In my last comment I banged on about the summer clutter of forecasts which always land on my desk - and no else's, or so it seems! But the most impressive and accurate of them was still worth studying. That forecast is by the Vancouver office of PriceWaterhouseCoopers (PWC).
The current report, Global Forest and Paper Industry Survey, 2003, (www.pwc.com/forestry) is the sixth in the series by Bruce McIntyre's team, and is mainly devoted to an analysis of 2002 results. It's only 33 pages, but the beef is in the first 19, which also include forecasts for this year and next. Some of the conclusions are:
- Improving economic conditions towards the end of 2003 and early 2004 should see prices recovering and a slight improvement in 2003 results.
- The decline in the US dollar (15% versus the Canadian dollar and the Euro in the first half of 2003) will negatively impact European, Canadian and Asian producers.
- Increased capacity and production in Russia will not affect 2003 results, but will impact capacity over the longer term.
- Although China is currently matching supply and demand (except in market pulp), the growth rates and size of the market will dramatically affect the industry over the medium term, if supply and demand become imbalanced
This is quite cheerful stuff especially as the news pages of my daily newspaper report that there has been a "...surge in American growth in the second quarter. The surge was fuelled by consumer spending and capital investment by companies." (The Times, 29 August).
The PWCs report's main conclusion for 2002 is that the industry's "...poor financial performance was primarily the result of global economic conditions and oversupply. The forest and paper industry continues to be hampered by overcapacity in virtually every industry segment. While production discipline (supply management) and capacity reductions are being practiced in some segments, industry fragmentation continued to disrupt efforts to curtail excess supply."
Readers will be familiar with this criticism. It's my well-known view that our industry needs to look at the oil and gas sector for its shape in the future—a natural resource processed and traded by five major companies.
Performance by grade
The report states that "...pulp and newsprint prices are beginning to recover. The pulp market is dominated by China, which now consumes over 11% of global market pulp production. Industry consolidation in the newsprint segment has yet to significantly impact overcapacity."
"Printing and writing papers have also suffered from the stagnant economy and decline in advertising spending."
"Packaging and containerboard performance is mostly linked to overall economic performance. Capacity has been controlled through production curtailment."
"Tissue demand is less cyclical, although influenced by pulp prices. Consolidation has not had a significant impact; key players are continuing to add capacity to keep up with changes in new technology."
Outlook
The report's main projections for this year and next are:
- Industry profitability is expected to be marginally higher in 2003 than the depressed levels of 2002, as prices and demand strengthen from the cyclical lows reached in mid- to late 2002. However a more robust recovery is not expected until 2004. The industry is not projected to earn the cost of its capital in the foreseeable future.
- The weakening of the US dollar against most major currencies will have a major impact on all markets. Particularly affected will be Canadian and, to a lesser extent, European producers.
- The emergence of Russia as a major producer will dramatically impact global timber supply. It remains to be seen whether this will drive increased European production, lower fiber costs or further fuel low pricing and profitability due to overcapacity.
- In Asia, growth prospects for China continue to be strong. The Japanese economy is expected to continue to stagnate as significant structural supply chain and other issues impede growth prospects.
- With respect to supply, the industry continues to add capacity to an already over-supplied marketplace. Some of it is technology-driven as in tissue; some of it is regional as in Russia and China. There is also new capacity being added by niche-players rushing in to fill voids left by retirement of old machines by larger producers. Despite the efforts of major industry players to remove capacity and take downtime, the industry is expected to have considerable overcapacity into the foreseeable future. As long as fiber, technology and capital are readily available, and there is no concentration of production amongst several large companies, this situation will continue.
My only criticism here is: where is that "readily available capital?" I can't see it—yet.
