A few months ago, the Forest, Paper and Packaging team of PricewaterhouseCoopers asked 17 CEOs in the industry from around the world, what's going on and what will happen.

by David Price

Recently, 17 forest, paper and packaging company CEOs from North America, South America, Europe, Russia, China, India and South Africa were interviewed by PwC. Their companies, combined, had sales of more than $70 billion, and according to the study they are worried and optimistic in almost equal measure. They agreed that:

• The industry is undergoing comprehensive and far-reaching change
• Demand is shifting east
• Pulp supply is shifting south
• North America's pulp industry is in decline
• Industry is still too fragmented
• Consolidation and rationalization are essential

Then they were asked: how do you get the best results in the short-term while still achieving long-term, sustainable growth? The executives then made four basic observations.

1. The cost structure of the industry is under intense pressure. To address this, CEOs are making traditional capacity and cost reductions. In mature markets, such as Western Europe, it is now difficult to pass on costs to customers. In this market, inefficient older mills are hampering productivity. In addition, higher energy prices have made paper production very expensive and transport costs have also rocketed. In these conditions executives are making tough decisions like an immediate sale of assets, cutting capacity, switching grades to more efficient mills, and re-looking timberlands as recreation areas.

Some CEOs are looking at more M&A, entering new markets, and making investments with low risk profitability.

2. The supply chain needs to be optimized, including industry consolidation. Forest, paper and packaging companies need to work on all aspects of the supply chain and be open to innovative solutions such as new types of supply agreements. And, the still fragmented industry also faces substantial consolidation in order to optimize supply chains. One CEO is trialing deliveries direct to production, which will reduce the need for working capital of a major customer.

In a theme of innovation, another CEO identified steam and energy supplies as an area the industry needs to work on. A number of chief execs agreed that capacity must more closely match demand.

There was agreement that more consolidation is inevitable for producers to stay competitive. But some countries have regulations—mainly on monopolies—that hinder consolidation. And consolidation is generally easier to achieve within a region than globally.

All CEOs identified South America as a future world-scale and worldwide paper supplier because of its low-cost and fast-growing pulp supply.

Most were aware of the role of private equity now reshaping parts of the industry; one CEO commented that private equity had introduced him to a fresh way of thinking about his industry.

3. Know your customer and understand your markets-established and emerging. While it is critical to retain existing customers and market share, it is equally so to get more information about the customer, values and new market opportunities.

All CEOs now focus ever more attention on understanding and serving their customers. This includes new products, shelf-ready packaging, more R&D in trees that will deliver specific types of fiber for pulp.

All CEOs are looking at the emerging BRIC markets. Most saw them as markets for their goods, but none foresaw any major paper production in China.

Most European executives saw central and eastern Europe and Russia as their emerging markets. A few saw Russia as a future global giant in the forest products industry-one CEO predicted that Russia will become the world's principal source of low-cost softwood fiber. They all identified Russia's vast oil and gas reserves which will protect it from high energy prices.

4. Sustainability is a critical factor to ensure long-term success. Good forest management and a sustainable business model make sound business sense for the industry.

Environmental sustainability is now rated very high for all CEOs. As good forest management now moves further into emerging markets, those management practices must ensure the long-term viability of available resources. The industrial, “colonial” countries can no longer plunder third world resources. Global players operating in emerging markets like South America now show more understanding of local issues, and will continue to do so.

The situation in Russia was seen as more complex. Illegal logging is a big problem, forest management practices are poor and certification has made little progress. Its customer base-the CIS countries and China-display similar bad habits.

The survey also includes a lengthy and candid interview with Guatam Thapar, CEO of Ballarpur Industries (India), whose views echo those of the other CEOs. What is different is his candor about the status of, and prospects for, India's paper industry.

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