Forest Products Industry CEOs Say: Back to Basics

Feb. 6, 2008 - Forest, paper and packaging (FPP) companies are adjusting to a changing business and consumer environment, according to the 2008 edition of "CEO Perspectives," released today by PricewaterhouseCoopers.

The survey of nearly 30 FPP CEOs across the global industry's developed and emerging markets, 30% from Canada and the US, identified four key priorities: attaining the right business model, cost control, sustainability and leadership. FPP companies are reconfiguring to meet these challenges, but views are mixed as to whether the industry has yet reached a turning point in its profitability.

"The evolving forest, paper and packaging industry is at the heart of many of the most important and intense debates taking place in North America's political and corporate circles and within society at large—climate change, sustainable development, the future of the planet's forests and the most appropriate use of natural resources," said Bruce McIntyre, leader of PricewaterhouseCoopers' forest, paper and packaging industry practice in Canada. "The forest sector's future will hinge upon its ability to address these challenges through innovation and change mangement."


The PricewaterhouseCoopers (PwC) report found that many of the FPP CEOs surveyed are eager to get back to basics, i.e. ensuring that they are capable of delivering a standard, quality product, on time and as economically as possible. They believe the industry is becoming increasingly commoditised, and do not see quality or service enhancements generating higher margins. Other CEOs, whose companies operate further along the value chain, are focusing on opportunities for differentiating their products and examining their offerings to ensure that the extra services they provide are really enhancing revenues.

Declining demand is seen as an issue, particularly in commodity segments like newsprint. In North America, CEOs express deep concerns about the weak building products market, a sector which has been hard-hit by a dramatic slowdown in US housing starts. But other executives are more positive and argue that increasing demand in emerging markets could offset falling demand in more mature markets. A separate PwC report, "The World in 2050," found that by 2050, the seven largest emerging market economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will outstrip the world's largest developed economies (US, Japan, Germany, UK, France, Italy and Canada).


Most CEOs in the PwC survey are trying to reduce major input costs and welcome the financial discipline private equity involvement has brought. Fibre is the single largest cost factor for many players and supply poses major challenges in some parts of the world. Several CEOs of companies with integrated supply chains list their access to fibre as a major competitive advantage. Sourcing fibre cheaply is critical to keeping costs down.

Energy costs continue to be a major factor for some players. Some CEOs report that their main strategy for reducing energy costs is the modernisation of existing assets. However, many respondents were more concerned about transportation costs than direct energy costs. Many executives see transportation and logistics as one of the most important remaining areas in which to secure further cost reductions.

Currency exchange rates are yet another major challenge. Countries such as Canada and Europe have seen their domestic currencies experience gains relative to the US dollar, thus reducing margins and forcing numerous plant closures. Producers in several provinces have been hit hard by closures. On the flip-side, some US companies have seen profits rise on the back of the weak US currency.


FPP companies are at the forefront of the increased focus on operating in a sustainable manner. The FPP sector is among the most sustainable industries; as one interviewee points out, it is the world's biggest producer and consumer of renewable energy, and 50% of the raw materials used in the European paper and packaging sector are derived from recovered paper. Forests are also the biggest binder of carbon on the planet, and have the greatest potential to offset damage wrought by carbon emissions.

Unfortunately the FPP industry still suffers from a poor image as the "destroyer" of the world's forests. The CEOs interviewed by PwC generally agree that the industry must do a lot more to raise awareness of its responsible approach to maintaining the health and viability of the world's forests. Suggested measures included sustainability reporting and collaboration with industry trade organizations and NGOs.

One clearly emerging and significant development is the concept of total supply-chain, which is being driven by the climate-change and carbon agenda of powerful customers. One CEO mentioned the increasing pressure to ensure that the entire supply chain is 'green' - i.e. lumber and paper manufacturers not only need to reassure retail customers about their own practices, they are also considered accountable for the practices of the loggers from which they buy wood.

Several CEOs also express frustration that, while demand for 'green' products is increasing, customers are often reluctant to pay a premium for such goods.


Many of the interviews show that executives are explicitly looking for leaders who will drive the industry forward and show the way in important areas like capacity reduction, inventory management and consolidation. Finding the right talent to pilot the industry in the future may prove extremely difficult. Many forest, paper and packaging companies, particularly those in developed markets, are failing to attract the best and brightest new joiners; without a strong contingent of younger people in the pipeline, they will be hard-pressed to fill upper-level management vacancies as they arise.

McIntyre added: "FPP companies in Canada and elsewhere will have to learn how to tap into new markets, such as carbon-neutral energy production, without jeopardising supplies of economically available wood fibre. These new businesses have different value chains and markets, and demand skills and relationships that are different than those traditionally found in the forest sector. For those companies that lead and make the transition, the rewards could be significant."

For a pdf copy of CEO Perspectives visit www.pwc.com/fpp.

SOURCE: PricewaterhouseCoopers

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