UPM's Q1 Earnings Decline: Navigating Pulp Prices and Biochemicals Challenges

Finnish forestry giant UPM reported a 14% drop in Q1 2025 Comparable EBIT to €287 million, marking a significant slowdown in profitability despite flat sales of €2.6 billion. The decline underscores the pressures facing pulp producers, as well as UPM’s ongoing struggles to execute its high-stakes biochemicals project. Let’s break down the numbers and assess the risks and opportunities ahead.

The Earnings Slump: Key Metrics and Drivers

UPM’s Q1 performance was dragged down by a mix of cyclical and structural headwinds:- Pulp Margins Under Pressure: The company’s pulp division faced cyclically low prices, with average prices remaining depressed compared to 2024 levels. A €50/tonne drop in pulp prices could slice annual EBIT by up to €270 million, a sensitivity that highlights the sector’s volatility.
- Operational Costs Rise: High wood costs in Finland and delays at the €1.2 billion Leuna biorefinery (now delayed until H2 2025) contributed to a €373 million impairment charge in 2024, which continues to weigh on margins.
- Geopolitical Risks: Trade tensions and currency fluctuations—UPM has significant exposures to USD, UYU, GBP, and CNY—added uncertainty, even as the company hedges only 50% of its currency flows.

The Strategic Crossroads: Growth Initiatives vs. Cost Cuts

UPM is responding with a mix of cost discipline and strategic bets:1. Cost Reduction: Fixed costs were slashed by €103 million in 2024, and further cuts are planned in 2025. The shutdown of its German Ettringen mill (July 2025) will reduce paper capacity but lower overheads.2. Growth Plays: - The Uruguayan Paso de los Toros mill, now fully operational, is expected to add 300,000 tonnes of pulp capacity in 2025, boosting deliveries.
- Acquisitions like Metamark (UK) and Grafityp (Belgium) are expanding its label materials business.
- The Leuna biorefinery’s delayed launch remains critical. While commercial production is now targeted for H2 2025, its success hinges on overcoming technical hurdles and scaling up demand.

Sustainability: A Double-Edged Sword

UPM’s inclusion in the DJSI Global and European indices and top CDP rankings underscore its leadership in ESG, but these credentials require ongoing investment. While sustainability is a long-term competitive advantage, short-term cash flows are strained by projects like Leuna.

The Bottom Line: Risks and Opportunities

• Near-Term Risks:
• Pulp prices remain vulnerable to global demand swings (e.g., China’s construction slowdown).
• The Leuna project’s execution is a binary bet; delays or underperformance could amplify losses.

• Trade tensions could disrupt supply chains or weaken demand for biofuels and specialty papers.

• Upside Catalysts:

• Paso de los Toros’ full capacity should boost pulp deliveries, offsetting margin pressures.
• Leuna’s commercial success could unlock a €1 billion addressable market in biochemicals.
• UPM’s strong balance sheet (net debt/EBITDA of 1.77x) and €160 million share buyback signal financial resilience.

Conclusion: A Wait-and-See Stance?

UPM’s Q1 results reflect the harsh realities of its industry: pulp cycles, project execution risks, and macroeconomic volatility. While its long-term bets on bio-based products and cost-cutting efforts provide a foundation for recovery, investors must weigh the execution risks.

The company’s 2025 guidance of €400–625 million in H1 EBIT (vs. €515 million in 2024) suggests cautious optimism. However, a sustained rebound hinges on pulp prices stabilizing, Leuna’s success, and geopolitical calm. For now, UPM remains a high-risk, high-reward play—ideal for investors with a multiyear horizon but a gamble for those seeking stability.

In short, UPM’s story is far from over. The next 12 months will test its ability to navigate the cyclical and structural challenges it faces today.