Research & Innovation
Industry outlook: Uneven growth
By Pulp & Paper Canada
If you’ve been hearing “things are looking up for the forest products industry,” it probably refers to the lumber sector, not pulp and paper.The global wood products industry may be entering a “super-cycle” of flat...
By Pulp & Paper Canada
If you’ve been hearing “things are looking up for the forest products industry,” it probably refers to the lumber sector, not pulp and paper.
The global wood products industry may be entering a “super-cycle” of flat log supply and rising demand, but in pulp and paper growth is less vigorous. “The longer-term trend is still not a rosy picture for some paper grades,” says Bruce McIntyre, a consulting partner at PwC. “Bright spots for mature markets are tissue products and adult incontinence products.”
McIntyre was one of the experts speaking at PwC’s Global Forest Products Outlook Conference in Vancouver last May. He is Canadian leader of PwC’s forest, paper and packaging practice.
Rhetoric at this year’s conference was less about transformation of the forest products industry, and more about how to take advantage of the opportunities presented by changing conditions in the industry.
Michael Vermette, a partner and senior vice-president at PwC notes that many things have changed in the pulp and paper sector since the last period of good times. “It’s a very different landscape today from what it was seven years ago.” Major restructurings have occurred (Resolute Forest Products, Catalyst Paper) and we’ve seen a significant new owner emerge in the pulp market (Paper Excellence).
In times of rapid growth, says Vermette, companies are going to have to figure out the optimal business combinations to overcome challenges.
“Ask yourself, are we ready for the great opportunities that are about to present themselves to the forest products industry?”
Conference participants were also advised that consolidation of the forest products industry and its supply chain is not over. McIntyre notes that forest products companies’ current cash position will likely be used to pursue consolidation. As well, foreign companies are eyeing Canadian acquisitions.
Kevin Clarke, former CEO of Catalyst Paper Corp., agrees. He expects the consolidation of the manufacturing base and the sales channel will happen at the same time.
Companies have more cash
The forecast from Craig Wright, chief economist for Royal Bank of Canada, is for 3.5 to four per cent global growth overall, with established economies running a few points less. He said some of the more extreme risks that were a concern six months ago have resolved themselves.
Wright noted that corporations are sitting on more cash than usual, equal to about 30 per cent of GDP. Consequently, we should see more of this money put to work as share buybacks, mergers and acquisitions.
According to Wright, most commodities are above their 25-year averages right now (such as pulp, zinc, potash, lumber). There’s been a long 10-year run of rising commodity prices, but Wright thinks this is starting to level off.
His forecast for the US dollar exchange rate is a little softer than parity, about 95 to 97 cents through to 2014.
Wright says he does not expect to see interest rates reach five per cent in the next 10 years. But, “at some point interest rates need to go back to normal. Keeping rates too low for too long is a risk.”
Each year in May, the PwC conference joins forces with a few other forest industry events in Vancouver to form the Global Forest Products Summit. During another summit event, delegates at the Wood Markets Global Softwood Log and Lumber Conference heard that the super-cycle is still considered to be two to three years away. Current market volatility is tied more to supply chain disruptions than to the longer-term supply/demand gap being forecast.
In short, the factors distinguishing the super-cycle from a normal recovery focus around flat (or even declining) global log supply occurring at the same time as global wood demand hits new highs.
Western Canadian companies, for example, have been exporting large amounts of wood products to China while the U.S. market languished. But will happen as the U.S. market picks up?
The experts say a generally upward trend in lumber prices could last up to five years if the U.S. housing market and global economy recover, and as the greatly reduced North American forest industry tries to expand to meet what is expected to be steadily growing demand. If the tension in timber supply and lumber production remains tight, then lumber prices will hit all-time highs starting as early as 2015.
B.C. wood supply: looking ahead
While the impact of the B.C. Interior’s mountain pine beetle outbreak on local lumber production is now well-known, independent consultant Murray Hall provided a broader perspective on the aftermath of the outbreak for the Wood Markets audience. As B.C.’s wood supply diminishes, a decline in Interior sawlog production will result in a reduction of residual wood fibre (chips, sawdust and shavings).
This will adversely affect the pulp, composite panel, and pellet industries in the B.C. Interior and pulp mills on the coast, which have required increasing quantities of Interior residuals in order to operate.
In 2016-2018, “there’s a gap between residual chip supply and pulp and paper mill demand,” says Hall. “So Interior pulp mills will be doing whole log chipping. That is the reality.”
There are not enough residuals for pellet mills either, he explains. “They will be grinding roadside material to make pellets.”
Murray is bullish on pellets. “Europe is not going to turn back from their reliance on pellets.” He is confident Canadian pellet suppliers can keep their costs down to be competitive, because “there are very few places in the world that have the fibre basket to produce pellets.”
Staffing, green energy concerns
Green energy, biofuels and bioproducts were the subject of much discussion among the international panel of CEOs assembled for the PwC conference.
Dave Scheible, CEO of Graphic Packaging International Inc., is in a business that relies heavily on recycled fibre. Burning biomass is a one-time use, and pellets are a “bad plan that doesn’t work without subsidies,” he comments.
Scheible went on to say that shale gas is not going away, and will continue to pull manufacturing back to the U.S. “[America’s] energy profile is definitely coming down, and will continue to do so for the next 10 years.”
Brazilian pulp producer Fibria undertook a survey of the bio-economy several years ago, according to Marcelo Castelli, CEO. The company found 17 pathways, and selected those that were the best fit for Fibria, he noted.
One of those pathways is pyrolysis. Fibria took an equity position with Canadian pyrolysis firm Ensyn and formed a joint venture for the development of facilities to produce cellulosic liquid fuels and chemicals in Brazil.
Castelli says Fibria also created a corporate venture capital fund. “We always have funding for good ideas.”
In Canada, the green electricity market for pulp mills is nearing its end, says Jim Lopez of Tembec. He believes governments and utilities will have to pass along the higher costs of green electricity to consumers, and that there will be a backlash.
Canadian industrial firms are dependent on cheap electricity, reasons Lopez, and there’s a danger if our governments put all their focus on un-economical forms of energy.
Thinking along the same lines, Dave Scheible, of boxboard producer Graphic Packaging International, notes: “When our customers say sustainability, the mean ‘take out cost’.”
The work force was a chief concern for North American CEOs, but less so for executives representing Europe and South America. Kevin Clarke, former CEO of Catalyst Paper, comments that the industry’s greatest opportunity and its biggest risk is hiring, training and motivating the workers of the future.
t, the transfer of knowledge has to happen in the next six years, he says due to the rate of attrition. “The transfer of knowledge has to be different than it was in the past, it has to be more effective.”
Similarly, Jim Lopez, CEO of Tembec, notes that a labour shortage plagues many Canadian businesses. At a recent meeting of executives from various industrial sectors, Lopez says, it became obvious that the skilled labour shortage is not an emerging issue, it’s an existing problem.
For the immediate future, pulp and paper industry executives will find themselves reacting to external forces – a changing wood supply, labour shortages, and declining markets for some paper grades. As PwC’s Micheal Vermette said, the glory times are returning for forest products, but they will not be the same as 2005, and the industry’s leadership needs to adapt.
With input from Alice Palmer, consultant, for Wood Markets conference coverage.