August 10, 2006 Press release
Global forest, paper and paper-based packaging companies face another challenging year following a difficult 2005 for most businesses in the industry, according to PricewaterhouseCoopers 9th annual ‘Global Forest, Paper and Packaging Industry Survey’, just released. Return on capital employed (ROCE), a key measure of performance in this capital-intensive industry, fell to an average of 4.5% in 2005 from 5.3% in 2004 — far from the target of 10-12%.
The survey found that total global industry sales were up slightly in 2005 to US$340 billion from US$328 billion in 2004. However, operating profits were down by 11% to US$21.6 billion and ROCE fell to 4.5% from 5.3% in 2004.
Robert Barnden, global forest, paper & packaging leader, PricewaterhouseCoopers said:
“2005 showed why it can be so difficult to make a decent return in the sector. The companies that succeed are ones who are innovative and develop methods to do more with less. Projections for 2006 remain challenging and innovation will again be the key to profitability.”
The economic factors which have impacted the industry most remain foreign exchange fluctuations, increased energy, transportation and raw materials costs, and the impact of the emerging market presence. Rising energy costs will remain a paramount concern for the industry for the second half of 2006.
Europe
European producers continued to face difficult market challenges in 2005 and continue to do so during 2006. Major issues affected key regional markets such as the industry-wide strike in Finland which contributed to almost a two billion US dollar reduction in earnings in Finland in 2005. During 2005 and continuing in 2006, most of the major producers began implementing capacity reductions, particularly the oldest and highest cost capacity, in order to establish a better balance between demand and supply.
Average sales growth was flat across the top 26 companies in the sector in 2005 against 2004 and return of capital investment fell from an average 4.7% in 2004 to 2.7% in 2005.
Robert Barnden, global forest, paper & packaging leader, PricewaterhouseCoopers, commented:
“It’s worth noting that for the second year running no Europeans appear in the top performing global companies in terms of their ROCE. This is a clear indication of why most companies in Europe have embarked on or have in mind major restructuring projects.”
Six European companies bucked the trend of falling ROCE. Most notably Cartiere Burgo (Italy) and Ahlstrom (Finland) which both more than doubled their ROCE increase.
Despite the sub-optimal returns experienced across Europe, producers are continuing to increase investment above depreciation levels. New investment by European producers, on the whole, has been in modern capacity outside their home bases and by investing in emerging markets.
North America
US forest products producers in the PwC Top 100 — the top 100 companies in the 100 largest forest, paper and paper-based packaging companies in the world with publicly available data — made modest gains, with sales revenues up to US$127 billion in 2005 from US$123 billion the previous year. ROCE for these companies averaged 6.3%, up from 5.7% in 2004. There were 27 US producers in the PricewaterhouseCoopers Top 100 and six of them achieved a ROCE of at least 10%, from the year before. Net income rose to US$5.0 billion in 2005, up from US$4.6 billion in 2004.
Housing sales and new builds in the US increased due to a favourable economy and interest rates. The strong housing market drove North American demand for lumber and structural panel products in 2005. The growth in manufacturing capacity, especially for lumber, coupled with improvements in rail transportation pushed product prices down in 2005 compared to 2004. Profits were diminished by higher raw materials and labour prices, energy prices and increased transportation costs.
Canadian producers had a disappointing year, with average ROCE dropping to 2.5% from 4.6% in 2004. Norbord was the most notable exception, ranked top company globally in terms of ROCE at 23.7%. The 11 Canadian-based producers surveyed posted total revenues of US$25 billion in 2005, an increase from US$24 billion in 2004. However, net income plunged almost US$1.3 billion for a loss of US$374 million. The reduction was equally contributed by reductions in operating earnings and increased non-operating expenses.
Capital investment as a percentage of depreciation fell from 2004 levels demonstrating the reduced confidence within the challenged Canadian industry and the anticipated difficulties in making adequate returns.
Latin America and China
The Latin America region once again held the top regional ROCE spot at 8.6%, down from 9.7% in 2004. Three Brazilian companies appeared in the top 12 global players in terms of ROCE — Aracruz, Votorantim and Klabin. Cash flow generated from operations was down across the industry by almost 20% to US$29 billion from US$36 billion in 2004.
In Japan, home to twelve of the PwC 100, the major companies have looked to investing in the nearby Chinese market in search of better growth prospects. This is a result little of change to average sales or ROCE which stayed around 3% when comparing the 2005 and 2004 figures.
The PwC 100 saw a newcomer in 2005 in China’s Nine Dragons Paper Holdings, which went public in 2006. China, with its phenomenal economic growth, continues to attract investment growth from Europe and Japan, and to a lesser extent, North America, in addition to high levels of investment from domestic producers. In 2006, interest remains strong in China with its fragmented industry and increasing demand for paper and wood products.
Russia
Russia remains a “sleeping giant” with huge growth potential due to low production costs and vast forest reserves that have yet to be developed (23% of the planet’s forests are found in Russia). Foreign companies such as International Paper, Mondi, Stora Enso, Swedwood, and UPM Kymmene, as well as Asian — especially Chinese — players have shown great interest in investing in new production facilities.
Alexey Ivanov, Partner at PricewaterhouseCoopers in Russia, comments on this interest in Russia, from China in particular:
“Chinese businesses interest in Russian forestry is undoubtedly justified. A number of factors, such as territorial proximity, huge reserves, relatively low labour costs and moderately soft environmental legislation make Russia the most attractive 'forestry base' to China”.
Nonetheless, although the forestry and pulp -and-paper industries are essential to the further growth and development of Russia, the total amount of foreign investment in the industry remains extremely low. The adoption of the new Forestry Code may improve the situation. It is set to come into force on 1 January 2007 and its objective is to ensure that more comprehensible legislation is in place to promote the influx of investment into the industry. In addition to legislative reform, there is an urgent need for structural reforms in the industry itself, e.g., vertical integration. Competent corporate governance, transparency and strict corporate reporting should be the main goals of the forestry businesses.
Alexey Ivanov elaborates:
“The efficiency of this sector can also be enhanced by applying tariffs and other measures of public regulation that aim to promote exports of woodwork products rather than raw timber and to increase the share of higher value-added goods in the total gross product of the industry. In addition, it is necessary to curtail illegal exports and timber sales by establishing mandatory certification in the forestry industry.”
Notes to Editor:
1. The full survey is available to download in PDF format at http://www.pwc.com/fpp
2. PricewaterhouseCoopers 2006 Global Forest, Paper & Packaging Industry Survey summarises the 2005 year-over-year financial information of the PwC Top 100 — the 100 largest forest and paper companies in the world with publicly available data. Companies are ranked by annual revenues.
3. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
4. For additional information please call Natalia Blotskaya, PwC Ukraine Marketing &Communications Manager, at (044) 490 6 777 or e-mail to: natalia.blotskaya@ua.pwc.com.
