Global forest, paper and packaging earnings slide deep into the red

July 8, 2009 — The Top 100 Forest, Paper and Packaging (FPP) companies from around the world saw net income tumble from positive $13.8 billion in 2007 to record losses of $8.0 billion in 2008, the first time this metric has been negative since 1996, the date PricewaterhouseCoopers (PwC) began the annual PwC Global Forest, Paper & Packaging Industry Survey.

This year’s survey shows that:

• Total sales were $357 billion in 2008, up from $333 billion in 2007.
• Cash flow from operations totaled $26 billion in 2008, down from $31 billion in 2007.
• Operating income of $21 billion represented a decrease of 19% compared to 2007.
• Average ROCE (return on capital employed) dropped from 4.9% in 2007 to 2.4% in 2008. Only six companies earned a return of 10% or more in 2008, compared to 14 in 2007.

“The sharp decline is mainly due to the impact of losses realized by major players in many of the mature markets as a result of low demand, goodwill and fixed asset impairments, restructuring, severance and high operating costs.

“This year’s Survey results reflect the significant challenges faced by the sector, with the PwC Top 100 companies’ net income sliding deep into the red, as well as return on equity and ROCE falling sharply from the already low levels seen in 2007.”

According to the Survey, six companies made the list of 2008 ROCE leaders achieving ROCE greater than 10%. Only two companies from China made the shortened list in 2008 compared to three in 2007 reflecting the widespread impact of the global slowdown. In 2007 emerging market producers were among the leaders in ROCE—a key measure of performance. In 2008 Emerging Asia ROCE for 2008 remained flat at 7.2% (2007: 7.7%). Chinese companies ROCE at 8.1% showed resilience compared to Latin American producers, who’s ROCE dwindled to 3.0% from 9.0% in 2007.

According to Campbell:

“Large sections of the FPP industry are struggling to survive in the current global recession and there can be little doubt that major changes will need to occur in order for companies to remain competitive in the face of falling global demand. Whether or not the industry will truly be transformed — either via long-overdue consolidation, notably in Europe, or a shift in business models, or both—remains to be seen.”

The ROCE leaders for 2008—greater than 10%—from the Survey include:

• Kimberly-Clark Mexico (Mexico): 22.3% in 2008 vs. 20.3% in 2007
• Kimberly-Clark (US): 14.8% in 2008 vs. 15.2% in 2007
• Sino Forest (China/Canada): 12.7% in 2008 vs. 12.8% in 2007
• Lee & Man Paper (China): 12.4% in 2008 vs. 15.0% in 2007
• Sonoco (US): 10.3% in 2008 vs. 10.5% in 2007

Russia

Despite the limited scale of Russian companies, the country has had a major impact on global FPP developments. It possesses the world’s largest forest resources and had assumed primacy in recent years as the world’s largest exporter of unprocessed timber. As part of moves aimed at encouraging investment in value added processing in Russia, the government had introduced an escalating scale of export duties on unprocessed roundwood, with the largest increase due to take effect in January 2009.

In November 2008, the Russian government announced that the increases would be postponed by nine to twelve months. Companies in regions where Russian exports form a large component of fibre supply have been looking to reduce their dependence on Russian sources; shipments to China, Finland, and Japan, all major buyers of Russian logs, declined substantially in 2008. Press reports indicate that rough timber exports overall decreased by 54%, although the global economic slowdown may also have been a factor here.

Finnish press reports in June 2009 quote President Vladimir Putin as saying that Russia no longer plans to further raise duties on exported wood, but at the time of finalising this report, official confirmation from the Russian government was outstanding.

Alexei Ivanov, Partner, Forest, Paper & Packaging Industry Leader, PricewaterhouseCoopers in Russia said:

“The current economic situation has, in the nature of things, affected the forest, paper–and–pulp and packaging industry. In particular, a decline in the global demand and prices for paper pulp entailed suspension of production at a number of paper mills. However, despite the difficulty in fund- raising, both Russian and international investors are still interested in major long–term projects, which gives grounds to look into the future with a certain degree of optimism.”

Europe

The big story in Europe in 2008 was cuts in production and capacity nearly across the board. Temporary and permanent reductions in production capacity have improved the supply and demand balance in the paper industry, especially in newsprint, magazine and coated fine papers.

According to Campbell:

“The main producers are trying to retain discipline on the supply side with aggressive cut backs or closures of capacity and we expect that they will keep to this strategy through 2009.”

Sales by the 30 European-based companies included in the PwC Top 100 amounted to $128 billion, up 5.1% from the $122 billion reported for 2007. However, when reported in Euros, 2008 sales actually decreased by 1.9% to € 87 billion from € 89 billion, due to the 7% depreciation of the US dollar against the Euro in 2008. European companies’ sales were higher than US companies for the second year in a row.

Net losses amounted to $1.5 billion, reversing the net income of $3.3 billion reported in 2007. Fourteen European companies posted net losses in 2008, compared to only four of those companies reporting losses in 2007. The sharp decrease in net income is attributed to both market conditions and asset impairments; in some cases there were significant foreign exchange losses.

SCA (tissue and personal care, packaging, graphic papers and wood products) was the most profitable European company in 2008 with net income of $857 million (2007: $1.1 billion). SCA’s net income benefited from its strong exposure to the less-cyclical hygiene segment.

ROCE was 2.9% in 2008, down from 5.0% in 2007. DS Smith (mainly packaging) and Heinzel Group (mainly pulp) earned the highest ROCE in Europe at 10% and 9.9% respectively. Results for DS Smith are based on a company year-end of April 30, 2008, so do not reflect the impact of global downturn later in the year. Heinzel Group benefited from the favorable pulp markets until the third quarter, as well as gains on exchange derivative values.

Notes to editor:

1. For additional information, please contact Anna Kogosova, PR Assistant Manager.
2. Due either to limited publicly available financial information or size there are no Russian companies in the PwC Top 100 list and their financial results are not addressed here.
3. For more information, please visit Global Annual Forest, Paper & Packaging Industry survey — 2009 edition
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