Losses reach US$8 billion in 2008
TORONTO, May 14 /CNW/ - The global forest, paper and packing (FPP)
industry experienced some of the heaviest losses in the entire history of the
industry in 2008, taking a 157% nose-dive on net income, with actual dollar
figures dropping from a profit of US$14 billion in 2007 to a loss of (US$8)
billion last year. These and other financial performance metrics were released
today from PricewaterhouseCoopers LLP (PwC) at the PwC LLP Global Forest and
Paper Industry Conference.
Return on Capital Employed (ROCE) is a key metric of industry financial
health. Preliminary ROCE figures released regarding the Global Top 100 company
- Global ROCE decreased to an estimated 2% from just under 5% in 2007.
- Eighty companies generated ROCE of 7% or less.
- Only five companies recorded ROCE of 10% or greater.
- Twenty-six companies generated negative ROCE in 2008 compared to only
eight in 2007.
According to Craig Campbell, Leader of the Performance Improvement
Practice for PwC's Global FPP Practice, "Why is it so tough to make a buck
these days in the industry? Well, the challenge is that the economic
influencers of forest and paper operations haven't changed through the years
and the expenditures required to build mills and keep them running are huge.
Furthermore, we've been dealing with over-supply for many years now, and the
current economic conditions aren't helping. Add in non-differentiated
products, and you have the makings for real challenges to make a decent
Furthermore Campbell adds, "Currency deserves specific mention given that
it is a major influencer of results, particularly for the Canadian producers.
The Canadian dollar hovered near par for the better part of 2008, and then
dropped significantly in September and October when the economic tsunami hit.
This drop in the value of the Canadian dollar was the one bright light at the
end of a tough year for the Canadian forest sector. Considering that the
dollar was on average 98 cents for the first nine months, the fourth quarter
average of 83 cents was a welcome change. The first quarter of 2009 saw the
dollar slip another 2.5% and every cent decline in the Canadian dollar
generates CAD$450 million more revenue for the Canadian industry."
Last year lumber prices were at 25 year lows. However, in Q4 of 2008
prices were even lower at US$181 per mfbm versus US$225 per mfbm in the same
quarter of 2007. The current price is US$150 per mfbm.
To manage the over-supply of lumber in the market, all producers took
downtime in 2008 and continue to do so. Indeed, total Canadian softwood lumber
production declined 21% in 2008 from the prior year in reaction to market
conditions. Looking at lumber production in the BC interior, where over 45% of
Canadian lumber is produced, output decreased 31%.
"But the reduced production has not kept pace with the decline in housing
starts," says Campbell. "Although most economists are saying housing starts
are at the bottom, there isn't an expectation to return to pre-tsunami
conditions any time soon. The average of all the analyst predictions for 2010
is about 750,000 housing starts, which is a good jump from the 500,000 that we
are at currently, but a big stretch from the two million of a few years ago or
even the pre-crisis one and a half million."
"The big factor is all of the unsold houses on the market in the US.
There are approximately 12 months of inventory of houses for sale right now
which is double the regular inventory of six months. Inventory is not
declining as there is a steady stream of foreclosures coming on the market."
The top 100 public companies aggregate ROCE experienced a decrease to 2%
in 2008 from 5% in 2007. Eighty companies made less than 7% ROCE and only five
companies recorded ROCE of 10% or greater. All regions are down from 2007 with
Canada and South America experiencing the biggest drops. BC and the rest of
Canada are at the bottom of the pack (both at -5%), and the only regions
showing negative returns on investment as mills are shutting down and
production moves to the southern hemisphere. "We are less diversified,
geographically and from a production point-of-view, compared to other regions.
This is part of a massive shift in production from the northern hemisphere to
emerging market countries, primarily in the southern hemisphere," says
In Canada, net losses for the largest public forest, paper and packaging
companies in 2008 grew to (US$4) billion in 2008 from (US$900 million) in 2007
due to the collapse of the pulp and paper market which had provided buoyancy
throughout 2007. The collapse of newsprint giant, Abitibi Bowater, has brought
the challenges of the North American newsprint industry to the forefront.
Consumption of newsprint in North America has fallen by 50% in the past ten
years, from 16 million tonnes in 1990 to an estimated 9 million tonnes in
When it comes to pulp prices, last year saw the highest levels in US
dollars since 1995. NSBK Prices peaked at US$880/ton in the first and second
quarters of 2008 but the tough fourth quarter of 2008 took a toll and was
exacerbated by the black liquor tax regulations in recent months leading to
current prices of US$690/ton.
"The economic tsunami that hit last fall washed away hopes of an upswing
in the sector," says Campbell. "We're working with this new version of normal
where low prices, low earnings, and pessimistic forecasts are the way things
are. The sector is learning to use all available options to weather this
perfect storm and find a way to survive."
For more information please visit www.pwc.com/ca/fpp.
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