Mixed financial trend for global forest products sector continues

August 27, 2008 — Producers in emerging regions post promising financial results; European and Canadian producers impacted by market forces.

Western Europe Results

There were 28 European companies in the Top 100 in 2007, including four new entrants: Setra Group (Sweden) in wood products, Heinzel Holding (Austria) in pulp, Corticierra Amorin (Portugal) in cork and Otor (France) in packaging. Sales of the European companies increased 13% from $109 billion to $123 billion. For the first time in the history of the PwC survey, the aggregate sales of European companies were higher than US companies, due mainly to the appreciation of the Euro (10%) against the US dollar.

The net income of the European companies was $3.2 billion, down by 18% from the previous year. Svenska Cellulosa (SCA) had the highest profit with net income of $1.1 billion (2006: $739 million).

ROCE averaged 4.9% in 2007, a modest increase from 4.6% in 2006. Setra Group had the highest ROCE in 2007 at 25.2%, up from 12.3%, with much of this attributable to strong sawn timber prices during the most part of 2007. Portucel was in second place with a ROCE of 10.2%, up from 7.4% in 2006.

Meantime, the one constant seems to be an increase in input costs (fibre, energy and chemicals), all directly or indirectly influenced by energy (policy and prices) or special factors, such as the Russian log export duties.

US Results

There were 24 US-based companies in the PwC Top 100 in 2007, one less than in 2006, reporting aggregate sales of $106.7 billion. Without merger and acquisition activity, 2007 sales would have been down from the previous year. Net income increased by 31% from $4.2 billion to $5.5 billion. Among US companies, the net income improvement was dominated by Temple Inland’s $2 billion gain from the disposal of its 1.55 million acres of timberlands to Campbell Group. Weyerhaeuser’s net gain of $700 million on the sale of its fine paper business to Domtar was also notable.

Losses increased with eight companies reporting a total of $ 500 million in losses in 2007 compared with five companies and $205 million in 2006.

Canadian Results

2007 was a challenging year for Canadian forest, paper and packaging companies. The total sales of the 13 Canadian companies in the Top 100 grew, but only from US$25.6 billion in 2006 to US$28.5 billion in 2007, an increase of 12%, reflecting acquisitions, notably the Domtar Weyerhaeuser transaction. Net losses climbed to $1.1 billion from $166 million in 2006.

Ten of the 13 companies reported losses; the largest were at AbitibiBowater and Canfor, totalling $827 million. AbitibiBowater’s losses were heavily impacted by facility closures whereas Canfor’s loss was the result of asset write downs related to lumber and panel operations.

A bright spot was NBSK pulp, where producers enjoyed good profits due to the tightening of supply through mill closures and increasing Asian demand.

Latin America Results

Sales of the nine Latin American producers in the Top 100 rose by 18% to $17.1 billion in 2007 from $14.4 billion in 2006, reflecting growth and the appreciation of domestic currencies against the US dollar. Net earnings were substantially higher at $3.8 billion in 2007, up 58% from $2.4 billion in 2006. Votorantim Cellulose e Papel (VCP) recorded the highest net income at $1.2 billion, boosted by net gains of $955 million from an asset swap with International Paper.

Although ROCE decreased by 1.5% from 9.3% to 7.8% in 2007, Latin America remained the best performing region compared to the prior year. Kimberly-Clark Mexico had the highest ROCE in 2007 at 20.3%, up from 2006’s 17.7%. Arauco was in second place with 2007 ROCE of 11.9%, up from 11.3% in 2006.

The strongest improvement came from Chile’s CMPC, where sales increased by 40% and with net income more than doubling, and ROCE almost doubling in 2007 compared to prior year.

The appreciation of the Brazilian real has narrowed Brazil’s cost advantage, and reduced the operating margins of Brazilian producers since most of their production is exported. Nevertheless, with the country’s strong forest base, favourable climate, and land availability it is expected to retain its position as a major supplier of fibre.

Clive Suckling, Global Forest, Paper & Packaging leader at PricewaterhouseCoopers said:

“With average pulp prices reaching record highs, and the increasing demand from Asia and Europe, Latin American countries are expected to continue to set the pace in market pulp”.

Emerging Asia Results

Sales of the 11 emerging Asian producers rose by nearly 22% to $12.2 billion in 2007 from $10.1 billion in 2006, due to the region’s strong economic growth and the high investment in new capacity.

The net income of these producers was up 58% at $974 million from $615 million in 2006, due mainly to higher earnings from the Chinese companies. According to Suckling “Chinese producers have been growing capacity strongly, with higher prices and improvements in operating rates, this is now improving returns also”.

Notes to Editor

1. For further details, please contact Anna Aristova, PR Assistant Manager.
2. Download the 11^th annual Global Forest, Paper and Packaging Industry Survey.
3. PwC’s 2008 Global Forest, Paper and Packaging Industry Survey summarizes the 2007 year-over-year financial information of the PwC Top 100the 100 largest forest products companies in the world with publicly available data. Companies are ranked by annual revenues.