UPM Braces for Tariff-Driven Uncertainty as Earnings Slip Amid Global Trade Tensions

Helsinki-based UPM, a Finnish multinational specializing in renewable materials, pulp, and energy, has issued a cautionary outlook for 2025, citing growing global trade tensions and the indirect economic ripple effects of tariffs. While its Q1 2025 earnings report showed stable sales, a 14% year-on-year drop in comparable EBIT to €287 million underscored the mounting pressures on its profitability. The company’s warning highlights the precarious balance between operational resilience and the unpredictable consequences of protectionist policies.

Financials: A Mixed Quarter Amid Structural Challenges

UPM’s Q1 results revealed a company navigating a tightening economic landscape. Sales held steady at €2.65 billion, but rising variable costs and thinner margins eroded profitability. The company’s net debt rose to €2.95 billion, up from €2.31 billion a year earlier, reflecting sustained capital expenditures—most notably the €1.275 billion Leuna biorefinery in Germany, which remains on track to begin commercial production in H2 2025.

The company’s guidance for H1 2025—projecting comparable EBIT of €400–625 million—signals cautious optimism. While cost reductions and higher volumes may offset margin pressures, UPM’s reliance on global supply chains leaves it vulnerable to disruptions.

Tariffs: The Indirect Threat

UPM emphasized that tariffs’ direct financial impact on its business remains limited. However, the broader economic uncertainty stemming from trade conflicts poses three critical risks:

1. Supply Chain Disruptions: Tariff-driven shifts in trade flows could delay shipments and increase logistical complexity, particularly for products like biochemicals from the Leuna facility.
2. Currency Volatility: With significant exposure to USD, Uruguayan peso (UYU), GBP, and CNY, UPM faces risks from fluctuating exchange rates. Its hedging of 50% of net currency cash flows provides partial protection but leaves half its exposure uncovered.
3. Demand Suppression: Trade tensions could deter customers from committing to long-term purchases, exacerbating already weak demand in sectors like communication papers, where UPM is closing its Ettringen mill to cut costs.

Sector-Specific Strains

• Pulp & Advanced Materials: Despite cost improvements at its Uruguayan mill, pulp prices—though slowly rising—remain cyclically low. UPM’s EBIT margin in this division fell to 11.1% from 13.6% in Q1 2024.
• Biochemicals & Biorefinery: Delays in Leuna’s startup have prolonged capital expenditures, but the facility’s projected output of 100,000 metric tons of specialty chemicals annually could position UPM as a leader in sustainable materials—if tariffs don’t disrupt export logistics.
• Decarbonization: UPM’s biofuels division expects cost reductions to drive H1 2025 performance, but trade barriers could complicate exports.

Sustainability as a Shield—and a Stake

UPM’s leadership in sustainability remains a key competitive advantage. It is the only forest and paper company in the Dow Jones Sustainability Indices (DJSI) and ranks highly in CDP and S&P Global ratings. This reputation could attract ESG-focused investors, though its financial health depends on executing its growth strategy amid trade headwinds.

Risks on the Horizon

• Pulp Price Volatility: A €50/tonne swing in pulp prices could shift annual EBIT by €170–270 million—a stark reminder of the industry’s cyclical nature.
• Currency Exposure: A 10% depreciation in the USD or UYU against the euro could reduce annual EBIT by €100 million.

Conclusion: Navigating the Crosscurrents

UPM’s Q1 results paint a company at a crossroads. Its strategic investments—such as the Leuna biorefinery and its focus on decarbonization—position it to capitalize on the global shift toward renewable materials. However, the indirect costs of trade tensions could derail progress. With a net debt/EBITDA ratio of 1.77, UPM retains flexibility, but its ability to navigate supply chain and currency risks will determine whether its H1 guidance proves achievable.

Investors should monitor two key indicators:
1. Global Pulp Prices:
A sustained rise could lift margins in UPM’s core pulp division.
2. Currency Movements: A stable USD/EUR exchange rate would reduce hedging costs, while volatility could amplify risks.

Ultimately, UPM’s story hinges on whether its operational discipline and sustainability credentials can outweigh the vagaries of trade policy. For now, the company’s resilience—and its investors’ patience—are being tested.