Poll Says Energy Costs Hit Industry Profits Hardest

NOTE: The following results of PricewaterhouseCoopers' online poll was open for responses on its website between August 22 and September 19, 2008, pre-dating the current deterioration of conditions in global financial markets, as well as the announced acquisition of M-Real's coated papers business by Sappi.

Oct. 6, 2008 - In the past 12 months, energy costs have had the most signifcant impact on profits in the forest, paper and packaging (FPP) industry, according to PricewaterhouseCoopers (PwC) recent online poll of eighty FPP executives. A third of respondents report that energy costs have hit their bottom line, whereas nearly 30% say that exchange rates have had the most impact on profits. Around 15% cited both fibre supply and transport costs.

Survey participants were also asked the million dollar question: when will major consolidation happen in the Western European industry? Forty percent of executives think that the industry will finally consolidate within 1-3 years. Thirty percent said that 3-5 years was more likely. An optimistic handful thinks it will happen within 6 months.

An overwhelming percentage of respondents said that the South American market has the best chance of sustaining profitability over the next 1-3 years. Sixty percent said South America, 20% said China has the best chance. Russia, Western Europe, the US and Central and Eastern Europe were highlighted by a small proportion of the respondents. Executives said that Canada has the least chance of sustaining profitability.

In terms of the effects of the global credit crunch, over half of respondents said it had had a moderate impact on the forest, paper and packaging industry. Nearly a quarter said it had a major impact. A small proportion said it had had no impact on their business at all.

Clive Suckling, global forest, paper and packaging leader at PwC said, "The most significant finding is that an overwhelming majority of industry insiders believe that competitive factors will continue to favour companies in Latin America, at least over the medium term; this contrasts with the relatively gloomy prognosis for traditional regions, suggesting few expect any near term change in the fortunes of companies in North America and Europe.

"The margin impacts of energy costs and exchange rate movements are not a surprise, but given the escalating costs of wood and waste paper supplies it is a little surprising that fibre supply didn't get more votes. This could be because fibre impacts have been more uneven.

"Since the poll closed, the first step towards consolidation has taken place with the announced acquisition by Sappi of M-Real's coated graphics papers business.

"Clearly the North American wood products sector has been hard hit by the credit crisis, but the main impact so far has been as a contributor to a slow down in economic growth. The poll closed just as the latest banking failures and rescues in the US and elsewhere were announced, leaving open the question of whether the flames of the credit crisis will spread more widely or whether a turning point is being reached.

SOURCE: PricewaterhouseCoopers

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