VANCOUVER, May 11, 2011 — 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:
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:
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:
“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.pwc.com/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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