2005 a Challenging Year for Global Forest and Paper Industry
July 27, 2006 (Press Release) - 2005 was a challenging year for the global forest and paper industry, according to PricewaterhouseCoopers’ (PwC) ninth annual Global Forest, Paper and Packaging Industry Survey, released today. Return on capital employed (ROCE), a key measure of performance in this capital-intensive industry, fell to an average of 4.5% in 2005 from 5.3% in 2004. This is far from the target of 10 to 12%.
“Canadian forest and paper companies saw their margins reduced significantly in 2005,” says Craig Campbell, leader of PwC’s Performance Improvement practice for the global forest and paper industry. “Producers were hampered by the strong Canadian dollar, along with reductions in most product prices. The softwood lumber dispute with the U.S. and increased shipping and energy costs also kept the industry’s results down.”
Canada’s Norbord, however, bucked this trend and finished in the number one spot globally in terms of ROCE. Norbord finished 2005 with a ROCE of 23.7%, up slightly from their second-place finish of 23.2% in 2004.
PwC’s 2006 Global Forest, Paper and Packaging Industry Survey summarizes the 2005 year-over-year financial information of the PwC Top 100—the 100 largest forest and paper products companies in the world with publicly available data. Companies are ranked by annual revenues.
Canadian producers had a disappointing year in 2005, with average ROCE dropping to 2.5% from 4.6% in 2004. The 11 Canadian-based producers surveyed posted total revenues of US$25 billion in 2005, an increase from US$24 billion in 2004. However, net income plunged almost US$1.3 billion for a loss of US$374 million. The reduction was equally contributed by reductions in operating earnings and increased non-operating expenses.
As in 2004, the largest returns were earned by Canada’s large oriented strand board (OSB) producers (Nexfor and Ainsworth). Demand for OSB remained strong, supported by continued housing start strength as well as rebuilding efforts undertaken in the U.S.
Capital investment as a percentage of depreciation fell from 2004 levels demonstrating the reduced confidence within the challenged Canadian industry and the anticipated difficulties in making adequate returns.
Canadian producers are considering markets outside their traditional operating regions. Forays into China and other Pacific Rim consuming nations, as well as Europe, have been made as producers seek alternate markets to the U.S.
U.S. forest products producers in the PwC Top 100 list made modest gains from 2004, with sales revenues up to US$127 billion in 2005 from US$123 billion the previous year. ROCE for these companies averaged 6.3%, up from 5.7% in 2004. There were 27 U.S. producers in the PwC Top 100 and five of them achieved a ROCE of at least 10%. Net income rose to US$5.0 billion in 2005, up from US$4.6 billion in 2004.
The U.S. dollar continued to flounder through much of the year, closing out lower against other major forest and paper producing currency bases. Profits were diminished by higher raw materials and labour prices, energy prices and increased transportation costs, due in part to hurricanes Katrina and Rita.
Housing sales and starts in the U.S. increased in 2005 due to a favourable economy and interest rates. The strong housing market drove North American demand for lumber and structural panel products in 2005. The growth in manufacturing capacity, especially for lumber, coupled with improvements in rail transportation pushed product prices down in 2005 compared to 2004.
The PwC survey found that total global industry sales were up slightly in 2005 to US$340 billion from US$328 billion in 2004. Operating profits were down by 11%, however, to US$21.6 billion and ROCE fell to 4.5% from 5.3% in 2004.
The Latin America region once again held the top regional ROCE spot at 8.6%, down from 9.7% in 2004.The volatility in the U.S. dollar impacted financial results. Cash flow generated from operations was down across the industry by almost 20% to US$29 billion from US$36 billion in 2004.
“2005 showed why it can be so difficult to make a decent return in the sector,” said Campbell. “The companies that succeed are ones who were innovative and developed methods to do more with less. Projections for 2006 remain challenging and innovation will again be the key to profitability.”
The economic factors which have impacted the industry the most remain foreign exchange fluctuations, increased energy, transportation and raw materials costs, and the impact of the emerging market presence.
A pdf of the 2006 Global Forest, Paper and Packaging Industry Survey is available for downloading at www.pwc.com/forestsurvey06. For more information on the survey, or to arrange an interview on the survey findings, please contact Jim Nelson in Vancouver at +1 604 806 7047 or Carolyn Forest in Toronto at +1 416 814 5730.
Note: Unless otherwise indicated, “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, Canada, an Ontario limited liability partnership. PricewaterhouseCoopers LLP, Canada, is a member firm of PricewaterhouseCoopers International Limited.