Stora China-II

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	24907
Company name	Stora Enso Oyj
Country	China
Sector	Pulp & Paper
Environmental category	B
Department	Global Manufacturing & Services
Status	Pending Disbursement

Date SPI disclosed	May 11, 2006
Projected board date	June 15, 2006
Previous Events	Signed: June 20, 2006 Approved: June 19, 2006

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Stora Enso Oyj (Stora Enso or the sponsor), the world’s largest paper and board producer in produced tonnes and number three sawn timber producer, has approached IFC to extend its existing loan facility to finance the development of its timber plantation and related investments in China. China is the second largest and fastest growing paper market in the world, yet it is critically short of timber/fiber. China accounts for over a third of the total increase in global paper capacity for the period 2001-2006, however the country’s short supply of fiber has led it to import unsustainably harvested fiber from neighbors such as Russia or the Pacific Rim. Stora Enso’s current projects in China include expanding its plantation in the Guangxi province of Southern China, which began operating in 2002, a paper mill in Suzhou, which was acquired by Stora Enso in 1998 and a joint venture with a Chinese company, Shandong Huatai Paper; this project will include transferring an existing paper machine to China.

Stora Enso’s immediate financing need is to continue to help cultivation of their plantation. These investment projects, combined with Stora Enso’s other possible investment projects in China comprise an estimated $500 million investment program over the three years. In June, 2005, IFC signed a loan facility agreement (the Existing Facility) with Stora Enso for $75 million. However, to meet their increased financing needs in China, Stora Enso has asked that IFC increase the amount of the facility by $225 million (the Increased Facility), bringing the total financing provided/arranged by IFC to $300 million (together, the Facility).

Project sponsor and major shareholders of project company

Stora Enso is a publicly listed (Helsinki, Stockholm and New York), Finland-based global forest products company. The sponsor’s Chinese subsidiaries will be the borrowers under the Facility. It specializes in integrated paper, packaging and forest products, producing publication and fine papers, packaging boards and wood products, areas in which the Group is a global market leader. The group has approximately 45,000 employees in more than 40 countries in five continents. Stora Enso has about 17 million tons annual production capacity in various papers and packaging board grades and more than 7 million m3 in sawn timber. It maintains a leading global market share in most of its paper grades, namely coated (magazine) paper, graphic and specialty papers where it enjoys market leadership in Europe and North America, and newsprint, office paper, consumer packaging board and forest products.

Total project cost and amount and nature of IFC's investment

The total project cost is $500 million. The proposed investment in an increase of Stora Enso’s existing loan facility by $225 million, which includes an A Loan of $50 million for IFC’s own account and a B Loan of $175 million from syndicate lenders.

Location of project and description of site

Stora Enso’s plantations are located in the Guangxi province, primarily in five counties on or near Guangxi’s coastal areas. The headquarters of Stora Enso Guangxi is located in the capital city of Guangxi province, Nanning, and its operational headquarters for the plantation operation locates in Beihai city. The plantations are located in rural locations which have primarily been used for forestry and/or agricultural plantations.

Stora Enso’s paper mill is located on an industrial site in an industrial region of the city of Suzhou, some 160 kilometers west of Shanghai.

The Huatai joint venture will be located in Shandong. Shandong is located along China's eastern coast and is in the lower Yellow River area. It is between the Huabei and Huadong areas.

Stora Enso is also considering other investments which will require financing under the Facility. Once these investments are identified as potential borrowers under either the Facility, they will be reported, prior to the signing of any loan agreement under the Facility, in a follow up Summary of Project Information and their environmental characteristics identified in a related Environmental Review Summary which will be made publicly available in accordance with IFC's policies and procedures.

Anticipated development impact of the project

The proposed IFC investment would assist Stora Enso, a global leader in the forestry industry with a strong brand name, to pursue an aggressive investment program in China. The proposed investment program would have a strong developmental impact, especially with respect to the plantation investments. First, despite the fact that 24% of the world’s plantations are in China (representing 28% of China’s forested areas), China’s plantations remain underdeveloped for industrial use. Measures to improve this include a higher timber growth rate and more efficient forest management. China’s logging ban in effect since the late 1990s has further curtailed access to fiber.

Given the resultant lack of internal fiber capacity, Stora Enso’s creation of a sustainable plantation would help reduce the country’s reliance on imported fiber. Second, Stora Enso will transfer technical know-how and, given the labor intensity of plantation work, create up to 7,000 direct jobs to add to the 1,000 that are currently employed and an additional 21,000 indirect jobs to add to the current 3,000. As important, since the plantation project is in Guangxi province, whose estimates $1,014 per capita GDP in 2005 was 84% less than that of Shanghai ($6,276) and nearly 40% less than that the average per capita GDP for China ($1,701) as a whole, Stora Enso’s operations in China will help promote more balanced economic development.

IFC estimates that when the plantation reaches its intended 120,000 ha and 32,000 direct and indirect employees, the average annual income of these employees will exceed $1,800, or 80 percent higher than Guangxi’s current GDP per capita. The plantations and related entities would also have strong linkages with local distributors through sales of timber and other fiber resources, encouraging their further growth and development. Finally, the sponsor’s application of its high environmental standards should have a demonstration effect on the rest of the industry, especially on local companies.

The proposed investment program also complements the new Chinese government’s objectives for its less developed regions. One of the government’s primary goals is to balance China's development success to better support the inland regions and the agricultural economy. IFC's support to this project will lead to increased cash flows for farmers as well as the creation of jobs in rural areas.

IFC's expected development contribution

IFC will assist the sponsor in the project by:

- assisting with its strong local presence in China and IFC’s local knowledge in the country;
- providing long term financing which is tailored to the project’s disbursement requirement and payback profile, in particular with its plantation project, whose growth cycles, to a great extent, define its financing needs; and
- supporting the sponsor as it applies world class environmental and social practices to its high profile, sustainable forestry projects.

IFC will also provide political comfort to the sponsor: as one of the poorest and more under-developed provinces in China, Guangxi is in need of substantial investment to contribute to its development. As a lender to Stora Enso in Guangxi, IFC will provide its client with needed financial and political support as it expands in this unfamiliar and difficult province.

Environmental and social issues - Category B

This is a category B project according to IFC’s Environmental and Social Review Procedure.

The environmental, social and health and safety issues which are typically associated with paper mills are: emissions to air and water, water supply, utility use, management of occupational health and safety, use, storage and disposal of hazardous materials and land acquisition procedures for expansion. IFC and a joint IFC and Stora Enso team have assessed these issues at both Suzhou Mill and for the Huatai JV, and concluded that these issues are generally well managed at Suzhou Mill and will be well managed within the Huatai JV, though further work in some of these areas is required of Huatai’s broader operations.

For the plantation development element of the project, issues reviewed during the 2005 project appraisal were the land selection and acquisition process, including procedures for protection of valuable habitat, and sustainability of plantation management. Subsequently an Environmental and Social Impact Assessment of Guangxi Stora Enso’s operation has been undertaken by UNDP, studying in particular the social impacts arising from land acquisition and employment, including needs of special populations, and environmental impacts of plantation development on water resources, soil and biodiversity.

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