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industry issues
Controlling Costs Remains
Key in Tough Market
A gathering of leaders and analysts in the global forest and paper industry met at a
conference in Vancouver, British Columbia to talk about some of the more prevalent
issues facing the industry and what to expect in the future.
By Bruce McIntyre
PricewaterhouseCoopers hosted the 21st Annual
Global Forest & Paper Industry conference on
May 8, 2008 in Vancouver, British Columbia. This
year’s conference theme, “Challenging Times,
Winning Strategies” acknowledged the significant
financial challenges currently facing the industry,
while also taking a forward look at new strategic
directions and future opportunities.
MACROECONOMIC AND SECTOR BACKGROUND
AND IMPACT
That the industry is facing “challenging times” came as no
surprise to our panelists or conference attendees. Patricia
Croft, chief economist, Philips, Hager and North, said the
World Bank had declared this the worst credit crisis since
the Great Depression; the US sub-prime crisis had created
a tangled web of economic issues in the US that had been
building over the past 10 years. This crisis born in the US
had fanned across other regions of the world exposing the
inter-connectivity and often fragility of macroeconomic
issues and systems.
The credit crisis, collapse in US housing starts, Russian
log export tax, excess lumber capacity, and the beginning of
the end of the British Columbia Mountain Pine Beetle epidemic are all factors having a particularly strong impact on
the global lumber industry. Many of the same factors are
impacting the pulp and paper sector, which is faced with
serious challenges around securing fibre. A number of our
speakers took a detailed look at what the impact of these
macroeconomic factors on the forest and paper industry is
likely to be.
Russ Taylor, president, International WOOD Markets
Group, stressed that US housing starts will be a key demand
factor for the entire global industry; however, he opined that
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industry issues
the situation should start improving soon. He detailed a
mine the future prospects of the Canadian softwood lumber
number of supply issues, such as the dramatic impact the
industry. While the US economy and capital markets are
Russian log export tax is likely to have on supply in Europe
currently facing a crisis, Ken argued that over the long-term
(especially Finland), Japan, and China, and speculated that an
housing starts will increase again, with a recovery likely in
increase in the log floor price may be coming. Russ argued
late 2008 or early 2009. Further, current levels of over-supthat lumber and panel capacity will remain excessive, despite
ply will slow down as harvests from mountain-pine beetle
a likely decrease in mountain-pine beetle wood coming out
infested wood from British Columbia decrease. The return
of Canada, and currency fluctuations may have a substantial
of housing starts to the historic trend line and the predicted
impact. His bottom line: the low cost producer wins, or,
decrease in production are likely to coincide, which will
more pessimistically, loses less.
inevitably drive prices up substantially, ultimately benefiting
Tom Wright, director, Hawkins Wright, argued that the
the remaining sawmillers in British Columbia. Ken comfundamentals of the paper industry have changed, with flat
mented that share prices of many Canadian companies are
demand, rising costs, and falling prices a
currently below the economic value of
trend rather than a cyclical low-point.
their business, so over the long-term,
The paper industry is responding by
there is much cause for optimism.
divesting non-core businesses and closCraig Campbell, partner, PwC,
ing capacity. The pulp market is shifting
detailed the competitive position of the
from long fibre (softwood) to short
Latin American industry, based on its
fibre (hardwood), but demand will need
high comparative forest yields. Despite
to grow substantially to keep pace with
the strong investment in pulp capacity
planned capacity increases. Demand in (l-r) Jukka Tiitinen, President, Metso Paper North in Brazil, Tom Wright signaled a cauAmerica; Tom Stephens, Chairman and CEO,
China, while likely to remain strong,
tionary note on future investment given
Boise
Cascade; Bob Barnden, Global Leader, and the relative strength of the Brazilian
may slow somewhat, so the industry
Kevin Bromley, Partner, Global Forest, Paper &
may face some overcapacity in short
real, which has reduced regional indusPackaging Practice, PwC; Mark Suwyn, Chairman
fibre over the next several years.
try’s competitive advantage.
and CEO, NewPage; Duncan Davies, President
Gail Glazerman, director, US and
Leo Hambro, CEO, Russian Timber
and CEO, International Forest Products.
Global Paper Analyst, UBS pointed out
Group, advocated strongly for investthat the paper industry has actually worked aggressively to
ment in the Russian forest industry. He sees the Russian
reduce costs in recent years, although the benefits are
industry as poised for a period of sustained economic
obscured by inflation. She argued that relative cost position is
growth. Russia is the most underdeveloped, underutilized
essential to maintaining competitiveness, with access to lower
timber supply and is next to the largest global market;
cost fiber increasingly important, and high transport prices
China. Given the sharp increases in Russian export taxes, he
impacting decisions to serve certain markets.
argues that it makes good economic sense to invest in processing within Russia; in fact if timber cannot be processed
PROMISING DIRECTIONS FOR INVESTMENT
locally, it will not be economic to harvest it.
Which regions are best positioned? In Gail’s view, the consolJukka Tiitinen, president, Metso Paper North America,
idation which has recently taken place in the US markets, as
explained that in these difficult times, diversified investment
well as the reduced competitiveness of imports due to US
in geographic and product terms can enable companies to
dollar weakness and high transport costs, add up to a solid
weather an industry downturn. This view is the antithesis of
position for US companies. The picture in Europe looks
many strategies pursued in recent years which have aimed
somewhat bleaker, given pressures from rising costs, limited
for selectivity and focus.
pricing power, and currency issues. Duncan Davies, president
LOOKING TOWARDS A SUSTAINABLE FUTURE
and CEO, Interfor, supported Gail’s analysis of the desirabiliThe forest and paper industry is at the heart of the drive to a
ty of the US market. He described part of Interfor’s success
more sustainable future, and a number of issues around sustainas attributable to its diversification from Canada into the US.
ability were topics of discussion. Forest certification remains an
Ken Shields, Chairman of the Board, Raymond James
important issue, as highlighted by one of our speakers, but
Ltd., also saw a number of reasons for optimism in the
the debate is also moving in several other directions.
future. Ken asserted that developments in the US will deter36
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Teresa Presas described how the
If forest products companies begin
European paper industry sees addressdeveloping bio-mass energy projects,
ing climate change as a top concern.
will there be a market for the elecEuropean paper-makers are subject to
tricity produced? According to Bev
the EU-Emissions Trading Scheme
Van Ruyven from BC (British
(EU-ETS) and may face higher costs
Columbia) Hydro and Power
when the next phase of the scheme
Authority, in British Columbia the
takes effect. At the same time, compeanswer is a resounding yes. BC
tition for fibre is increasing sharply as
Hydro, a BC utility, has identified a
countries look for ways to meet the
substantial gap between the demand
(l-r) Tom Wright (speaking), Director, Hawkins
Wright; Mikael Selling, Co-founder, Opticom
EU’s targets for renewable energy proand supply of electricity emerging over
International
Research
AB;
Russ
Taylor,
duction. The use of forest biomass as a
the near-term. Part of their strategy to
President, International Wood Markets Group;
renewable energy source does not only
fill the gap includes buying clean enerKen Shields, Chairman of the Board,
mean facing competition for fibre,
gy such as that produced from bioRaymond James Ltd; Todd Stroup, US Leader,
though. It also provides excellent
mass. In February 08, BC Hydro issued
Global Forest, Paper & Packaging Practice, PwC.
opportunities for the industry.
a Bioenergy Call – Phase 1, soliciting
Avrim Lazar, president and CEO, FPA of Canada, providpotential projects to provide energy generated from forest bioed an optimistic outlook for the forest and paper industry,
mass. A wide range of companies responded with proposals,
noting that the ‘horizon is golden’, especially in Canada
including both well-known Canadian forest products producers
where the boreal forest is not as impacted by the interand smaller players.
dependency of fibre, fuel and food. He also said that Canada
UNDERSTANDING YOUR CUSTOMER
has a good supply of key inputs such as land and water, and
PwC’s first edition of CEO Perspectives, our report detailing
has the largest area of certified forest in the world.
the views of CEOs from across the industry (available for
Although many may think certification has become the
download at pwc.com/fpp), identified “understand your cusnorm for the industry, Ken Strassner pointed out that access
tomer, know your markets,” as one of the key strategies
to timber is constrained because only 10% of the world’s
employed by industry executives. Several of our presenters
forests are certified. His company, Kimberly-Clark, sees a
echoed this advice, which remains critical for the industry.
competitive advantage in sourcing and consuming certified
Mikael Selling, Opticom International Research AB,
fibre. Ken urged the industry to work closer with NGOs,
stressed the importance to producers of understanding their
native populations and government to improve the access to
customer’s situation and strategic challenges and helping
and certification of fibre, as well as helping small landowners
their customers to create competitive advantages. However,
in the US obtain certification.
he implored producers to change their business models so
What’s the best way to use forest bio-mass? Niel Barnard,
that instead of giving away value for free, they are compenCEO, Ceres Ventures Limited, reviewed some of the options
sated for developed services such as logistics solutions, prodfor bio-mass energy projects, include burning for heat or
uct consulting and printing techniques.
power, or bio-refining. The pulp and paper industry has a
Mark Suwyn, chairman and CEO of NewPage, discussed
unique opportunity to capture value as a result of its access to
the paradigm shift in advertising and the resulting increase
fibre and existing ability to generate energy, however bio-refinin catalogues and direct mailings. His company focuses on
ing may actually provide the best long-term opportunities.
this growing market.
Barnard noted that there will likely be a significant firstAnd Boise Cascade’s chairman and CEO, Tom Stephens,
mover advantage and that choosing the right technology and
explained how his company’s recent restructuring aims to
the right product will be critical. He detailed steps for sucdifferentiate the company through a better understanding of
cess focused around improving EBITDA via the elimination
customers’ needs and a “never stop learning” attitude. ■
of fossil energy purchases and deriving more products (energy, chemicals) from existing feedstock supply, growing revBruce McIntyre is a partner and leader of PricewaterhouseCoopers’
Forest, Paper & Packaging and Sustainable Business Solutions
enue by means of product development, with outside energy
practices in Canada. He is based in Vancouver, B.C. Canada and
and chemical product sales and with the selection of product
can be reached at: bruce.mcintyre@ca.pwc.com.
mix and supply chain partners being critical success factors.
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