Global Forest Products Sector Posts Mixed Results
July 26, 2007 - Financial results for the world’s 100 largest forest, paper and fibre-based packaging products companies showed distinct differences in the major producing regions. The top three regions in terms of return on capital employed (ROCE), a key measure of performance were: Latin America at 9.3%, followed by China with 6.5%, and South Africa with 5.5%. Canada’s producers posted the lowest combined ROCE at 2.0%. Overall, the sector’s global ROCE improved slightly from 4.9% in 2005 to 5.1% in 2006, but still far off the 10 -12% target. These and other findings were released today in PricewaterhouseCoopers’ (PwC) tenth annual Global Forest, Paper and Packaging Industry Survey.
“Forest, paper and packaging producers everywhere had their margins eroded by the rising cost of energy, transportation and raw materials in 2006. They also faced fluctuating currency exchange rates which have become more significant with the rise in international trade,” said Craig Campbell, leader of PwC’s Performance Improvement practice for the global forest and paper industry, and author of PwC’s survey. “The difference in regional financial performance all comes down to the production cost structure in a region and how well producers can absorb the cost increases.”
Campbell added that producers in Latin America and some emerging markets have a competitive advantage with an abundant fibre supply, short harvest cycle plus new technology. They are closer to the growing demand for forest products in Asia, when compared to North American and Western European producers. Procter & Gamble in the US bucked this trend in 2006 and finished in the top spot in terms of ROCE at 20.6%, followed by Kimberly-Clark Mexico at 17.7% and Aracruz in Brazil 15.8%.
In revenue terms, the number one spot in the 2006 PwC Top 100 is held by U.S.-based International Paper with sales of US$22.0 billion, up slightly from US$21.7 billion in 2005. The second spot is held by U.S.-based Weyerhaeuser with sales of US$18.6 billion, dropping from $US19.1 billion in 2005. The global forest products sector continues to be characterized by a small number of very large producers and many medium and smaller firms—the largest 10 companies in PwC’s 2006 list of 100 companies account for approximately 41% of the total revenues, virtually unchanged from the previous year.
PwC’s 2007 Global Forest, Paper and Packaging Industry Survey summarizes the 2006 year-over-year financial information of the PwC Top 100—the 100 largest forest products companies in the world with publicly available data. Companies are ranked by annual revenues.
Canadian producers faced many challenges 2006—a strengthening dollar against the US currency, a decline in the North American housing market, increased production costs, and some regions were affected by the Mountain Pine Beetle infestation. One bright spot for profits was NBSK pulp production. 2006 also saw a settlement of the Canada-US softwood lumber trade dispute, with over US$4 billion in duties returned to Canadian producers.
Canada contributed 12 companies to the 2006 Top 100 list, with aggregate sales of US$25.9 billion, up slightly from US$25.6 billion in 2005. Overall net income for these companies shot up to US$890 million from a loss of US$528 million during the same period, due in large part to the re-payment of countervail duties collected during the softwood lumber dispute with the US. ROCE tumbled to 2.0% in 2006 from 4.5% the previous year, reflecting the declining health of the Canadian forest industry. Norbord enjoyed the best ROCE number in Canada for 2006 at 11.4%, a distinction it also held the previous year with 23.7%. Interfor held the second place ROCE spot with 6.7%, followed by West Fraser Timber with 4.3%.
Twenty-seven US companies made the 2006 PwC Top 100 list. Their combined sales revenues increased by 3.1% from US$123.2 billion in 2005 to US$127.1 billion in 2006. Net income for the corresponding period rose 8.4% from $US 5.2 billion in 2005 to US$5.6 billion. American producers are trying to cope with growing competition from producers in emerging countries, and a slump in domestic housing demand. Profits were negatively impacted by higher costs of raw materials, labour, energy and transportation.
ROCE in the US averaged 5.4%, with Procter & Gamble turning in the best number at 20.6%, followed by Rayonier at 12.5% and Kimberly Clark at 12.1%. In 2005 US ROCE averaged 5.5%. Notable transactions during the year were Weyerhaeuser’s disposition of 11 packaging plants, its North American composite paper operations and combining its fine paper business with Domtar. International Paper substantially completed disposition of many assets. Private equity investment continued to be a major player behind the sector’s M&A activity.
WESTERN EUROPE RESULTS
European producers continued to face difficult challenges in 2006 as reflected in the industry’s financial results. Significant increases in energy and raw materials forced companies to look for ways to increase efficiencies. There was over capacity in Europe and increased global competition. Export margins were squeezed by the strength of the Euro, but Eastern European demand for forest products has grown.
Europe was home to 25 companies on the 2006 PwC Top 100 List, posting combined sales of US$111.8 billion (€ 89.1 billion) in 2006, up 11.8% from US$100.0 billion (€ 80.4 billion) in 2005. Net income rose by 156% to US$3.9 billion (€ 3.2 billion) in 2006 from US$1.5 billion (€ 1.2 billion) in 2005. ROCE was up to 4.9% from 3.2% over the same period. Sodra in Sweden posted the best ROCE in Europe of 10.5%, followed by Mayr-Melnhof Karton (Austria) at 9.2%. The third place spot was held by SIG Group (Switzerland) at 8.1%.
LATIN AMERICA RESULTS
Forest products companies in Latin America experienced continued growth in 2006, partially due to abundant fibre supply and short harvest cycles. Recent investments in new production facilities, technology and silviculture are beginning to pay off as well. The relative cost advantage enjoyed by the region due to foreign exchange rates was somewhat eroded as the regional economy grew, somewhat exacerbated by the decline in the value of the US dollar. The pulp sector is set for huge expansion, and is expected to dominate the world’s hardwood market pulp production within the next few years.
2006 saw sales grow in the region by 17% from US$12.3 billion in 2005 to US$14.4 billion in 2006. Year-over-year net income rose by 30% to US$2.4 billion in 2006. Kimberly-Clark Mexico was the top ROCE performer in Latin America at 17.7%, followed by Aracruz (Brazil) at 15.8%, and Klabin (Brazil) at 13.4%.
Campbell pointed out that added economic growth in China has made it the hottest forest, paper and packaging market in the world, with a key driver being the export of panels, remanufactured wood products, flooring and furniture shipped all over the world. China is also a net exporter of graphic papers. The increase in demand, low labour and manufacturing costs, and its proximity to Russia, the world’s leading exporter of unprocessed logs, is attracting local and foreign investment into the forest products sector.
This year, PwC’s Global Forest, Paper and Packaging Industry Survey also includes a review of the sustainability reporting practices of the Top 100 global forest, paper and packaging companies. The analysis reveals that two-thirds of companies now produce a sustainability report.
Bruce McIntyre, leader of PwC’s forest, paper and packaging practice in Canada, noted, “This high proportion is a good sign. It demonstrates the need shared by industry players to be more transparent in communicating their environmental, social and economic performance. On the other hand, there are widespread differences in content and disclosure, indicating a need for companies to adhere to a common standard such as the Global Reporting Initiative (GRI).”
The review also shows that North American companies produced relatively fewer sustainability reports and obtained less external assurance than their counterparts in Western Europe. Notably, the review reveals that Latin America was the strongest region for sustainability reporting, both in terms of the proportion of companies reporting and the metrics used.
“As green thinking becomes more mainstream, there will be increased pressure on companies to report more consistently and to adopt external reporting and assurance standards to increase transparency and reduce risk” said McIntyre.
The PwC 2007 Global Forest, Paper and Packaging Industry Survey is available as a pdf file at: www.pwc.com/fppsurvey07 and includes a summary of the recent 20th annual PwC Global Forest and Paper Industry Conference which brought together in Vancouver, British Columbia, Canada, thought leaders from the forestry, pulp, paper, wood products and fibre-based packaging sectors, suppliers, customers and policy makers from around the world.
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.