Global Forest Products Sector Posts Mixed Results
Aug. 14, 2007 - Financial results for the world’s 100 largest forest, paper and fiber-based packaging products companies showed distinct differences in the major producing regions, according to PricewaterhouseCoopers’ tenth annual Global Forest, Paper and Packaging Industry Survey.
The top three regions in terms of return on capital employed (ROCE), a key measure of performance, were: Latin America at 9.3 percent, followed by China with 6.5 percent, and South Africa with 5.5 percent. The US posted a combined ROCE of 5.4 percent. Overall, the sector’s global ROCE improved slightly from 4.9 percent in 2005 to 5.1 percent in 2006, but still far off the 10 - 12 percent target.
“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 PricewaterhouseCoopers’ Performance Improvement practice for the global forest and paper industry, and author of PricewaterhouseCoopers’ 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 fiber 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. US companies bucked this trend in 2006 and finished in the top two spots in terms of ROCE at 20.6 percent and at 17.7 percent, followed by a Brazilian company at 15.8 percent.
In revenue terms, the top two spots in the 2006 PricewaterhouseCoopers Top 100 are held by US-based companies with sales of $22.0 billion and $18.6 billion respectively. 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 PricewaterhouseCoopers’ 2006 list of 100 companies account for approximately 41 percent of the total revenues, virtually unchanged from the previous year.
Twenty-seven US companies made the 2006 PricewaterhouseCoopers Top 100 list. Their combined sales revenues increased by 3.1 percent from $123.2 billion in 2005 to $127.1 billion in 2006. Net income for the corresponding period rose 8.4 percent from $5.2 billion in 2005 to $5.6 billion. However, American producers are still concerned about a variety of economic factors, including a weakening dollar, falling demand for newsprint, growing competition from producers in emerging countries and a slump in the domestic housing demand.
“Forest, paper and packaging companies in the United States dealt with several challenges in 2006,” said Todd Stroup, assurance partner for PricewaterhouseCoopers. “A weak dollar, uncertainty in the housing market, and higher costs of raw materials, energy, distribution and labor were among several drivers to a sluggish performance.”
Stroup added that growing competition from emerging markets in South America and Asia continues to pressure US companies to evaluate their asset portfolio and production capabilities, and many US companies are now executing on strategic divestitures of assets in efforts to seek improved performance and returns.
As such, the US has taken the lead in deal activity, with their global M&A activity reaching $17.3 billion, or 67 percent of total forest, paper and packaging deal values of $25.7 billion executed in 2006.
Stroup notes that the impact of private equity buyers fueled much of this M&A activity in 2006 and this trend looks to continue in 2007.
SUSTAINABILITY REPORTING PRACTICES
This year, PricewaterhouseCoopers’ Global Forest, Paper and Packaging Industry Survey 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.
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.
PricewaterhouseCoopers’ 2007 Global Forest, Paper and Packaging Industry Survey summarizes the 2006 year-over-year financial information of the PricewaterhouseCoopers Top 100, which are the 100 largest forest products companies in the world with publicly available data. Companies are ranked by annual revenues.
The PricewaterhouseCoopers 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 PricewaterhouseCoopers Global Forest and Paper Industry Conference, which brought together thought leaders from the forestry, pulp, paper, wood products and fiber-based packaging sectors in addition to suppliers, customers and policy makers from around the world.