Aug. 4 (Bloomberg) -- UPM-Kymmene Oyj, Europe’s second- largest papermaker, had a smaller-than-expected loss and said it will continue to curtail production to counter falling demand.

The net loss was 8 million euros ($12 million) compared with a profit of 92 million euros a year earlier, the Helsinki- based company said in a statement today. Analysts estimated a loss of 30 million euros.

UPM and rival Stora Enso Oyj, Europe’s biggest papermaker, are reducing capacity in their Finnish home market to combat falling prices and demand. UPM agreed last month to take over a Uruguayan pulp mill and forest to add production in the South American country and reduce Finnish output.

“The contraction of economic activity seems to have slowed and demand for our products is stabilizing,” Chief Executive Officer Jussi Pesonen said in the statement. “In paper, there is also some improvement in order intake.”

UPM advanced as much as 5.2 percent in Helsinki trading and was priced at 8 euros as of 10:17 a.m. local time. The stock has fallen 11 percent this year, giving the company a market value of 4.16 billion euros.

Fixed costs at UPM fell by 100 million euros in the second quarter through temporary layoffs and other savings measures, Pesonen said today. Sales in the quarter declined 23 percent to 1.84 billion euros.

“Our market outlook remains cautious,” he said. “The recession continues to have an impact on the demand for our products. Therefore, temporary production curtailments will continue.”

Rival Stora announced plans in May to purchase $344 million worth of Uruguayan forests with a Chilean partner to lower wood costs. In Latin America, eucalyptus trees can be harvested after seven to 10 years, compared with 60 years for spruce and birch in Finland.

Stora will shut unprofitable mills during the third quarter as demand for paper remains weak, the company said in July. The company on July 23 reported a second-quarter net loss of 368 million euros after booking a 418 million-euro writedown on the value of its 19.9 percent stake in NewPage Corp. in the U.S.

To contact the reporter responsible for this story: Chad Thomas in Helsinki at cthomas16@bloomberg.net.

Last Updated: August 4, 2009 03:32 EDT