Stora Enso delays China investment to protect cash

Finnish paper and packaging group Stora Enso deferred a 1.6 billion euro ($2.1 billion) project in China in a move to safeguard cash flow that analysts said pointed to a slowing down in vital transformation plans.

The company said on Friday it had gained long-awaited approval for a pulp and packaging board plant in Guangxi but that the build-out would start later and take longer than originally planned to protect capital spending.

Europe's number two paper maker is betting on the integrated mill to help shift focus from loss-making paper operations to more profitable areas such as pulp and cardboard.

Stora earlier this year launched a cost-cutting plan to slash 200 million euros of annual fixed costs, and said last month that it aims to eliminate around 2,500 jobs.

It will start ramping up the new China board line in 2016 and the pulp mill in 2018-2019, chief executive Jouko Karvinen told a news conference. Under the original plan, both plants were aimed to start production in end-2014.

"For sure it reduces the risk of the project, but the expected returns will be delayed at the same time," said analyst Markku Jarvinen at Finnish brokerage Evli.

The move means the mill would start producing paperboard without the full integration to the company's own plantation wood and pulp. The integration is seen providing an edge for the firm.

"There will soon be a lot of new paperboard capacity in China built by the local suppliers... Until Stora Enso has its pulp line up and running, the company may lose some of its competitive advantage against the local players," said Harri Taittonen, head of research in Nordea Markets.

Stora shares fell 2.3 percent to 5.46 euros by 1336 GMT.

The company reported quarterly adjusted operating profit fell 14 percent to 124 million euros, in line with analysts' estimates in a Reuters poll. The main source of that profit was the group's packaging board business unit.

Its paper division booked a loss as weak European economy accelerated a shift from traditional print media to online publishing.

European demand for graphic paper grades such as magazine paper, newsprint and office paper fell 5.4 percent year-on-year in the first five months of 2013, according to industry association Euro-Graph.

The company forecast overall sales in the third quarter to fall from the second quarter, and core operating profit to be flat or slightly higher.

(Editing by Ritsuko Ando and David Cowell)