PAPER profits at one of South Lakeland's largest employers have shrunk due to a combination of rising overheads and increased pension costs.

James Cropper plc notched up interim pre-tax profits of £163,000, on a turnover of £31.5m, compared with £700,000 for the first six months of last year.

The profit figure would have been closer to £500,000, but for complex changes in accounting rules imposed on all EU companies with staff pension schemes.

The papermaker has warned that it could make a pre-tax loss for the full year, due to difficulties facing papermaking and pension adjustments, but says its future prospects look brighter.

The Burneside-based specialist papermaker, which has two final salary schemes, had to divert more than £300,000 of its half-year profits to plug a theoretical' hole in its pension schemes.

Like many UK manufacturers, James Cropper has also seen spiralling energy bills eat into its profits, with the cost of gas continuing to rise.

Company director John Denman told Business Gazette that Cropper had witnessed a threefold increase in its fuel bills since 2000.

"Five years ago, our total energy costs were about £1 million. This year, it's likely to be about £3.5 million. We can't absorb those price increases. We are a very energy efficient company. We are not wasteful, and we look at ways of managing our energy costs in the most efficient manner possible."

James Cropper has also been hit by a significant increase in effluent treatment costs.

"This year they will go up by 19 per cent. It has nothing to do with the cost of treating water; it's about a mandate placed on United Utilities to clean up beaches in the region and rebuild the Manchester sewers."

In an attempt to reverse this soaring overhead, the company has agreed to invest £1 million in a new effluent treatment plant for the Burneside paper mill, due to come on stream by the end of next year.

"It's the first step in a programme to reduce effluent. The new plant will separate more water from our papermaking sludge, making it drier," said Mr Denman.

The firm also had plans to recycle more water back into the papermaking process, reducing the amount of waste water sent to United Utilities' treatment works in Kendal.

Company chairman James Cropper said the firm's papermaking operation had experienced a "challenging start" to the year, with higher overheads and "subdued activity", particularly in European markets.

However, sales gains from last year had been consolidated, while orders had picked up in the past three months.

The company's chain of Paper Mill Shops saw turnover go up by 30 per cent on the same period last year, with new outlets opening in Mansfield and Hatfield this year. The 21st Paper Mill Shop will shortly open in Portsmouth, and two more will follow, possibly in Essex and Lancashire, over the coming months.

Sales remained fairly flat at Cropper's Technical Fibre Products division, although the US continued to be a growth market for composite materials containing metal-coated carbon fibres.

The converting division saw a slight drop in turnover, but investment and product rationalisation would allow older machines to be decommissioned, which should significantly boost output and productivity.

While Mr Cropper said he was confident that steps taken to reverse the decline in the company's fortunes would bear fruit, he added: "The impact of these measures will only be felt significantly in the next financial year."