Despite currency fluctuations and market volatility, the global forest and paper industry showed some improvement in 2004, according to results released today by PricewaterhouseCoopers (PwC) at its 18th annual Global Forest and Paper Industry Conference in Vancouver, Canada. Return on capital employed (ROCE) is estimated at 5.4% in 2004, an improvement over the past four years. However, the numbers still fall short of the 10 -12% ROCE target required for the industry to be competitive in the capital market. British Columbia however, stood out as the industry’s top performing region in the world, earning ROCE of 11% in 2004.
According to the PwC analysis, global forest and paper revenues were up 8% to US$343 billion in 2004 from US$319 billion in 2003. Net earnings almost doubled to US$14 billion in 2004 from US$7.3 billion in 2003.
"We are slowly returning to earnings levels last seen in 2000," said Craig Campbell, leader of PwC’s performance improvement practice for the global forest and paper industry. "But a lot of the sectors are still struggling with overcapacity due to new production coming on-stream in the southern hemisphere. Further consolidation and closure of high-cost production is needed to make the industry attractive to investors."
Lumber producers in British Columbia were found to be among the best performers globally, driven mainly by capital investment that has created more efficient and larger mills, and their focus on solid wood products. "B.C.’s excellent performance in 2004 was in the face of adverse conditions-the U.S. - Canadian dollar exchange rate, duties imposed by the softwood lumber dispute, a railcar shortage, plus the damage incurred by the pine beetle," says Campbell.
Top performers in B.C. included Canfor Corp. and West Fraser Timber, which are the second and third largest lumber producers in the world.
"The B.C. lumber producers have gone through mergers and acquisitions in excess of US$5 billion in the past year giving them the scale to shut down high-cost facilities. In addition, they have spent over US$1billion upgrading and expanding facilities. They now have the largest, most efficient sawmills in the world," said Campbell.
The B.C. performance was led by a 44% increase in 2004 average lumber prices compared with 2003. Campbell forecasted: "We expect lumber prices to level off at around US$325 through the balance of 2005. The fundamentals for lumber are still very strong: mortgage rates continuing at record lows and U.S. and Canadian housing starts remaining at, or near, record highs. However volatility is still the order of the day due, in large part, to fragmentation, the fact that no major player controls the market and entry is relatively easy."
Also in 2004, Oriented Strand Board (OSB) prices were riding a nice wave up 28% year over year but, like lumber, OSB prices are expected to settle down in the second half of this year in the US$250 band. The strong OSB prices are primarily a result of the concentration of the OSB sector, especially as compared to lumber. According to Campbell: "The top five North American OSB producers have a 70% market share, which leads to a better linkage between demand and supply."
Pulp prices have increased over the past three years, up to the current price of US$650 per tonne, off slightly from last month’s four-year high price of $680, but far from the cyclical highs in 1995 and 2000. The outlook is for prices averaging around US$640 per tonne through the balance of the year.
"Despite this current cyclical high, pulp is the worst performing sector," said Campbell. "It is the most fragmented global commodity and needs fundamental restructuring. We believe a minimum five million tonne producer is required to create such critical mass to allow for permanent closure of high-cost, excess production."
Newsprint is seeing improved trend lines, but it is on the backs of some very difficult curtailment and closure decisions. "Newsprint has been in a serious oversupply situation since 9/11, when demand dropped by 13%, the only time it has ever dropped double digits-and it hasn’t recovered since," said Campbell.
PwC’s 18th annual Global Forest and Paper Industry Conference in Vancouver, Canada is being held today as part of The Global Forest and Paper Industry Summit 2005 (Summit 2005), which continues through to June 3. Summit 2005 is a series of forest and paper industry conferences and events over three days that brings together senior executives from companies involved in forestry, wood products, pulp and paper products and packaging plus customers, suppliers, NGOs and government policymakers. Summit 2005 provides a unique opportunity for industry leaders to discuss the current state of the industry and identify opportunities and challenges to be met over the next decade.
Media who are unable to attend in person are invited to join PricewaterhouseCoopers' 2005 Global Forest and Paper Industry Conference live, via Webcast. Hear leading forest and paper executives from around the world as they discuss financial performance, trends and issues facing the forestry industry. On-line participants will have the opportunity to ask questions of the panelists via e-mail. An on-line archive of the panel discussions will be available approximately one week after the conference. Visit www.pwc.com/forestry for details.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, advisory and tax services for public, private and government clients in all markets. More than 122,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 4,200 partners and staff, and offices in 25 locations.
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