THE Jefferson Smurfit Group has warned that 1997 will be another difficult year for the paper and packaging industry, with product prices expected to remain weak. The forecast came as the group reported that lower product prices and excess production in the industry pulled back 1996 pre-tax profits by 52 per cent to £201 million.

With over-capacity still a problem, particularly in the US where significant levels of stocks have built up, prices are expected to remain weak this year.

Although the latest results are in line with market forecasts, Smurfit shares fell 6p to 162p yesterday, weakened by cautious comments from the group on the outlook for 1997. Product prices were weak in all markets throughout 1996. Finance director Mr Ray Curran said there are signs that prices may be at, or close to, their lowest levels.

The current expectation is that price increases may be possible in Europe in the second quarter and in the US in the second half of the year, according to Mr Curran. But at a current level of $300 to $310 per ton the price of basic board has a long way to rise before it reaches its 1995 highs of over $500 per ton.

Group earnings per share fell to 12.6p from 28p in 1995 when record results were recorded. Despite the fall in earnings, shareholders are to get a 5 per cent increase in dividends for 1996 with a final dividend of 2.7p per share bringing the total dividend for the year to 4.2p per share.

A breakdown of the 1996 results shows that profits fell in all geographic areas. In Ireland the impact on profits of weak prices was reduced by the group's non-cyclical businesses - printing and financial services - and by strong economic growth which fed demand. In the UK the improvement in the economy helped but the rise in the value of sterling made imports more competitive.

In Ireland and the UK sales fell to per cent to £564 million, while profits were 29 per cent down at £34 million. Operating margins slipped from 7.6 per cent to 6.03 per cent. This geographic area accounted for 22 per cent of group sales and 13 per cent of profits.

In continental Europe sales fell 17 per cent to £1,485 million, while profits dropped 42 per cent to £113 million. Operating margins were down to 7.61 per cent from 10.97 per cent. This region accounts for 57 per cent of group sales and 44 per cent of group profits. The Netherlands produced record profits and the outcome in Italy was ahead of expectations but a weak economy made for a difficult year in France.

In Latin America, which accounted for 14 per cent of group sales and 18 per cent of profits, sales fell 15 per cent to £360 million, while profits fell 42 per cent to £47 million. Margins fell to 13.1 per cent from 19.04 per cent. The group operates in Colombia and Venezula and Mexico and is concerned about "the economic management of the region and the relative strengthening of local currencies against the US dollar.

In Columbia domestic sales volumes remained steady, inflation was stable at 20 per cent but exports were lower because of competition. In Mexico a stronger economy helped but sales prices and volumes fell in Venezula following devaluations in 1994 and 1995. Smurfit is looking for expansion opportunities in other Latin American countries.

In the US lower prices caused by over-capacity affected all divisions at Jefferson Smurfit Corporation, the group's 46 per cent associate, with the container division worst affected. Newsprint and industrial packaging reported higher profits. Wholly-owned group operations reported an 8 per cent drop in sales to £185 million.

Overall, group sales fell by 14.5 per cent to £2,594 million, while profits after tax were 55 per cent lower at £140 million. The group spent £127 million on acquisitions, including the £94 million final payment for Cellulose du Pin in France and £135 million on capital development.

By year end net assets per share had risen to £1.34 from £1.29. After reducing net borrowings from £585 million to £482 million, group gearing - net debt as a percentage of shareholders funds - was 34 per cent, leaving the group with financial flexibility for future expansion.