OREANDA-NEWS. September 03, 2008. The world’s 100 largest forest, paper and fibre-based packaging products companies posted mixed financial results in 2007, reflecting the significantly different business and economic situations across regions, reported the press-centre of PwC.

According to the PricewaterhouseCoopers (PwC) 11th annual Global Forest, Paper and Packaging Industry Survey the three top regions in terms of return on capital employed (ROCE), a key measure of performance, were: Latin America (7.8%), Emerging Asia (7.3%) and the US (5.5%). Canada’s producers earned the lowest average ROCE — a negative 0.1%, reflecting the financial crisis experienced in the Canadian forest products sector. The overall average ROCE of the companies surveyed was relatively flat compared to the previous year at 4.8%, and a long way from the industry’s 10–12% target range.

Rapidly growing markets — mainly China and India — have turned out to be more stable, continuing their active development. The year 2007 saw continued high GDP growth in China (11.4%), India (9.2%), Russia (8.1%) and Latin America (5.6%). Asia (namely China), Latin America and Russia are now the leading regions among emerging economies in the timber, pulp and paper, and packaging industries.

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

“The global forest, paper and packaging products sector continues to be shaped by shifting business and environmental factors, creating opportunities for some regions and challenges for others. Mills with the lowest production cost structures are the ones that are best able to manage currency fluctuations and rising costs, allowing them to take advantage of new opportunities and markets.”

High performers in 2007 included Setra Group in Sweden, holding the top spot in terms of ROCE at 25.2%, Kimberly-Clark Mexico was second with 20.3%, and Kimberly-Clark in the US held third spot with a ROCE of 15.2%.

According to the survey, the capital reinvestment ratio — capital investment as a percentage of depreciation, measuring the extent that capital investment is replacing aging assets — for the PwC Top 100 companies was 1.2, up from less than 1.0 in previous years. The positive trend is largely due to in the increasing weighting of Chinese and Latin American producers, where ratios were 3.08 and 2.84 respectively.

At the other extreme, Canada had a 2007 reinvestment ratio of 0.4. It is expected to see more consolidations and closures in regions like North America, where there are some smaller, older mills that cannot compete with high tech, low cost producers in Latin America.

Indeed, the forest products companies based in emerging markets, primarily China, India, Latin America and Russia, remain the growth drivers. On the supply side, the competitive advantage continues to shift towards South America, and China remains a major influence on the demand side. Further, the number of companies from emerging markets in the PwC Top 100 is growing, with Sino Forest, Shangdong Huatai Paper and Lee & Mann Paper from China and Ballarpur Industries in India entering the list in 2007.

In terms of revenue, the number one spot in the 2007 PwC Top 100 list is held by U.S.-based International Paper, with sales of US21.9 billion, down slightly from US22.0 billion in 2006. Number two is Finland’s Stora Enso, with sales of US18.32 billion, rising 12% from \\$US16.27 billion in 2006. US-based Kimberly-Clark holds third position with US18.27 billion, up 9% from US16.75 billion. The largest 20 companies in PwC’s 2007 list of 100 companies account for nearly 60% of total sales.

Alexei Ivanov, said:
“Of the many economic factors which have affected the industry, the continued depreciation of the US dollar against other world currencies, the rising costs of transportation, raw materials especially fibre, supply and energy have had the greatest burden on financial results”.

Russia
Russia has one of the fastest growing large economies in the world. Demand for paper products is being propelled by strongly growing domestic consumption. An active construction sector (new build and repair) is driving good demand for wood products. Russia has the largest untapped wood resources in the world. Accordingly, there are strong fundamentals.

However, the dominant forest and paper development for the outside world in Russia’s plan to impose stringent tariffs on unprocessed wood exports, at a time when it has risen to be the world’s largest log exporter. Prior to 1 July 2007, the duty level was 6.5% (subject to a minimum of 4 EUR/m3).

For softwood logs, these duties were escalated to 20% and 25% from 1 July 2007 and 1 April 2008 respectively and with plans to raise to 80% (subject to a minimum of 50 ?/m3) from the beginning of 2009. For birch pulpwood, the tax is delayed until 2011 when it rises from zero to 80%. The increases to date and future plans have unsettled both Russia’s neighbours that have relied on these log exports as well markets further afield.

This program of log export taxes has been driven by Russia’s desire to develop a strong domestic value added forest products industry to supply domestic and export markets. The impact, if and when fully implemented, will likely be that harvesting timber in Russia will only be economic if the logs can be processed locally.

It is too early to judge the effectiveness of these taxes in addressing their objectives. There has been some step up in investment in wood processing, but in pulp, although announcements abound, major projects have yet to be implemented. Accordingly, in the short term at least, Russian harvest levels may be reduced with a potentially serious disruptive impact on global wood supplies.

Potential foreign investors remain cautious about significant investment into Russia, despite the rapid growth in domestic demand and the export potential given factors such as infrastructure limitations, illegal logging and political concerns.

Alexei Ivanov, Forest, Paper & Packaging Industry Leader commented:

“Russian industry is to face a period of sustainable economic development. The country has the largest supply of natural resources, which has not yet fully been developed or used. Moreover, Russia neighbours the biggest market in the world: China. In light of the sharp increase in Russian export duties, investments into the Russian forest industry seem quite feasible from an economic perspective.”