Industry rallies but earliest full recovery may not be until 2011
VANCOUVER, May 11 /CNW/ - While the global forest, paper and packing (FPP) industry experienced some dismal results in 2009, high solid wood and pulp prices at the end of 2009 and the start of 2010 are driving better than expected results for the first quarter of 2010. These and other findings 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 for 2009 regarding the Global Top 100 company list showed:
- Global ROCE improved to an estimated 3.2% in 2009 from 2.4% in 2008
- 75% of companies generated ROCE of 7% or less
- 15% of companies generated ROCE of 10% or greater
- Of the companies that generated ROCE of 10% or greater, 70% were
- 30% of companies generated negative ROCE in 2009, which was
consistent with the percentage in 2008
"The weak economy over the last few years has led to chronic under-supply in the forest and paper industry," says Michael Armstrong, a Vice President in the Consulting practice at PwC. "As a result, many companies have taken down time or gone out of business all across the supply chain. While it may be relatively easy for existing companies to turn back on idle mills, it will be more of a challenge to rebuild supply chain components."
In addition, while the last two years have seen building product prices at 25 year lows, prices have surged since the beginning of the year. The current price of lumber is US$305 per mfbm (2x4 No. 2 & btr), up 40% from the 2008 average price. Price increases for oriented strand board (OSB) products are even more dramatic with the current price at US$395 per msf, more than two and a half times higher than the 2008 average price.
"Supply side discipline paid off in late 2009 and early 2010 as a slight increase in demand meant that the supply could not meet demand and the price of lumber has been increasing as a result," says Armstrong. "These higher prices and the anticipated increases in demand are attracting new players to the marketplace and a positive result for those companies with sawmills open."
The good news about pulp prices continues into 2010: prices are up almost 50% from one year ago (NSBK prices currently US$965 per tonne compared to US$635 per tonne in 2009).
"When it comes to pulp, the story is similar to the lumber markets - the supply side is driving the price rather than demand," says Frédéric Bouchard, Managing Director, Corporate Finance and Montreal leader of the Forest, Paper and Packaging practice. "There were several supply side challenges in 2009 including the earthquake in Chile and a port strike in Finland. The earthquake in Chile affected pulp mills which accounted for 8% of world supply. Once these mills are back online and operating similar to before we expect to see a decrease in pulp prices."
Overall, the top 100 public companies aggregate ROCE is up in 2009 although its level varies regionally. Consistent with last year, BC and Canada continue to be at the bottom of the pack although they showed signs of improvement over 2008. Indeed, Canada experienced the largest increase on a percentage basis after the US. The real driver behind the US increase related to the black liquor subsidy which has been estimated to be US$6.5 billion in 2009 alone. Without this subsidy, the ROCE in the US would break even or even be in the negative.
BC operations saw US$200 million in positive earnings for 2009 and a ROCE of 4% which is the first return to positive earnings since 2005.
"While we have seen some signs of relief in early 2010, the underlying fundamentals for growth are not yet there for the forest and paper industry. We anticipate that there could be a slight decline in this rally before a full recovery in 2011 or 2012," says Bouchard.
For more information, please visit www.pwc.com/ca/fpp.
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