"The paper companies are early cyclicals, and that's why they are so interesting at this point," Mika Metsaelae, an analyst with the brokerage Kaupthing Sofi, told AFP.

"If there is an economic turnaround in the US, demand will go up for paper, and probably prices will go up too," he noted. "So it's a very hot sector right now."

During the past couple of years the industry has been suffering from low prices and demand as the global economic slump has curbed orders for their products from the construction and publishing sectors.

For many companies, profits have plunged as much as six-fold since 2000.

To combat the slump, the sector has been forced to close production lines and cut the output of paper mills.

Finland's second-largest paper maker, UPM-Kymmene, operated at only 87 percent of total capacity in the first half of 2003.

"Massive downtime has been taken to adjust production to demand," chief executive Juha Niemelae conceded when releasing the group's quarterly results on Thursday.

Lately however there has been a noticeable pickup in television advertising in the all-important US market, as consumer spending remains strong there, a trend now spreading to the printed press, analysts noted.

"Over the last six months we have seen a slight increase in magazine and newspaper advertising, there is a light recovery in the US advertisement market," Catarina Ihre, forestry analyst with Nordea Securities, told AFP.

Increased economic activity in North America could doubly benefit paper makers, as a rise in the US dollar would improve the currency exchange rate for European-based forestry groups.

"Exports from Europe to Asia and the United States have been suffering from the weak dollar," Ihre noted.

The weak dollar has caused trade flows to change too, she said, enabling paper producers outside Europe to export to the continent at a discount, attacking the Nordic paper groups on their domestic fronts.

"Their sales have been suffering in two ways, due to the weaker dollar and (because of) higher volumes of imported paper into Europe," Ihre said.

On Thursday UPM-Kymmene reported a 53-percent drop in net profit from a year ago, to 133 million euros (148 million dollars).

"The strengthening of the euro has intensified competition in Europe, and the profitability of the US dollar and the British pound-denominated exports has weakened," Niemelae admitted.

As a result the group's sales were down five percent, at 4.96 billion euros.

Finland's Stora Enso, one of the world's largest paper makers, has already issued a profit warning and is now expected to report a 40-percent drop in pre-tax profits on July 24.

The rest of the Nordic forestry groups, including Finnish M-Real, Norway's Norske Skog and Sweden's Holmen are all expected to report similar drops in profit when they release results this week.

Their situation could however improve promptly after the seasonally weak third quarter, as continued strong US consumer demand hinted at increased advertisement volumes.

"There is a possibility for an upturn in the fourth quarter, and the market is optimistic now about the US economy, speculating that it can turn around," Metsaelae said.

"Usually these upturns take place quite rapidly, with sales and profits increasing rapidly, as everybody suddenly starts to buy paper, knowing that prices will soon go up quite rapidly too," he pointed out.

"So there could be a huge amount of orders quite rapidly," he concluded.

TERRA.WIRE