FINANCIAL OutLook
Forest product companies and market challenges Article by Dirk Steinicke, Analyst at Moody’s
Forest product companies are likely to focus on executing capital spending projects and cost-cutting given market challenges
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oody’s predicts that 2020 will be a difficult year for most paper and forest products companies in Europe, especially the first half of 2020. Firstly, demand for communications papers is continuing to decline, especially for coated woodfree paper, which calls for ongoing production capacity reductions. Secondly, the pricing level for hardwood and softwood pulp grades is currently relatively low and we believe it is below the cash cost of production for a significant portion of global production capacity. Slower economic growth in major economies also puts pressure on paper packaging mainly because the growth in demand becomes insufficient to fully absorb capacity additions, which leads to lower corrugated container prices. In our view, flat consumer packaging and tissue prices will not offset pricing pressure in the corrugated container segment. Following a prolonged period of deleveraging, the rating agency thinks that many companies across the pulp, paper and paper-packaging sector in Europe are likely to turn their attention to executing recently announced new investments and reducing costs in response to the currently challenging demand and pricing situation in most market segments. The coronavirus outbreak has diminished optimism about prospects of an incipient stabilization of global growth this year. While logistics disruptions may temporarily slow paper and forest product exports from China and other areas of significant outbreaks like Korea and Italy, the impact on global demand is likely to be far worse (than the impact on global production), resulting in oversupply across many regions, which will also drive prices lower. Moody’s expects consolidated operating income for the 42 paper and forest product companies that we rate globally to decline by 5%-7% over the next 12-18 months. However, many Moody’s rated European companies in this sector, in particular UPM-Kymmene (UPM), Progroup, Smurfit Kappa (SKG), Mondi and Metsä Board, have built up financial flexibility to execute their capital investments in new projects without putting significant pressure on their credit quality. Over the past few years the companies have benefitted from a fairly benign operating environment that has supported volume growth in all segments aside from graphic paper, where demand is structurally declining owing to the shift to digital media. Investments to optimise the level of vertical integration, increase productivity and reduce the overall cash costs of production have also played an important role. Even companies with graphic paper exposure, such as UPM, Sappi and Stora Enso, have increased their earnings. Despite declining graphic paper volumes, these companies have continued to shift their business mixes away from margin-dilutive paper operations towards structurally growing and more profitable segments, such as pulp (Stora Enso, UPM), paper-packa-
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PAPERFIRST MAG SPRING 2020
