Industry News Markets
Delivering Value

Conference chair Bruce McIntyre, leader of PwC’s forest, paper and packaging industry practice in Canada, opened this year’s conference with a note of cautious optimism, pointing out the industry seems to be on a slow but steady road back to profitability. He noted that many Canadian companies will return to profitability in late 2012 or early 2013 and that in a recent survey of 1,200 industry CEOs conducted by PwC, most indicated they are confident about the prospect for future growth.

Don Roberts, vice-chairman and managing director, CIBC World Markets, feels there is good growth potential in the bioproducts and European pellet market.

“Globally, pricing will likely be flat over the next couple of quarters. Looking ahead, stronger offshore lumber exports should help increase commodity prices and deliver some sustained improvement in lumber prices for 2013,” McIntyre says.

In the years following the financial collapse, global politics have become a major risk factor. Willis Sparks, global macro analyst at the Eurasia Group, offered some key insights into global politics and the resulting challenges facing forestry companies and their clients. Sparks says that with a painfully slow U.S. recovery and Europe still in a quagmire of unstable member governments and a financial mess, emerging markets will provide most of the growth in the global economy for the foreseeable future. Sparks defined emerging markets as any country where politics are more important than or as important as economics. China, India and Latin America topped the list of emerging markets; however, China still remains the most important emerging market in the global economy. He also stated that there are two critical issues China must solve to get its economy on the right path: first, China needs to unwind its state capitalism, to get more money flowing into the middle class, and secondly, to activate that middle class to create a strong internal consumer market. Sparks also drove home the need for all Canadian corporations and governments to continue to diversify their export markets and commercial trading partners.

Finance
Financial performance is where the “rubber meets the road” and while financial reporting is always on past performance, this year’s financial panel addressed some of the challenges and opportunities that may lie ahead for forest companies. The PwC preliminary Net Earning summary showed that, of Canada’s top forestry companies, only Mercer International and Resolute Forest Products posted positive earnings. U.S. housing is still the backbone of the Canadian lumber market.

Jock A. Finlayson, executive vice-president and chief policy officer of the Business Council of British Columbia, sees the U.S. housing market stabilizing and showing some small signs of growth. He expects U.S. housing starts to hit 700,000 this year and continue to grow in 2013 and 2014, and believes there is a lot of pent-up demand for housing and much of it will come in the form of affordable multi-residential housing. He says that Asian markets continue to favour Western Canada as exports of logs and lumber outpace exports to the United States, but as B.C. faces the coming end of the mountain pine beetle epidemic, this, too, may change the ebb and flow of forest products in Canada.

The audience was happy to hear the recovery is imminent. However, it will be a different recovery.

The Digital Impact
As the digital revolution continues at breakneck speed, publishers face a rapidly changing marketplace that has had serious and far-reaching implications for their businesses, and the pulp and paper producers that supply them. This year’s panel on the future of paper and communications in a digital world featured John Cruickshank from the Toronto Star, Kevin Bent, executive vice-president, Western Canada, of PostMedia Network, and Douglas Knight, president of St. Joseph Media. Panellists cited a plethora of statistics surrounding the changing habits of consumers and they all agreed the digital revolution is the largest shock in the publishing industry’s history.

Panel members also talked in depth about their challenges in integrating the new media into their businesses and how they’ve adapted their print and digital businesses to survive. Daily free newspapers and specialty magazines are the bright spot in the industry, attracting new readers to traditional products and/or bringing them online. The panellists all asked the pulp and paper industry to work with them to create better print products by creating new and better paper products to help attract and retain new readers. All were in agreement that the future of digital media consumption is far from clear and that having a strong offering in both print and digital is the key to successfully managing change.  

Transformation
The Market Outlook session is viewed as one of the most important sessions in the conference, and this year’s outlook focused on diversification, markets and certification. Don Roberts, vice-chairman and managing director, CIBC World Markets, addressed the emerging bioenergy and bioelectricity markets. Roberts feels biofuels is a better market for North America than bioelectricity in part because of ongoing low natural gas prices, and he feels there is good growth potential in the European pellet market since Europe and China dominate the bioelectricity market. The timber supply is still strong in North America and the expansion of log exports, lumber and wood chips to China will continue to grow. While India is the fastest growing market for softwood lumber and logs, it still only comprises 2% of the volume China consumes and many exporters find it too difficult navigating the Indian political and government systems. Many experts are predicting a continued strong Canadian dollar will put additional pressure on exporters to keep costs down and result in further industry consolidation. 

Hans Sohlström, executive vice-president, UPM-Kymmene Corporation, presented the company’s diversification efforts as it experiments with new markets and products such as biofuels, bioproducts and power generation. Sohlström sees UPM-Kymmene as a BioFore company producing a sustainable and environmentally diverse product line, including pulp and paper, biofuels, biomaterials and bioelectric power. While these new products are still in their infancy, they hold the key to maximizing the current infrastructure of pulp and paper operations and diversifying their customer base in the future. Both financial analysts and forest industry leaders agree there is a great opportunity for forest companies to lead in the development of sustainable and environmentally friendly products consumers are starting to demand.

Summary
Diversity and value were the recurring themes throughout this year’s PwC Global Forest and Paper Industry conference. The type of products and services consumers are demanding is changing and the consensus from this year’s event is that we have all the tools necessary to be a driving part of that change. Sustainability and diversification of Canadian markets and products will continue to be keys to growth and prosperity for all forest companies. The PwC speakers were clear on one point, the forest and pulp and paper industry is clearly starting to recover, but this recovery will not look like it did 15 years ago.

Joe Perraton, president of Point One Media, has been working in or for the forest products sector for over 25 years.