Global forest and paper industry starts to rally back after dismal few years: PwC

More fresh competition, M&A's and cross industry partnerships in store

VANCOUVER, May 11 /CNW/ - Today, PwC released key indicators for the health of the forest, paper and products industry that show the beginning signs of a return to full recovery, at its annual Global Forest and Paper Industry Conference in Vancouver, BC.

Return on Capital Employed (ROCE) is a key metric of sector financial health. Overall, the top 100 public companies aggregate ROCE increased in 2010 although levels varied regionally. Preliminary ROCE figures for 2010 for the top 100 global companies indicate the following:

  • Global ROCE has been improving steadily to an estimated 4.8% in 2010, up from 3.2% in 2009 from 2.4% in 2008. (The current average cost of capital is 11% to 15%.)
  • Canada's ROCE showed significant gains, increasing from -3% in 2009 to 3.8% in 2010, BC and Atlantic Canada experienced a strong pick-up at 4.6% and 3.4% respectively from their negative positions last year (-1.7% and -2.9%).
  • The US and emerging economies in Asia, including China have the highest ROCE (5.8% and 5.2% respectively).

But Canadian forest product exports to the US, its main trading partner, have declined by 50% since 2005 and PwC notes other obstacles for forest companies in 2011. "While we are seeing some positive signs of recovery for many companies, there is hesitance to being overly optimistic," says Frédéric Bouchard, PwC's National Deals Leader for Forest, Paper and Packaging. "The mood is balanced by several other factors including a strong Canadian dollar and that prospects for the US housing market remain uncertain."

Larger deals could be on the horizon

While merger and acquisition (M&A) deal numbers have been increasing since 2003, average global deal value fell steadily from 2006 to 2010 with a 29% decline in average deal value between 2009 to 2010 (US$95.6 million to $US68.2 million). Total deal value has also been declining since 2007, with a 32% decrease between 2009 and 2010 ($18.7 billion to $12.7 billion). Notable regional results include:

  • Europe experienced the largest share (36%) of worldwide deal value for the first time since PwC's data series began (2003) and was the only continent last year with deal values over US$1 billion.
  • Asia Pacific: deal numbers and value dipped year-over-year in 2010 but the value share of all deals increased to 25%; the highest level in PwC's data series.

North America has experienced a revival in deals after a virtual collapse in 2009 - deal numbers rose 47% in 2010. "First quarter deals in North America are promising with the RockTenn deal for Smurfit-Stone coming in at $US3.5 billion and the PSP's and BCIMC's purchase of Timberwest for over US$1.2 billion," says Bouchard.

New applications for forest products present large market opportunities

The possibility to convert wood fibre for new purposes is going to expand dramatically, with heat and power, biofuels and chemicals all vying for access and control to fibre resources over the next decade according to a recent forest industry report from PwC.

"New biomass energy plants and biofuel refineries are returning to the most fundamental use of lumber for heat and power," says Bouchard. "As a result, energy will again be the baseline use for wood over the more traditional uses of paper. The energy sector's growing interest in biomass will change demand patterns, as well as industry practices."

More cross industry partnerships will form as a result of new entrants. These will explore business development opportunities and research and will spur three main outcomes for the industry:

  • Cooperation to promote wood as a great building material. It won't only be new markets like energy and fuel where partnerships have potential. Traditional uses of timbers in areas like residential construction will be expanded if wood is used together with other building materials. For example in chemicals, developing coatings which help windows retain heat better in developing engineered wood products that combine wood with plastic to make durable building materials.
  • New, more sustainable packaging solutions. From developing coatings, to enhancing water resistance, or pairing paper labels with plastic containers or aluminum cans, the industry will have to innovate and improve the performance/weight ratio of paper and create bi-coating solutions for current products that combine paper and plastics.
  • More capital for R&D and investment in technology. Paper manufacturers may need to work together with electronics companies and logistics operators to develop the next generation of high tech labels. Researchers are already presenting electronic paper display technology, like an interactive paper computer that can duplicates many of the functions of a smartphone for instance.

"Most companies won't be able to succeed on their own," says Bouchard. "They'll need to form alliances with other industries that may have better access to capital, experience in new markets like energy distribution, or research in areas like molecular chemistry."

On the other hand, the industry will continue to consolidate in traditional areas, especially where market demand is declining. Companies will be pressed to secure financing for mill conversions or other capital investments required to shift their business to energy production or other new products.

Bouchard says, "Companies are going to continue to respond to the radical changes in the industry. Whether it means consolidating, divesting, closing down mills or reducing costs, but with a rigour that makes sure the returns from their existing core business are maintained and they can regain support from their investors, many of whom have been deterred by the poor returns in the industry."

Technology has the potential to increase both forest yields and production, but the gains are likely to be incremental, the report says. While PwC believes that new technology will impact demand trends dramatically and quickly - the supply side will change more slowly.

For more information, please visit http://www.pwcom/ca/fpp. To read the full report, entitled "Growing the Future", please visit http://www.pwc.com/gx/en/forest-paper-packaging/publications/new-values-directions-technology-fibre-competition.jhtml. The report is also available from the media contacts.

Follow PwC on Twitter @PwC_Canada_LLP and on Facebook at http://www.facebook.com/pwccanada.

Firm Description

PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 5,700 partners and staff in offices across the country.

"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

Note to Editors: PwC has changed its name from PricewaterhouseCoopers to PwC in the fall of 2010. 'PwC' is written in text with a capital 'P' and capital 'C'. Only when you use the PwC logo is the name represented in lower case.


"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

SOURCE PwC

For further information:

Jim Nelson, PwC
Tel: 604 806 7047
email: jim.nelson@ca.pwc.com 

OR: 

Kiran Chauhan, PwC
Tel: 416 947 8983
email: kiran.chauhan@ca.pwc.com

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