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
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.
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