Ladies and gentlemen, dear audience, welcome to UPM's webcast. My name is Jussi Pesonen. I'm the CEO of UPM, and I'm here with our CFO, Tapio Korpeinen.
Hello to everyone.
When I was walking down here to the conf call room, I sum it up that this is my 62nd quarterly report, and I have to be saying that there has been quite many big changes and forward-looking events in UPM, starting with the closure of Voikkaa Mill and then acquisitions of Fray Bentos and Myllykoski and the operating model change, not even speaking about taking the balance sheet to a strong position. Today, I think that it is as kind of historical date and day for me and for the whole UPM. We have two important topics to be discussed. First of all, the result of UPM of the second quarter, which was 25th consecutive quarter of increasing earnings. Tapio, of course, will analyze that more in details in few seconds.
Secondly, UPM's board of directors has today made the decision to proceed with the new world-class pulp mill investment in Uruguay. It is my great pleasure to also describe this investment more in details later today. If we move to page two, the 25th consecutive quarter of earnings is absolutely important for us, and I think that key word for the Q2 and for the remaining part of the year will be how do we manage and how we are managing the margin, and we have been able to manage margins well in UPM on UPM level, but also in different businesses. Let's start with the Q2 performance. In Q2, our operating model continued to deliver good result. We succeeded in maintaining good margins, and our comparable EBIT continued to increase, reaching EUR 345 million in quarter.
The slowing economic growth, particularly in Europe, was having some impact in our product markets in Q2. At the same time, also the cost environment started to moderate. Our operating cash flow was strong, increased clearly from that of last year, totaling EUR 436 million in Q2. Our net debt at the end of Q2 was EUR 366 million, or 0.19 times EBITDA. Even after the adaptation of the IFRS 16 standards for leases and paying out a dividend of EUR 693 million during Q2, our balance sheet is practically debt-free. This is absolutely great starting point as we are now beginning the large investment project in Uruguay. Ladies and gentlemen, at this point, I will hand over to Tapio for detailed analysis of the result. Tapio, please.
Thank you, Jussi. On this third slide, you will see, first of all, the moderation that is starting to take place in the cost environment, and then the continued positive development in our margins in the second quarter. On the left-hand side of this slide, you can see the comparable EBIT development year-on-year compared to last year's second quarter. There, still sales prices continue to have a positive impact on our earnings year-on-year. At that comparison at the same time, the increase in variable cost already had only a minor negative impact. Fixed costs decreased from last year, mainly due to less maintenance than in the same period last year. Deliveries and production volumes had a small negative impact on the second quarter EBIT, mainly coming from lower deliveries and also related to reducing paper stocks in Communication Papers.
On the right-hand side, you can see the same development sequentially as compared to the first quarter this year. Here, sales prices had a small negative impact on EBIT. This comes from lower pulp prices. However, variable costs decreased as well, having a larger positive impact on our EBIT. About half of this cost relief comes from pulp costs in our paper businesses. As you can see in this slide, also other variable costs started to decrease already in the second quarter. Fixed cost increased seasonally compared to the first quarter, and also due to the maintenance shutdown at the UPM Kymi pulp mill. Deliveries and production volumes had a negative impact on our Q2 EBIT. This was partly due to seasonal reasons, also due to the maintenance shutdown at the Kymi pulp mill and to the reducing of paper stocks in Communication Papers.
Here we have the comparable EBIT development by business area. In Biorefining, EBIT increased from last year despite the fact that pulp prices were 6% lower. Solid customer demand from our customers continued for pulp, therefore, our delivery volumes grew by about 5% compared to the first quarter last year. For advanced biofuels, demand continued to be strong and our deliveries grew. Many of you remember that last year we had scheduled maintenance shutdowns at two pulp mills, and also at the Lappeenranta biorefinery where we had the so-called turnaround shutdown. As compared to that, now we only had the one pulp mill down for maintenance. Sequentially, compared with the first quarter, Biorefining EBIT decreased due to the 5% lower pulp price and the maintenance shutdown at the Kymi pulp mill.
In Communication Papers, paper prices continued at a good, stable level during the second quarter. Comparable EBIT was held back by the combined impact of lower deliveries and reducing stocks during the quarter. On the positive side, this reduced our working capital during the quarter and thus contributed to the strong cash flow. Paper demand development in Europe has been somewhat weaker than last year, part of it is related to the slow economic growth in the region. Also thinking about the second quarter figures in particular, part of it is due to reducing safety stocks created ahead of the expected Brexit, which did not take place in March, and probably also related to postponing purchases to Q3 ahead of the moderate reduction in paper prices in July. To ensure our competitiveness, we continue stringent cost control and asset optimization in Communication Papers.
In July, we completed the closure of Plattling paper machine number 10 in Germany, reducing our coated magazine paper capacity by 155,000 tonnes. The conversion of Nordland paper machine number two will reduce our fine paper capacity by about 200,000 tonnes later this year, while enabling our specialty papers business to grow in a highly competitive way. Speaking of specialty papers, we achieved a clear recovery in EBIT after three weaker quarters. Pulp costs started to decrease, or we started to feel the decrease also in the bottom line of the specialty paper business, while fine paper prices in Asia actually slightly increased from the first quarter. Demand for our products continued to be solid. Our fixed cost reduction measures started to show results. To stay on this track, we continue our cost management and our product development initiatives as well.
Our growth projects in Germany and China are proceeding well and will support our growth and competitiveness next year. Raflatac and Plywood showed stable EBIT development from the first quarter. In Raflatac, sales growth continued mainly due to higher sales prices and improved mix. Deliveries grew slightly from last year. Finally, Energy had an excellent quarter. Here, we had a perfect combination of higher hydropower and nuclear power generation volumes, higher electricity sales prices, and lower costs. Even the annual maintenance shutdown at the Olkiluoto power plants proceeded smoothly, having a smaller negative impact than last year. In the second quarter, we received the update on fixed costs for nuclear power generation from TVO. Fixed costs decreased by EUR 12 million for the first half of the year, which was all booked in the second quarter.
Roughly about EUR 6 million of the Q2 EBIT in Energy is related to the first quarter. Looking at the cash flow, as Jussi already mentioned, operating cash flow was strong at EUR 436 million, increasing by EUR 108 million from last year. Working capital decreased by EUR 48 million during the quarter, mainly due to reduction in stocks. Here we have the updated outlook for 2019. We continue to see the same uncertainties in the global economy and business environment that we highlighted six months ago. The economic growth continues, but at a slower pace, especially in Europe. Nevertheless, we expect UPM's business performance to continue at a good level in 2019. In the second half of 2019, we expect pulp prices to be lower than they were in the first half.
Paper prices in Europe and in North America are expected to decrease moderately in the second half compared to the first half of 2019. On the positive side, we also expect input costs to be lower in the second half than they were in the first half. We will continue our measures to reduce both variable and fixed costs. Finally, fair value increases of forest assets are not expected to contribute materially to our comparable EBIT this year. Now back to you. It's time to discuss our Uruguay investment.
Thank you, Tapio. Let's get ourselves into the details of the investment. I would like to first start with some of the background material. Obviously, in last three years in UPM, we have been putting a strategy together, which came to a picture that we see here, as I call it, the triple tower growth initiative picture, where we were presenting this as also in our Capital Markets Day. This slide reminds you of the spearhead of growth, the three focus areas where we seek significant growth during the coming years. These three are long-term. These spearhead, all of them are actually attractive long-term growth outlook having and are supported by the global mega trends. Obviously, one of the topic that we have been always discussing here is that there needs to be a clear entry barrier for the business as well.
Basically, that is the kind of background for that kind of information. In specialty papers on the left tower, we are growing through the ongoing focused growth initiatives that are as we speak, around EUR 200 million in investments in Finland, in China, and in Germany. The right-hand side is still in the development phase, i.e., the molecular bioproducts, biofuels, and biochemicals, and those could provide a large new growth platform for UPM for the coming years and decades. Preparation continue for the potential investments are proceeding as planned. However, today we will focus on the middle part of the picture, high-value fiber, the competitive new pulp mill in Uruguay will represent a large growth step in this area. Page nine is actually UPM's investment into a world-class pulp mill in Uruguay.
As said already, we have made today investment decision to make a 2.1 million tonnes eucalyptus pulp mill in central Uruguay near the town of Paso de los Toros. As you can see from the maps here, the total investment is about $2.7 billion. On top, which we will invest $350 million on dedicated pulp terminal or port in Montevideo Harbor, and local facilities in Paso de los Toros as well. The new mill is scheduled to be starting up on the second half of 2022. The major part of the capital expenditure will take place over the years 2020 to 2022. Next page is actually describing why it is a good investment. Firstly, it will provide a significant step for UPM future earnings. Earnings growth is something that we are always looking after.
With competitive plantation operations, the scale, and the best available technology at the mill, and the efficient logistics systems. It's a three-folded plantations, the mill itself, and then the outbound-inbound logistics. The new mill is expected to be one of the most competitive pulp mills in the world, both in terms of costs and in terms of safety and environmental performance of the whole value chain. We expect its cash cost level to be about $280 per delivered tonne of pulp, this means all fixed cost and variable cost of the plantation operations mill, and then logistics, inbound, outbound logistics, and delivered to the customer. It is including all of those costs. We have carefully prepared the prerequisites for the investments.
As I said earlier, three years in a very intensive phase, but more than five years or close to nine years of preparation for the possible investment. We have done that in very careful way. For us, it has been important to ensure sustainable competitive operations long-term and to minimize risks both in the project phase and during the continuous operations. For Uruguay, the project and the infrastructure development offers significant opportunities for economic and social development. For UPM's pulp business, the project represents a step change. It will grow our pulp capacity by almost 60% in a sustainable and high competitive way. With our pulp product mix, the share of the fast-growing eucalyptus pulp increases significantly, as does the share of the plantation-based production.
The average production cost will decrease, the average profitability increases, both because of the new low-cost unit, but also because of the synergies with the existing operations in Uruguay, i.e., the Fray Bentos mill. Why is the pulp business interesting? To start with, we believe that the long-term market outlook for pulp is attractive. Page 12. Global consumer megatrends such as middle-class growth in Asia, urbanization, changing demographic, and digitalization are driving demand for tissue, hygiene, packaging, and specialties. This provides a robust base for pulp demand growth. Sustainability, for example, consumers' view against plastics could drive further growth in specialties and new end uses. Recycled fiber scarcity worsened by declining graphic paper consumption is also a positive long-term driver for the pulp demand. We estimate that the long-term demand growth for market pulp is about 3%.
In coming three years, only limited additional pulp capacity is expected to enter to the market. In the long term, creating a competitive and sustainable wood supply forms an entry barrier, which limits the rate at which scale the new capacity can enter into the market. Obviously, I think that when I said that UPM has been managing margin well during the last few years, I think that one part of managing the market is a commercial success, how we are commercially operating. I think that UPM does have a very solid commercial strategy for the pulp business as well. First of all, we are aiming to grow with our growing customers. UPM is trusted pulp supplier with our own sales and marketing network throughout the whole globe. We have a global presence in all markets.
Today, our existing external customer base is representing about 2.6 million tonnes of pulp annually in growing end uses in Asia, in Europe, and globally. Pulp is not one or even two commodities. There are many different types of qualities of pulp, not to mention the different levels of sustainability performance as well. We offer a broad multi-fiber product portfolio. Most of our pulp customers are buying two, three, even some cases, four different pulp grades from us. We provide them with the R&D, and especially, I would like to underline a very good technical support to optimize the quality and the cost of their products. Our products and the operations meet the highest sustainability standards in terms of forestry, biodiversity, environmental performance of the mills, as well as stakeholder engagement. We will build on all of this with the new mill in Uruguay.
It will increase our offering in sustainable, high quality, and cost competitive way in eucalyptus pulp. What makes our new pulp mill competitive? What are the key prerequisites that one needs to meet in order to be able to make an attractive investment on this business? To look into from another perspective, what are the barriers to entry? As I already summarized, to be competitive and profitable and to achieve attractive returns for the investment, one needs to meet three hurdles. Competitive and sustainable wood supply for the mill, state-of-art mill design, thirdly, efficient logistic value chain inbound and outbound to the world markets. Let's shortly look at all of these topics. Wood supply, first of all, is one of the most important part of the competitiveness of the mill.
We have secured eucalyptus availability for the current Fray Bentos mill years ago and the new mill near Paso de los Toros through our own leased plantations and long-term sourcing agreements with the private partners. Three sources of how we have been able to secure the kind of competitive wood supply. We started to develop our plantation base in Uruguay almost nearly 10 years ago. If I remember correctly, that was year 2010. With the aim of eventually supply the second mill with the sustainable raw material. Now our own and leased plantations in the country are covering 382,000 hectares. We have more than 30 years of experience in plantation operations in Uruguay, which secures well-managed and productive plantations without making compromises on sustainability. This optimizing the plantation operations for the two mills will provide synergies for the existing Fray Bentos mill.
The second one, part of the competitiveness comes from the state-of-the-art mill design. The new mill has been designed as an efficient single line operations with the best available technology in this globe. The design criteria have been to enable the high operating rate, maintainability, and energy output. We have been really putting a lot of emphasis onto the scope to ensure also the low operating costs, excellent safety, and high environmental performance during the long life cycle of the mill. All of these criteria we have been clearly putting a lot of emphasis and developing them to the phase that we would have the best available mill in this globe, most competitive one. The total investment cost is $2.7 billion, and it is also a competitive investment level if we compare with the previous projects. Page 14 puts our investment level to the perspective.
This is a comparison chart provided by Pöyry, showing the capabilities and specific investment levels of the selected greenfield and brownfield projects, which on the axis is capacity and then the CapEx per tonne. The chart shows that our expected investment is below $1,300 per tonne of capacity. That is clearly lower than the average cost of these major projects, especially in the greenfield. Obviously, this chart only shows the level of investment, the attractiveness of the investment, i.e. the returns come from having a both efficient investment level and having the elements of the competitive operations in place. Moving to the logistics. The third major part of the competitiveness is obviously inbound and outbound logistics. How do we set up that?
This, in our case, will be secured by the agreed road improvements in Uruguay, the agreed extensive rail modernization from central Uruguay to Montevideo Harbor, as well as the dedicated pulp terminal at the Montevideo Deep Sea Port and Harbor. We will construct the modern pulp terminal into the Montevideo port with an investment of $280 million. The direct rail access from the mill to the port creates a very efficient supply chain into the world markets. Once again, the new Montevideo Deep Sea Harbor also enables synergies with our existing UPM Fray Bentos mill. We will also make local investments outside of the mill fence totaling of $70 million. A large part of this is related to permanent and temporary housing in the area. When discussed the status of our preparation three months ago in our Q1 call, several important prerequisites were still under preparation or pending.
The necessary permits have been granted, and the material agreements with the Government of Uruguay have been concluded to the satisfaction of both parties. The PPP agreement between the Government and the railway construction company was signed in May 2019. Initial works on the central railway have been started, and the financing of the railway construction consortium is proceeding, but not yet finalized. We will begin site works for the mill and dredging of the port immediately in the tendering for the main equipment and the manning of the project are going. As already mentioned, the mill is expected to start in the second half of 2022. Ladies and gentlemen, I would like to summarize my presentation by stating that the Q2 was 25th consecutive quarter of increased earnings. We expect our business performance to continue at the good level in 2019.
Our investment on new, highly competitive pulp mill in Uruguay will provide a step change in the scale of our pulp business and, of course, in the UPM's future earnings. At this stage, I conclude the prepared part of the presentation. Dear operator, we are ready for Q&A session.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There'll be a brief pause while questions are being registered. Okay, our first question comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead. Your lines are open.
Thank you. Congratulations on this decision for the pulp mill. It is clearly an interesting project. Could you share with us how you think about the return on this investment, given your different criteria? What you expect, and if the total investment also includes what you have invested in forest lands? If you can start there, please.
Clearly, Lars, obviously what we have been guiding is the cash cost level of $280 per tonne. What is the criteria for investment is in our capital markets material, where the return on capital employed for the whole business to be over the cycle more than 14%, and this will meet those criteria.
Great, thank you. Then coming back to the results specifically, interesting to hear what sort of costs you are seeing coming back aside from pulp as you mentioned. Also, the energy fixed cost reduction, is that something we should expect also in the second half, i.e., about EUR 6 million per year? Finally, if you think about your comments on pricing pulp, paper prices, how do you see the spread between cost and price developing? Is that a negative or neutral or whatever, how you see it?
Yes. This is Tapio. Maybe I'll comment on those questions. First, starting on the cost development as, again pointed out, it was already visible in the second quarter figures that this kind of a cost environment turned. As said, obviously lower pulp prices is negative for our pulp business but positive for our pulp-consuming paper businesses, and we were able to sort of capture that benefit as a lower cost. Other costs started to come down as well. We would expect that to continue into the second half of the year.
Let's say going forward, what we have seen already also in other fiber costs, including particularly wood cost, that the market prices started to come down and as the kind of inventory cycle or the cycle in the sort of value chain from purchase to harvest to consuming the pulp or the wood in the pulp and paper mills and wood products mills is longer, that takes some time to sort of flow to the bottom line, but we expect that to happen and take place during the second half of the year. Let's say in the logistics costs, we are starting to see some moderation as well. On several fronts. To your question regarding the costs in the Energy business, maybe just as a background, where this particular item is coming from.
In the costs of nuclear power generation that is charged to us from TVO is included a charge for the estimated future costs of dealing with the final depository for the spent nuclear fuel. Posiva, which is the company in Finland owned by TVO and Fortum, who will take care of the final placement of the spent fuels from Loviisa and Olkiluoto, made a revised estimate of those future costs, as they do annually, this time also related to the fact that Posiva made earlier this year a decision to move into the implementation phase of that plan for the spent fuel. Therefore, there was a more significant revision downwards.
This EUR 12 million lower fixed cost for the first half. There will be, let's say also, as far as the fixed cost is concerned, for the rest of the year, a benefit coming for our Energy business in the second half as well. Finally, to your question in terms of pulp and paper prices. No specific comment on the spread as such, I would say that as has been visible already in the first half of the year, in this environment, we expect that we will keep our margin stable the same way in the second half as we have succeeded doing in the first half of the year as well.
Just one final question, if I may. Just on CapEx, you raised this year's guidance by EUR 100 million. What sort of level of CapEx should we expect in 2020 and 2021? If you can give us any color on that, please.
That we don't have as a figure to give yet. As said, the rest of the CapEx for this Uruguay project, then, is expected to take place during 2020, 2021 and 2022.
All right. Thank you.
Thank you. Our next question comes from the line of Justin Jordan from Exane. Please go ahead. Your line is now open.
Thank you, good day, everyone. Firstly, I just want to say congratulations to the board for finally reaching this decision. I know there's many, many years of preparation work gone into this decision. Can I firstly just talk about the Communication Papers? Sorry, Communication Papers division. I'm just intrigued by your comment of impact of reducing stocks in Q1. I guess conceptually, if I take a step back, you should be benefiting from lower pulp or material costs in this division. Is that something that is yet to come through, or is that something that has been masked by the impact of reducing stocks in Q2?
Maybe if I'll comment on that. Perhaps it's a bit of both in a sense that there is some time lag how quickly the, and at what pace, in a sense, the pulp cost benefit shows in the bottom line. Of course, in the case of Communication Papers, that's most relevant for the fine paper part of the business to some extent to the magazine papers where we do consume some chemical pulp as well. On the inventory reduction part, the way in a sense the accounting works is that the realization of the margins in our bottom line is somewhat less when you are selling from stock more so than what you are adding to stock by producing paper. It's a combination of the two.
Okay. All right. Thank you. I fully accept what you're saying in terms of the long-term global pulp demand growth rate being circa 3% for market pulp. Can you give us some thoughts as to where you think short-term, I think for the remainder of 2019, pulp price outlook is? I know you talk about lower pulp prices in the second half overall, but do you believe, for example, Chinese pulp prices are at or near their trough? What's your view on this? Clearly if you ask 10 investors, there are 20 different views out there at the moment as to where we may or may not be. I'm just interested in your view.
Maybe that is the reason that we do not actually put that kind of guidance for there is 20 different views on it. It remains to be seen how the balance of the market will move on as we have seen that now the inventories are getting downwards even if they are still on the high level. That is something that is now happening. Most probably those kind of delivery statistics are not representing the underlying demand. My opinion is that the underlying demand is somewhat better than that of what we have seen in the deliveries for the reason that there's a kind of inventory correction as well.
Okay. Thank you, Jussi. Just one final question from me. Can you just remind us, I know this may seem like a really boringly anal question from me, but UPM, when you're declaring your dividend as a board, am I right in thinking you base that off your operating cash flow? The important thing I'm trying to check here is clearly you're signaling a much reduced free cash flow period over the next three years in 2020 to 2022. Am I right in thinking that should not influence future dividend payments?
That should not be the case.
Yes. Maybe to sort of recap in a sense that we have been discussing earlier. First of all, the dividend policy is, as you say, it's based on operating cash flow, so it's before investments, after obviously any finance cash costs, taxes, or change in working capital, but pre any CapEx. Secondly, the policy, we have the 30%-40% range, which is the target where we want to be over time, meaning that it's not a hard ceiling or a floor. Obviously the board will consider, in a sense, let's say the trajectory on which we have been as far as our dividend is concerned and what the expectations are for the future and where we are in terms of our financial standing, in terms of our balance sheet and performance of the business.
Obviously we put great weight on predictability and a consistent track as far as dividends are concerned.
Great. Thank you, Tapio.
Thank you. Our next question comes from the line of Alexander Berglund from Bank of America. Please go ahead. Your line is now open.
Thank you very much. I have two additional questions on Uruguay. First of all, if you can comment anything on how long you think it will take to reach full capacity? Is it in the range of three years or so? The second question is just a clarification on the ownership. I think you said Uruguay have a 91% ownership in the project. Does that also mean that you're only going to pay 91% of the $3 billion CapEx? How does that partnership work? Those are my questions. Thank you.
If I'll take that, three years is probably a good estimate. Of course, let's say accounting for the factor or taking a note that it's not a linear curve in terms of three years. Let's say the startup curve normally for an experienced operator such as ourselves is pretty quick in the beginning, and then there is, let's say, a tail of getting to the full capacity for the full days of the year. That takes a couple of more years. Then in terms of the ownership, as we have said, we have a local partner in Uruguay who has been also with us in the Fray Bentos project from the beginning. In a sense, it's a partnership where they have responsibilities and benefit that mirror ours in that project.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Mikhail Depot from UBS. Please go ahead. Your line is now open.
Thank you. A couple of questions. First of all, on the paper markets. What we have seen recently in the European statistics is that the demand declines have been accelerating a bit recently. Do you see that as a new trend, since we are coming down faster now compared to the 3%-5% in the recent years? Is that a new trend or is this mainly reflecting a weaker cyclical situation and some inventory adjustments? That would be my first question.
First of all, I guess that we have not changed our view of the around 5% trend decline in paper business. As Tapio said earlier, that there was inventories on Brexit inventory corrections. Of course, paper business is also having a kind of link to the general economics, and the pace has been somewhat lower in Europe now. Our view is very solid with that around 5%, and I would not actually draw conclusions from one quarter that there would have been any kind of particular change.
Okay. Thank you. In terms of pricing, you mentioned you expect somewhat lower pricing on paper in the second half. Would you care to give some more color on the magnitude of the declines?
Definitely, we are not giving any particular number. If we did have the moderate increase in the beginning of the year, I think that this will be similar to that, going downwards.
Okay. Just finally on costs and the maintenance costs that you have. You talked about the underlying input cost, if you think about the maintenance costs H2 compared to H1 or Q3 compared to Q2, what kind of a delta should we expect to see there?
I believe at the end of first quarter, we talked about roughly 35 million impact of maintenance costs in the second quarter, including everything that has been mentioned here in the Biorefining business and, well, let's say impact of maintenance, obviously not only costs, but sort of lost margin in Biorefining Energy and to some extent in the Communication Papers business as well. Third quarter, from that point of view, will be a clean quarter in terms of any major maintenance. In the fourth quarter, we will have the Fray Bentos maintenance shutdown.
Okay. That's clear. Thank you very much.
Thank you. The next question comes from the line of Linus Larsson from SEB. Please go ahead. Your line is now open.
Thank you very much. Again, congratulations on this very exciting go-ahead decision that you made today. I'd like to follow up a bit on Uruguay. If you could talk a bit about the scope of the investment. Correct me if I'm wrong, I think the amount that you have talked about in rough terms before was somewhat lower, the $2.7 billion. I wonder if you could talk about the scope, if that has changed in any way. Also, in this context, whether there is also an investment need in further plantation expansions, please.
If I may actually start and maybe Tapio continues. When we are looking the rough estimate that we gave, 2 million tonnes and EUR 2 billion, that was a rough estimate. As you can see that it would have been very competitive on that level. The scope has changed somewhat, with the energy concept is something that we actually have been improving. In all of the areas, there have been some changes and, of course, the capacity is somewhat now bigger, so it is a bigger facility. There are additional kind of facilities as well that to secure that $280 per tonne cost level. Basically that's the reasoning that it is somewhat higher on that. When it concerns the platform of the Uruguayan plantations, obviously we have already secured through these three items, i.e.
the own forest and then the Fomento arrangements leases and then the external long-term suppliers. Obviously we are continuing with the development of the plantation platform as well. That's something that will not stop here, but we'll move on.
We shouldn't expect to step up in your investments in own plantations from now on, given the go-ahead decision that you've made today.
No, we have secured the supply for both mills actually. That is the status at this point. With all these factors we are talking about 90% self-sufficiency already or the kind of secured volumes. Obviously, we will develop when it is feasible to use CapEx for new plantations, we will do so.
Excellent. That's great. Also, on the results and the outlook, I'd like to follow up on what you've talked about on variable costs. If I look in your graph in your presentation, it looks as if the tailwind, including pulp obviously on variable cost in the second versus the first quarter was around EUR 50 million. Is that the sort of magnitude we should expect in the third quarter sequentially as well?
No sort of figure to give on that at this point in time. As said, we believe that this is a kind of a shift that now took place in the second quarter and we expect to sort of continue with that during the second half of the year. As said, about half in a sense of the benefit was coming from pulp cost for the paper business. That can be more or less during the second half of the year. Also let's say there's the flip side of the coin. It's the sort of other items in a sense, which we continue that we will continue to see a trend in the second half of the year in terms of input costs decreasing.
Great. Specifically on wood costs, did you have a tailwind sequentially in the second quarter? What kind of market outlook and P&L effects are you seeing in the third and fourth quarters, please?
Well, let's say no more details on that than what I said earlier that we have seen, let's say the sort of market prices moderating and that already earlier, and that is kind of flowing through to our bottom line as we are starting to consume that wood.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Robin Santavirta from Carnegie. Please go ahead. Your line is now open.
Thank you very much. First in terms of the Uruguayan project, you have agreed with Uruguay on no tax or a tax-free zone for the new project. How long is that agreement and does that also work for the Fray Bentos mill, the tax-free agreement?
It's actually a free trade zone where there is obviously a lower fixed annual tax that we pay, which is mentioned in our release. It is 30 years long as we had for the Fray Bentos mill as well. Actually that Fray Bentos free trade zone agreement has been agreed to be extended for 30 years starting from now.
All right, good. In terms of the synergies that you several times talked about during the prepared presentation with different Fray Bentos operation, can you sort of provide some kind of examples and what kind of magnitudes are we talking about in terms of earnings?
We don't have a number. We don't provide that. Obviously, if you think about our operations in Uruguay, we can utilize the platform that we have built there for the whole business in terms of the plantation operations, the running of the pulp mill itself, and all the supporting functions that we have over there. Obviously, the significant areas of synergy are in the plantation operations as a whole, as we are developing and optimizing the whole plantation area for the two mills. As Jussi mentioned also in the logistics where the investments that are being made, particularly in the harbor terminal operations, will benefit our Fray Bentos mill as well. In terms of sourcing and securing the main inputs for the operations in Uruguay, obviously we will have scale benefits like, for instance, in the area of chemicals, but other areas as well.
Several areas, and benefit for the existing operations as well, but no numbers to give on that.
All right. Thanks. In terms of the, you have two other transformative investments that you have been talking about, and you're planning the biofuel project and the biochemicals project. What is the status of those projects, and when should we expect an investment decision? Could it be already during 2024?
This is running great, five minutes after we have announced $2.7 billion or $3 billion investment, somebody's asking already the next step. This is a fair good question. We are moving as we have planned to actually develop those projects and like we have been guiding that the biochemicals are somewhat more advanced than the biofuels. Both are moving on based on the plan. When they are ready, obviously we are making those decisions. Today, I have no more further information on those.
I understand. Finally, I don't know if I didn't catch the, when do you expect to reach design capacity? Is it already during 2024 in Uruguay?
Well, what I was saying earlier to the earlier question that somebody asked, this three years a good assumption for the kind of startup curve, I said that that's probably a good estimate. Again, noting the fact that it's not a linear curve, let's say the ramp-up during the first year for us is pretty quick, it takes a couple of more years probably to get to the full production throughout the year.
All right. Thank you very much.
Thank you. Our next question comes from the line of Mark Hoving from Handelsbanken. Please go ahead. Your lines are open.
Yes. Thank you. I have a few more questions on the pulp mill still. You mentioned that your environmental permit allows more than 2.1 million tonnes, and 2.1 is sort of the initial capacity. Could you specify how high can you go within the current permit and Does it require further investment to increase capacity, or how should we interpret that?
That is something that we have not disclosed. The pulp mill is designed for 2.1 million tonnes. Typically, like in all of this size of the investments you have creep, and creep is only needing some minor CapEx when actually doing so. Basically today we do not have any more information around this.
Okay. Very good. Do you, at this stage, have a view on what the annual depreciation will look like when you're up and running?
Well, basically, you can assume 20-year depreciation on the equipment of the mill.
Okay. Very good. Further on the two other investments that are in the plans, biochemicals, biofuels. Now that you know the timeline of this investment, does that have any impact on the timeline of those investments, or can you run this concurrently, or how does it work?
We have been, from the beginning, resourcing these separately. Basically, it is not a resource question to UPM. It is more how these initiatives will develop and get to the stage that we are prepared to take the decision. Basically, it is more on that how we develop those.
Okay. Thank you very much.
Thank you.
Okay. That was the last question. I'll hand the call back to you speakers.
Yes. Thank you for joining us today. Like I said, this is a pretty historical moment to make a big investment, which is one of the largest, most competitive pulp mill in the whole globe. With these words, thank you for joining us, and have a very nice day. Thank you. Bye.