Sept. 6 (Bloomberg) -- Stora Enso Oyj, the world's largest papermaker, plans to triple forest holdings in China, making its largest timberland investment outside Europe, as rising paper demand causes a shortage of raw material in the country.

Stora aims to increase its pulp-wood forest to 160,000 hectares (395,360 acres) by 2010, said Kari Tuomela, president of the Helsinki-based company's forestry unit in China. That's twice the size of New York City. Pulp, a mixture of wood and chemicals, is the raw material for paper used in offices, catalogues, books and glossy magazines.

China is the world's fastest-growing paper market, leading Stora and rivals such as Oji Paper Co. to invest about $3 billion in high-speed papermaking machines there in the past year. The government began encouraging overseas investment in forestry five years ago to reduce reliance on world markets. Pulp prices have risen 21 percent over the past year.

``It makes a great deal of sense to be involved in domestic fiber,'' said Linus Larsson, Stockholm-based analyst at ABN Amro Holding NV. ``China is a large net importer.''

The price of northern bleached softwood kraft pulp, a benchmark grade, has risen $123.65 a metric ton in the past year to $708.37 a ton according to Forest Web.

China overtook the U.S. as the biggest buyer of pulp in 2004 and has long been the biggest importer of wastepaper, which is used as a pulp substitute and to make cardboard boxes. Stora is one of the biggest foreign holders of forest in China.

Demand Rising

``China's demand for pulp is on an upward trend, and won't slow down till at least the first quarter of 2007,'' Alf Henrik Gistren, the general manager of Brazilian pulp maker Aracruz Celulose SA's Asian unit, said Aug. 31.

Aracruz, Latin America's largest pulp producer, exported 400,000 tons to China last year, the largest amount after Indonesia's Asia Pacific Resources International.

Stora, which agreed to buy two Brazilian paper plants from International Paper Co. last month, is expanding production in areas with lower labor costs to combat falling paper prices and higher raw material charges. The company returned to profit in the second quarter after a loss the previous year.

The company has rights to 60,000 hectares of forest in China's southern Guangxi region, including 35,000 hectares of eucalyptus plantations. It wants to increase that to 160,000 hectares, Tuomela said in an Aug. 30 e-mail.

Seven-Year Rotation

Guangxi's climate and location in the south of China make it the best place to grow the hardwood trees, Tuomela said today at the China Pulp and Paper conference in Shanghai. He expects to harvest the trees every seven years compared with a growing period in northern Europe of 20 to 40 years.

``Stora Enso is actively looking for profitable investment opportunities in China,'' Song Wangqiu, president of the company's Chinese unit, said in an e-mail Aug. 20. ``We would like to strengthen our market position.

China began allowing overseas investment in plantation forestry about five years ago, according to URS Forestry, an industry consultant. There are currently no restrictions on overseas shareholdings in forestry developments.

In the first six months of the year, China imported 3.28 million tons of market pulp, 3.1 percent more than 2005, according to China customs. It probably imported 16 million tons of wastepaper in 2005, according to Global Trade Atlas.

Overseas Investment

China's demand for pulp is being boosted by investments in new machines by overseas papermakers. Foreign companies accounted for 29 percent of China's 54.4 million ton paper market in 2004, according to PricewaterhouseCoopers.

Oji Paper, Japan's largest paper maker, will build a $2 billion paper factory in Jiangsu province in eastern China in its largest investment outside Japan.

UPM-Kymmene Oyj, the world's third-biggest papermaker, started up a $470 million fine-paper machine last year in Jiangsu province.

Inner Mongolia Blue Sky Paper Ltd. is building a project that may eventually produce 800,000 tons of fine paper a year, according to Chinese industry publication Pulp and Paper Week.

Paper and board consumption in China will increase about 5 percent annually until 2020, according to an estimate by Poeyry Oyj, a Finnish consultant for the forestry industry. That compares with less than 1 percent growth in mature markets in Europe and North America.

Increasing output in China will add to pressure on producers in mature markets, according to McKinsey & Co's Per- Ove Nordstroem, co-author of a report on China's paper industry.

``China has changed from a net importer of coated fine paper to an exporter in just two or three years,'' Nordstroem said Aug. 29. ``The change in volume is about 1 million tons, which compares to Europe's total exports of 2 to 3 million tons. So everyone is looking at China.''

Shares of Stora fell 1.9 percent to 11.96 euros. They've gained 4.6 percent so far this year, valuing the company at 9.5 billion euros ($12.1 billion).

To contact the reporter on this story: William Bi in Beijing at wbi@bloomberg.net

Last Updated: September 6, 2006 12:59 EDT