Jun 06, 2005. /Lesprom Network/. Finnish paper bosses, who have responded to sporadic strike action in the sector with a lock-out, hope that resulting rises in paper prices and future productivity increases will make up for lost earnings, analysts said. "The lock-out will have an effect on prices," Timo Poranen, president of the Finnish paper and forestry industry federation (FFIF), said recently. The FFIF has shut down 45 Finnish factories in a lock-out that is to last until mid-June unless a pay dispute pitting the federation against the paper industry union is resolved. Despite daily losses of Euro 40 million ($49 million), industry managers claim that shutting down production altogether is less costly than suffering on-and-off stoppages by the 24,000 members of the paper workers' union over a prolonged period. But some analysts also see a deliberate strategy of engineering a rise in paper prices by reducing supply in a market that went into a downward cycle in 2001 and is forecast to increase by no more than 2% or 3% this year. "Reducing supply will push prices up, or at least stabilize them," said Ritva Toivonen of the Pellervo institute of economic studies in Helsinki. Sales generated by the Finnish paper sector doubled between 1992 and 1995 to around Euro 15 billion, but have hardly moved since then, with operating margins stuck at around 15%. In addition, economic growth rates in some of the main importers of Finnish paper, such as Germany and France, are amongst the lowest in the Eurozone. According to the Mandatum brokerage, the lockout will weigh on second quarter results of paper giants Stora Enso and UPM-Kymmene, who are the second and third-largest paper producers worldwide respectively after International Paper of the United States. But the pay-off in terms of higher paper prices was likely to come in the following three months. "As 90% of paper deliveries are based on future contracts of more than three months, the lock-out effect will be felt in third quarter prices," a broker told AFP's financial newswire AFX. The price effect would, however, be softened by the fact that 60% of Finnish paper companies' production is located outside Finland, and therefore unaffected by the strike, analysts said. Capacity utilization in the paper industry will rise to 95% this year, said Tapio Tilli, another Pellervo researcher, a fact not lost on investors, who have continued to buy into paper shares since the start of the lock-out. The price of UPM stock has risen by 5.3% over the past month, while Stora Enso has risen by 7.7%. Paper industry managers are hoping that the lock-out will push through reforms which will increase productivity, notably through longer working hours. Finance Minister Antti Kalliomaeki had warned on the eve of the lock-out that the conflict, which has lasted nearly five months, could have a negative impact on economic growth in the country. "The conflict in the paper and forestry industry is such that it could affect growth or cause concern, which could have negative consequences on growth perspectives," Kalliomaeki said. Finland registered gross domestic product growth of 3.7% in 2004, one of the strongest performances in the Eurozone. According to the finance ministry's latest forecast, GDP is expected to slow to 3% this year. The paper and forestry industry accounts for 6% of Finnish growth and 25% of exports. Talks over collective agreements in the sector have stumbled over holidays and bonuses, with companies arguing that days worked at Christmas and over the summer are too costly and hinder competitivity.