Vancouver, May 8, 2008 — Currency is one of the biggest issues facing the forest, paper and packaging industry around the world, in particular Canada and Europe. But the news is not all bad for the global industry. According to findings released today by PricewaterhouseCoopers (PwC) at its 21st annual Global Forest and Paper Industry Conference in Vancouver, the southern hemisphere and other emerging markets (Central America, South America and non-Japan Asia) are prospering, in particular due their use of new technologies, fertile soil and low wood costs.
“The Canadian dollar has increased in value 57% against the US dollar since its low in 2002,” says Craig Campbell, leader of PwC’s performance improvement practice for the global forest and paper industry. “The five cent increase since 2006 has cost the BC forest industry approximately $600 million in reduced revenues and cost the Canadian forest industry over $2 billion in reduced revenues. While the companies do benefit from a one time reduction in the amount of Canadian dollars required to repay their US debt, the hit against sales from the strengthening Canadian dollar is annual.”
Furthermore, notes Campbell, with forest products priced in US dollars, the strong Euro relative to the US dollar has limited European imports into the US and Asian markets and has put pressure on European earnings in the same way as Canadian producers. However, the US and European companies produce more valuable, profitable products than Canada with less reliance on commodities like lumber, pulp and newsprint. And in particular for the Americans, the weak US dollar makes US production more competitive in the global markets.
The good news comes from the southern hemisphere and emerging markets where they are buying leading edge technology giving them the lowest production costs. Emerging markets are generating 40 to 50% cash on sales versus less than 10% for Europe and North America. South American producers have made significant investments in silviculture and production facilities in recent years and are especially apparent in the pulp sector where low-cost fibre has propelled the region into the forefront as a key supplier of market pulp. South America also possesses the richest forest resources on the planet, with 21% of the global forest area. With a generally favourable climate, fertile soil and abundant land which allows for extremely rapid tree growth, the continent has some of the lowest wood fibre costs in the world. Low wood costs have become a prime competitive advantage in world markets for globally traded forest products, particularly in pulp. Overall, 2007 Return on Capital Employed (ROCE)—key industry metric of financial health—saw the top 100 public companies largely unchanged from 2006 at 5.1% and continues to be well short of the target of 10-12%. Canada, US and Europe are well behind the target ranging from a low of -0.4% for eastern Canada, 5.1% for Europe and 6.7% for the US. Emerging markets hit the ROCE target and was slightly above at 12.4%.
On the positive side for the Canadian market place, pulp prices are at their highest level in USD since the 1995 peak. However, again, exchange rates have eroded much of the increase, along with higher chip prices, caused by sawmill shutdowns. Newsprint is going through a significant transformation as well, particularly in North America, where sales are on a downward trend due to. Reduced circulation, less print advertising and conservation measures are all contributing to less demand.
In terms of actual earnings, the ups and downs in lumber and pulp translate into volatile BC earnings. PwC estimates that the BC industry lost almost $750 million in 2007, before unusual charges of a further $500 million. West Fraser Timber and Canfor, the two biggest operators in BC, together earned $1.3bn less than 2006.
“It’s not all doom and gloom for Canada,” says Campbell. “The demand is there, with global paper consumption expected to increase by almost 3% per annum for the next 10 years. The tough economic times have reduced the number of producers, especially in North America, but those that focus on cost reductions and manage to weather the storm are poised to take advantage of the eventual turnaround in the sector that is expected sometime beyond 2009.”
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