Demand in the ailing forestry sector has stabilised after a grim start to 2009 but controlling costs will remain a major focus for the foreseeable future, paper company executives said on Tuesday.

The global paper industry has struggled for the better part of a decade to climb out of a slump caused by overcapacity, soft demand, low prices and weak earnings.

The drop has been exacerbated by the recession, which has further eroded demand for basic materials, including paper, as print advertising has dropped steeply.

I cannot say that there is a light at the end of the tunnel based on my experience and my discussions with our customers, Juha Vanhainen, head of Stora Enso's publication paper unit, told the Reuters Paper and Packaging Summit in Helsinki.

It seems to be so that the decline has more or less stabilised, but the absolute level is still very, very low.

Vanhainen's comments added to a growing chorus of voices at the summit. He joined South Africa's Mondi (MNDI.L: Quote, Profile, Research, Stock Buzz) and Sweden's SCA among others, in saying that the sector was now seeing some relief after extensive de-stocking at the start of the year.

Mondi, a Top 10 global player by sales and a heavyweight in office papers, said that pricing for one of its key paper grades -- uncoated fine -- had also stabilised, as had demand.

There does appear to be some bottoming taking place, David Hathorn, Mondi's chief executive officer, said. Demand is improving but we need more capacity closures. We are not seeing any price strengthening in this grade yet.

Finland's Metsaliitto, also a Top 10 producer, said it was seeing stronger demand for sawn goods in Europe as balance returns to the market.

Stora Enso shares closed the session off 2.7 percent at 4.74 euros, while Mondi was down 0.6 percent down at 296.4 pence. The Dow Jones Stoxx Basic Resources Index ended down 1.0 percent.

COSTS, COSTS, COSTS

Despite the short-term relief, analysts have said the industry remains too fragmented, with prices pressured by excess capacity as many small loss-making mills churn out paper regardless of the price, just to cover their costs.

Executives stressed that until there is a broader balance between demand and supply, something that would be aided by consolidation, the focus would remain on cost controls, which have included mill closures, capacity curtailments and layoffs.

We are increasing the pressure on cost reduction to combat the strength in the rand, Mondi's Hathorn said, referring to the firm's South African operations.

Part of the fundamental problem in (western) Europe is that it is not a sustainable base for exports ... it doesn't enjoy that global cost advantage, he said.

Stora's Vanhainen said the recession, while making an already tough market even worse, had at least helped to change the industry's mindset.

Engineers used to just dream about extra capacity ... because growth was more or less the element that everyone believed in, Vanhainen said.Finally now the industry has understood that restructuring and capacity closures are needed.

(Additional reporting by Tarmo Virki, Adam Cox, Anna Ringstrom and Eva Lamppu in Helsinki; editing by Karen Foster)

South Africa