June 26, 2009

PricewaterhouseCoopers' survey finds plunging profits among global forest product firms

TORONTO

The top 100 forest, paper and packaging (FPP) companies from around the world saw net income tumble from positive $13.8 billion in 2007 to record losses of $8 billion in 2008, the first time this metric has been negative since 1996, the date PricewaterhouseCoopers (PwC) began the annual PwC Global Forest, Paper & Packaging Industry Survey.

This year’s survey shows that total sales were $357 billion in 2008, up from $333 billion in 2007.

Operating income of $21 billion represented a decrease of 19 per cent compared to 2007. Average ROCE (return on capital employed) dropped from 4.9 per cent in 2007 to 2.4 per cent in 2008. Only six companies earned a return of 10 per cent or more in 2008, compared with 14 in 2007.

“The sharp decline is mainly due to the impact of losses realized by major players in many of the mature markets as a result of low demand, goodwill and fixed asset impairments, restructuring, severance and high operating costs,” said Craig Campbell, leader of PwC’s Performance Improvement practice for the global forest and paper industry, and author of the PwC survey.

“This year’s survey results reflect the significant challenges faced by the sector, with the PwC Top 100 companies’ net income sliding deep into the red, as well as return on equity and ROCE falling sharply from the already low levels seen in 2007.”

According to the survey, six companies made the list of 2008 ROCE leaders achieving ROCE greater than 10 per cent.

Only two companies from China made the shortened list in 2008 compared with three in 2007 reflecting the widespread impact of the global slowdown. In 2007 emerging market producers were among the leaders in ROCE — a key measure of performance. In 2008 Emerging Asia ROCE for 2008 remained flat at 7.2 per cent (2007: 7.7 per cent). Chinese companies ROCE at 8.1 per cent showed resilience compared with Latin American producers, whose ROCE dwindled to three per cent from nine per cent in 2007.

According to Campbell, “large sections of the FPP industry are struggling to survive in the current global recession and there can be little doubt that major changes will need to occur in order for companies to remain competitive in the face of falling global demand.

Whether or not the industry will truly be transformed, either via long-overdue consolidation, notably in Europe, or a shift in business models, or both, remains to be seen.”

DCN News Services

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