work and shift working, and multiple other things concerning that business. In biofuels, once again, a bit similar to what the pulp making is, you know, 365 days operating model. You know, kind of security also when there's strike and if there will be disturbances, you know, how to make the kind of mill running on the closed loop, that is on agreement, you know. Allocating resources of course, you know, into the major shutdowns differently. Plentiful of kind of detailed level topics that will enhance the competitiveness of our assets.
Like I said that we actually were able to achieve all of our targets. One of the major target was that when UPM is organized differently than many of our competition, that we do have these six different businesses where the responsibility on costs and on the markets is in the same hands, you know. Now how we agree with the unions, how do we organize the work, how do we get the flexibility in the circumstances that business is fluctuating is also now done and dealt locally. That's one of the, you know, kind of foundations, you know, kind of places where you can build on long-term competitiveness.
Obviously, I truly believe that, you know, this will definitely enhance especially all of our growth businesses, but also the challenging Communication Papers business that we could actually now more in the future to actually get efficiencies out and therefore prosper on the business in here in Finland. Like I said earlier, we do have similar model now in other operating countries. Now, finally Finland is also in this same boat. I'm looking very positively to the future and, you know, even if this has been costly exercise, I firmly believe that, you know, cost of strike will be covered many times in the coming years and decades to come. Now I hand over to Tapio to talk about impairment.
Maybe to be clear, I'll just begin by repeating that, as we have suspended or stopped actually deliveries to Russia, therefore we have also taken the EUR 17 million reservation against our receivables in Russia, Communication Papers and Raflatac, which is included in the first quarter comparable EBIT. And at the same time as let's say the environment for conducting business in Russia for the future is highly uncertain, then we have taken a basically general decision to write off all of our other assets in Russia. That is where that EUR 95 million impairment comes from, and that does include the Chudovo plywood mill.
Great. Thank you, Tapio and Jussi.
The next question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you for taking my questions. To start with, from the strike, you provided an estimate of EUR 180 million-EUR 220 million. How should we think about the continuation of that impact into second quarter? You obviously are three weeks out. I'm also a bit curious about the Fibres division's performance in first quarter, which seems to generate extremely low margins considering Fray Bentos have very high margins. Can you talk us through what has happened to the costs during the quarter in that division? And by the same sort of token of logic, I guess the Communication Papers division was quite strong, considering, you know, you lower cost mills out. Are there any particulars, you know, such as stock movements or something that have impacted that particular division?
The final point, I just wanted to clarify if I heard you right on the maintenance activity that would cost about EUR 80 million in second quarter, and should we expect then a similar number as Fray Bentos costs are in third quarter? Those were my questions.
Are you taking, Tapio, the, you know? No, take some, you know. I will continue then on top of that.
Yeah, I can take the ones that I've noted down, and then you can sort of, if there's something that I've missed, then please fill in. Well, let's say, on the strike impact, well, obviously, the strike ended last Friday. Then we have the continued impact from the month of April. This week we are ramping- up. The last volumes in a sense are there. Then we will see how the remainder of the quarter goes. Obviously, now we are ramping up. The good news is that we are ramping up into a tight market where margins are good. We will see how much we can, in a sense, gain back from there. No sort of numbers in that sense.
In the Fibres business, again, we had three of our four pulp mills down, so obviously it's going to impact the business area level figures, even if the sawmilling business was performing well, but in scale, obviously, quite small compared to the pulp business. Margins in Fray Bentos were extremely good. In CommPap, again, we had the mills here in Finland not producing, but then we were able to produce obviously in the mills outside of Finland, kind of catch up as much as we can with the capacity outside of Finland.
As mentioned, we did have some inventory also to sort of deliver from. Again, the numbers basically are coming from the good margins that we have been able to produce in that business in the mills that have been able to run outside of Finland. Then the question around the maintenance, yes, as I said, EUR 80 million is the impact in the second quarter, and again, remembering there are two mills, so Kaukas and Pietarsaari, that both have their maintenance now during this current quarter. Let's say also some more than usual in a sense. Fray Bentos then we will have a kind of a normal shutdown, obviously only one mill, and that will be in the fourth quarter.
I might actually only add on what Tapio most probably already said that, you know, in Communication Papers, you know, it was actually a good success in commercial implementation. This is only a proof point again that how well the UPM operating model works, that, you know, when there's a tight market and we have been able to generate a high margin on that kind of market as well. It's pretty much operational that what we have been doing in those mills that has been operating.
All right. Very well. Thank you.
The next question comes from the line of Cole Hathorn from Jefferies. Please go ahead.
Cole Hathorn, thanks for taking my question. Just looking at Specialty Papers division's done very well and you'd imagine that, you know, higher pulp prices are impacting the China fine paper business. Would you mind just breaking down a little bit on the demand trends you're seeing in the Specialty Papers, particularly the label release liner and how you're supplying customers despite, you know, the strikes in Finland? Then focusing specifically on the China or the Asia fine paper business, how is that market developing at the moment? Thank you.
If I start with the release liner market, of course, you know, as you can easily understand, it is a very tight market, as we speak, where we have our Tervasaari mill down here in Finland. Luckily in UPM, we have been investing quite heavily into the business also elsewhere. We do have a big facility or machine in China producing full release liner in our Jiangsu mill, and that has had, you know, very good run. We do have the Nordland mill, where we made a significant conversion couple of years ago to actually ensure the kind of supply in Europe and of course take the growth in the market. The release liner market is strong. It is growing fast. It is actually having a quite positive outlook.
Now when we get the Tervasaari fully ramped up in a couple of weeks' time, you know, obviously that will help again. You know, it is very tight market and has been kind of one of those spot places or the places where we have had the tightest position. Luckily, like I said, that we have been investing in last five years, more than half a billion EUR into the business. Therefore, we have been able to support our customers also. Coming to the customers from Asia or from our Nordland mill, you know. The fine market has been solid in China as we speak, you know, and the prices have been quite good on that level.
Of course remains to be seen how the whole COVID situation or pandemic will evolve in China. So far so good, you know, the mill is operating, and we haven't had any kind of problems there. That remains to be seen how China will develop in the coming months and quarters.
Maybe in the meantime, one can say that there's been some improvement in the surrounding markets as the COVID restrictions have been easing and the sort of business has been picking up there.
That is correct.
Thank you. Then just following up on Communication Papers, I mean, you called out a very good strong operational performance, and you're benefiting from obviously the higher graphic paper prices. But is there any color you can give on the energy rebates you called out in the division? Any quantification that you can give there for first quarter and how you are phasing those rebates through the year? Then secondly, following up on Communication Papers, is there anything we should be thinking about on the U.S. business versus Europe? Is there any differences in trends or profitability that we should be aware of?
If I start with the latter one, and Tapio will come into the first one. The U.S. actually business is we have been quite strong always, you know, delivering to U.S. We have one LWC machine in the U.S. which is operating as is, and is a quite significant part of the coated No. 5 grade supply in the U.S. Obviously we then have other grades going to U.S. as well. Nothing that dramatically will be different from Europe. Of course, markets are declining, and the supply-demand balance is improving by many conversions that we see closures and conversions in the U.S. as well as in Europe. There's a lot of conversions happening from graphic papers to packaging grade.
Basically, we need to take only care of the competitiveness, and this is what this CLA is all about that, you know, we need to work on all fronts of our costs and take the kind of actions that will actually give us a good returns for the business. Yeah, maybe on this question concerning energy rebates. In the first quarter, there were no significant energy rebates as such in the Communication Papers result. Overall, one can say that this year when it comes to, let's say, the rebates and CO2 compensations and the free allocation of CO2 rights and so on, that is expected to come more kind of throughout the year. Perhaps no big sort of quarterly swings there expected this year.
Thank you.
The next question comes from the line of Robin Santavirta from Carnegie. Please go ahead.
Yes. Thank you very much. Now, related to the new CLAs in Finland and the improved productivity and flexibility you mentioned, did you provide some view of the potential earnings impact now from these contracts going forward?
No, we did not. Of course, this is what our kind of aim has been long-term, you know, competitiveness and like I said, that in plywood even if we didn't consider that there will be a quick win, as we have now, you know, experienced a very tight market due to Russian situation, we have been able to really ramp up fast, you know, into the 24/7 model in our plywood mills and we do furthermore that in the latter part of the year as well. This is more actually finding, you know, specific contracts that will serve the businesses in different circumstances, in different market situations, and in different cost positions. That is where I'm.
Like I said, I feel very comfortable with that now we have the kind of how we organize the work is now coming home, if I put it that way, that the business areas are responsible for organizing the work and making the agreements how to work and what's the compensation of the work. This will lead to a significant contribution to UPM when the time moves on. It's a bit similar type of situation that we experienced 2006, those that remembers that long ago when we closed Voikkaa Mill. It was first thought that, you know, now UPM is taking the capacity down, and we lose market share, and everybody else will benefit. As we have seen, we have been able.
With that action and with that kind of a chain of actions afterwards, we have been able to keep the Communication Papers business in the shape that nobody else has been able to do. I think that this is a bit similar type of thing that it's in the kind of DNA and in our operating model how we deal with the competitiveness. And we all know that it was a tough period of time. It was 22 weeks actually and a tough period of time. Typically when there's a tough period of time then the success in the future will be there, and you have the opportunities to be more competitive.
I understand. Thanks. Related to the ramp-up of production now in Finland, I guess that can be quite tricky. The mills and production has not been running for quite some time. How has the ramp-up proceeded, and how long does it take for the pulp mills and the paper mills to be fully up and running? Is it one week or three weeks or what?
Depends, but I have to say that what I have seen ever since Friday last week, it has been very positive, kind of starting point. You know, people have come quickly back to the work, and obviously we have been keeping the mills in that shape that, you know, the bearings have been turning rolls, and we have been turning and keeping the mill in that shape, our effluent plants in that good shape that, you know, it is easy to start up. Of course, as you know that our power stations have been operating during this strike. We'll see.
Of course, it is after so long of being shut down, you know, it might take some doing, and there might be some challenges. Quite positively I think that, you know, it will move on. Of course, paper machines are the easiest to start, and then the pulp mills and the bio-refinery is somewhat more complicated because of the nature of the process. UPMers are, you know, kind of high-quality people, and they know what they do. They are hardworking people, and I'm actually looking positively to see the ramp-up going nicely, but we'll see.
There's no kind of clear guidance how long it takes but like I said that in order paper machine is somewhat easier than pulp mills, and then the biofuels plant is of course the most critical for the many reasons.
I understand. Thanks. A quick last one in Communication Papers. How long is the average time span of the price agreement you have? I know in history it's been between three and even 12 months. Is it now considerably shorter and would you mind providing some indication of the time span?
Majority of the deals are quarterly based.
Quarterly.
Material of the deals are quarterly based.
Thank you very much. Thanks.
The next question comes from the line of Linus Larsson from SEB. Please go ahead.
Thank you very much, and a good day to everyone. Olkiluoto three is in ramp-up, and I wonder if you could provide just some update on how that is going and what to expect in terms of production for 2022. Maybe also comment on your hedging for that production and maybe even some comment on how you expect Olkiluoto three to impact your P&L this year.
Yes. Well, you can actually kind of more or less real-time follow the production and the sort of testing program from the TVO website, where they give the forecast for the coming hours and couple of days, as a kind of a real-time figures. At the moment, they have been running tests at this so-called 60% plateau where the unit is running at 60% and they are conducting relatively sort of severe tests. Like, on Sunday they had a test of a turbine trip, and this week they will have another test of a reactor trip and so-called loss of outside power test. These kind of steps are now being taken.
The next kind of weeks and months will take the capacity up to 80% then 100%, where the tests will be repeated. Now it has been around 850 MW output. Obviously, also since mid-May, when the connection to grid was taking place, then this kind of a test run electricity has been benefiting the shareholders of TVO obviously. Very small still in the last quarter as it was from the mid of March. Then with current prices there is value for the shareholders now in the coming weeks and quarters. The commercial startup still according to TVO expected at the end of July.
There you will see actually again from the TVO web pages this kind of a real-time updated information of the expected production. It's best to go and check there. We have been obviously, let's say, considering this ramp-up and the risks related to that in the hedging decisions. In that sense, we have been sort of cautious in terms of hedging any of the Olkiluoto three volumes to date as obviously this test run and exact volumes and timing and such is not certain. Going forward, as more information comes, then we make the hedging decisions accordingly. I've said earlier that the P&L impact is not material, let's say, if you look at the UPM figures as a whole.
Maybe more meaningful than now looking forward, when you look at it from at least the Energy business area point of view, if you look at where the current forward prices are, which are at levels which we have not been used to a couple of years ago still.
That's very helpful and reassuring. Thank you very much. Just one question on Raflatac had another very strong quarter, especially considering the provision that you took relating to potential Russian credit losses. Could you just update us on what you're seeing in the marketplace in terms of, you know, order situations, for instance, given the business area's proximity to consumer spending and potential concerns around that? How are the market trends out there?
No, at least at this point of time where we have had the capacity down here in Finland, the tight market is quite tight and there are, especially for the specialties that we produce here in Finland, there is a tight market. But then when it comes to, you know, future kind of changes in the consumer confidences, you know that we don't guide at all. But having said even that, you know, Raflatac and the Raflatac business is having a very solid outlook for the kind of longer term trend growth, for the reasons that we all know, you know, whether it's e-commerce or whether it is, all kind of labeling kind of materials needed in the business.
Basically that's a very good actually kind of outlook for the kind of trend growth in Raflatac.
Great. Thank you very much. The next question comes from the line of Johannes Grunselius from DNB. Please go ahead.
Yes, hello, everyone. It's Johannes here. I have one question about your thoughts on the wood fiber side. What do you see in terms of availability and pricing and so on, especially given the Russian situation; they are a big exporter. Could you shed some light on that, please?
Now when you talk about wood fiber, are you talking about pulp wood or are you talking about, you know, logs or what?
Yeah. Yes.
So the
Good. Let me clarify that.
You know, the wood ro-
pulp wood, yes.
That is actually, as we all know, you know, all of the companies in Finland has stopped buying wood from Russia and trading wood from Russia to Finland. That has been stopped. It remains to be seen, well, how it actually affects on the Finnish market. What I see that, you know, we have a very good, you know, we are still cutting much less than, for example, in Sweden of the annual growth of our forest. Our forests are growing 106 million cubes a year, whereas the annual cut has been on a level of 80.
The sustainable level of cutting is something that we have a very solid good, you know, kind of position on that, even to some years to grow, you know, kind of take even out somewhat more, more wood out of the forest. We'll see. You know, that is something that of course we cannot know. You know, it is then very much related to how the businesses are performing and how the global markets are moving on. Finland in that respect is in good position that, you know, we are talking about like less than 80% of the annual growth that we are cutting here in Finland. Therefore Finland is well positioned in that respect, but we'll see.
Anyways, you don't see any sort of immediate changes in the market here.
No, that is something.
Rise in prices.
Yeah, that is something that you never know, but, you know, that is the view that we don't see it, you know, as we speak, but, you know, hey.
Okay.
Who knows of tomorrow?
Okay. Thank you.
We have one final question from the line of Harri Taittonen from Nordea. Please go ahead.
Yes, good afternoon, and thanks for explaining the dynamics in a very exceptional quarter. Most questions have been sort of answered already. Maybe on the pulp side and what's your sort of thinking now that you are losing more than 500,000 tons of pulp deliveries because of the strike. Then in addition, if we look at next year, depending on how much, how quickly the Paso de los Toros ramps- up, there will be something like 1.5 million tons, or perhaps roughly more deliveries probably from your system. Obviously it's very good for very strong contribution to your system. How do you see the market kind of capability of absorbing that business or that sort of extra volume?
The market seems to have been strong for longer. How does that sort of cut in your supply-demand thinking.
I think that there's nothing really that has changed our mind at all. You know, the annual growth is there as we all know that, you know, all kind of materials that are replacing fossil raw materials is something that the consumers would like to see more and more, Harry, and therefore there is a good demand for pulp. We all know that, you know, the biggest entry barrier for pulp making is that you need to have the plantations, and it takes 10 years or even more to build a solid, good plantation base for a big pulp mill. You know, if I remember correctly, you know, the growth trend growth will swallow one pulp mill a year going forward, and therefore quite solid kind of outlook.
There are not that many projects, considering as well that there will be closures. The old worn-out pulp mills will close, whether they are in southern hemisphere or in the northern hemisphere. Then on top of that, we don't know all what happens now in Russia and how that, you know, those volumes will then be visible in the markets in even the short term or medium term or even long term. How does that actually change the kind of supply-demand balance as well? Basically quite positively considering that how the world goes on.
Yeah. Okay.
And
Well, that's helpful.
It's good to remember that, for a number of years, the net increase of capacity has been zero because there's been delay on, most projects and there's been exit all the time. Sooner or later, there needs to be some new volume coming to the market because the market continues to grow.
Exactly. Thanks for pointing that out. Thank you.
Ladies and gentlemen, thank you for joining us this afternoon, and have a very good day.