Looking local while going global
July 1, 2006 By Pulp & Paper Canada
International Pulp Week…
International Pulp Week
A total of 425 delegates participated in this year’s event, up from 380 in 2005. Roughly 150 companies and 40 different countries were represented. Held over a three-day span, the conference comprised three main events, the customer forum, a press and analyst briefing, and the market pulp open forum, where the pulp and paper industry was examined from a broader perspective. Mark Zandi of Moody’s Economy.com, offered a comprehensive assessment of the global economy with a particular focus on the U.S. housing market, while Tony Pearkes of Oldendorff Carriers addressed global shipping market projections. Pat Boushka expounded on the details surrounding Koch Industries’ acquisition and privatization of Georgia-Pacific, while Kjell Aleklett of the Association for the Study of Peak Oil and Gas offered a candid, exegetic presentation on the impact of global oil prices and the ramifications of peaking oil supplies.
The forum was structured as to provide ample time for audience questions, which generated good dialogue between panelists on some of the most pertinent industry issues. The cost of oil was an extremely hot topic and panelists concurred about the complete lack of precedence in terms of pricing and supply the industry is witnessing. “There is no excess global oil capacity,” Mark Zandi said. “So any disruption in supply is a problem. We should have some excess in capacity by next year, due to lower demand.”
Kjell Aleklett painted a strikingly dire picture of the oil industry, and offered a presentation ripe with warning. “In Sweden, the forestry industry is moving into ethanol, and this is a sign that others should be doing this,” he said. “We are living at the top of the peak, and we need to recognize that oil is a fine natural resource, one subject to depletion.” Aleklett posed some hard-hitting questions with reference to China, positing that although the country accounts for a whopping 21% of the global population, it consumes a disproportionate 8% of global oil, and this potentially does a large disservice to the Asian giant. “Is this fair? There’s no way for people in India and China to make more money without using more oil. A country has to increase its oil usage to increase its GDP,” he argued.
Global Forest and Paper Industry Conference
The PricewaterhouseCoopers Global Forest and Paper Industry Conference drew an impressive crowd this year. Entitled Global Sourcing, Local Impacts, the one-day event was filled with presentations from both industry and government, and provided delegates with a solid understanding of the forestry industry from many divergent viewpoints. The conference was broken down into five main components, financial performance and economic outlook, global sourcing, local impacts, market outlook, the Federal Government perspective and executive perspectives.
Craig Campbell of Pricewaterhouse-Coopers gave an overview of the factors influencing financial performance in the Canadian forest sector, and pinpointed the Canadian forest tenure system as the critical weakness of the industry. A perceived, yet realistic lack of security of fibre supply and pricing discourages investment, and as a result, capital is instead pouring into regions such as Russia, despite its highly unstable political climate. Campbell suggested a move towards 100-year tenure agreements to counteract this trend, and highlighted that Russia has already done so, to tremendous advantage.
The wrath of the Mountain Pine Beetle was top of the agenda and, despite the havoc it has, and continues to, wreak on BC’s forests, the sheer volume of timber the pest has left in its wake is presenting the province with what could be described as a miraculous window for opportunity, and transformation. “Because of the beetle, we now have the cheapest wood world wide for pulp mills. This could imply a ten-year bonanza for the pulp sector, but we’re still among the highest cost converters in the world. Had we invested in converting technology, we would have been doing much better. However, if we didn’t have the beetle, we would be seeing many closures,” Campbell noted. In terms of predictions, Campbell forecasted a return to profit in 2006 “despite the dilapidated equipment” the industry is working with, but that the money won’t keep rolling. “There is a window of opportunity, but it will close shortly. We need to move quickly,” he cautioned.
The softwood lumber dispute, and its resolve, was also widely discussed. The Honourable Rich Coleman, Minister of Forests and Range and Minister Responsible for Housing, Province of British Columbia, Victoria recounted the laborious discussions and negotiations that led up to the settlement, saying, “when there are that many parties, no one walks away from the table thinking they got the perfect deal. There is a certain amount of having to settle down and deal with it. We didn’t budge on the numbers we thought were important to Canada, and those numbers were agreed on at the last minute. Right now all we have is a framework agreement, and the heavy lifting, the actual writing of the agreement isn’t done, but there is goodwill.”
A panel made up of representatives from Dell, Wal-Mart, IKEA and UPM-Kymmene addressed the changes and challenges that are impacting global supply chains. Tyler Elm, senior director of corporate strategy and business sustainability of Wal-Mart Stores relayed some statistics researched by CSIS, perhaps the most surprising that of the world’s 100 largest economies, 42 are now corporations, and not countries. This fact alone casts corporate competition into vastly different territory, forcing companies to revisit the ways they traditionally approach business. These types of changes are particularly manifest in the role companies are expected to take regarding issues such as sustainability. Wal-Mart has translated its environmental responsibility into a fairly simple mission statement; the company will derive economic benefits from environmental and social improvements. This goal breaks down into three principal themes, renewable energy across the supply chain, zero waste (i.e., removed, reduced, reusable, renewable and recyclable packaging) and products that conserve resources and protect the environment.
IKEA’s approach to sustainability is slightly different. As the company’s forest coordinator Sofie Beckham explained, 50% of IKEA’s products are wood-based, and as such, the home furnishing giant focuses on transparency, traceability and legality in its wood sourcing. The company labours to effect lasting change in its key sourcing countries. The degree of difficulty associated with this task varies dramatically, and as Beckham noted, can prove a distinctly arduous task in areas such as Russia, where illegal logging is a rampant problem, and wood from the country ends up being manufactured into IKEA furniture kits in China.
The market outlook section of the conference featured speakers with extremely divergent, yet intriguing backgrounds. From the forestry sector, Tolko president of marketing and sales Brad Thorlakson, addressed his company’s strong emphasis on sustainability, (Tolko is credited with the planting of over 500,000 million trees) while trying to carve out its share in an ever-constricting marketplace. “A total of 9% of global NBSK capacity closed in Canada over the last 14 months,” Thorlakson said. “In this time of consolidation, in this ‘do it yourself’ market, it’s time for us to turn around and face the customer.”
Inevitably, the focal point turned to China, and how the country is eating into market shares at an unprecedented rate. As Roger Wright, managing director of Hawkins Wright said, “there are things taking place now that will not revert.” However, Wright moved away from some of the doctrinal notions of China and highlighted the discrepancies associated with statistics concerning the country’s actual place in the market. “China accounts for 50% of Russian wood imports,” he noted. “However, statistics in China are notoriously unreliabl
e, and so we are seeing a reliance on China’s continued growth to an extent that is unhealthy, because China just isn’t that reliable.” Wright confirmed that the apparent consumption of paper and board is overstated in the country, while it is understated in North America and Europe, skewing our perception of the realities of the marketplace. Wright also addressed the jeopardy associated with entering into business relationships with China, due to superlative cultural differences. “It’s risky to enter into a joint venture with a Chinese company because the cultures are so different,” he said.
From the top
The Executives Perspectives panel was highly energetic, and elicited an extremely forthright exchange of ideas between panelists. The panel was comprised of Rick Holley, president and CEO of Plum Creek, Frank Graves, executive vice president of llim Pulp, Jim Lopez, president and CEO of Tembec and Russell Horner, president and CEO of Catalyst Paper. The session was moderated by Robert Barnden, partner, global leader, forest paper and packaging practice at PricewaterhouseCoopers LLP, and Kevin Bromley, partner, leader, forest investment account at PricewaterhouseCoopers LLP.
The session kicked off with a recap of CEO responses that were amassed and sorted prior to the conference, provided by Robert Barnden. “It’s really a tale of two cities,” he said. “It’s doom and gloom in North America, yet there is tremendous optimism in South America, China and India.” He called attention to the situation in Canada where “CEO’s blame governments,” saying “one wonders when the industry will start blaming itself.” These remarks generated a somewhat defensive response from Barnden’s Canadian counterparts, however, Barden held his ground. “The challenge is to be there. Consolidation is needed -there are too many clever people in Canada making investment decisions, all at the same time. We need to focus on our customers. It’s too late to start selling our products to developing countries, we need to find new, higher-value products.” Barnden additionally called for an immediate shift in mentality concerning ’emerging’ markets. “As far as I’m concerned, it’s time to stop talking about emerging markets. They’re new markets, and they’re here to stay and they cannot be ignored. Additional growth is to be had through mergers in mature markets,” he said. Barnden also drew attention to the topic of private equity, and the possibilities that lie within it. “[It] is a panacea for new thinking and investment,” he concluded. Barnden topped off his address with a call for change in outlook. “Although there are some very strong optimistic points, the attitude of ‘problems have solutions’ and ‘just do it’ in China and South American, is hard to ignore.”
Jim Lopez, who recently took the helm at Tembec, provided a very frank description of his company’s present situation. “Our business model has not returned anything we, or our investors are happy with. Our model is not working. We throw capital around way too easily. In eastern Canada, we’re adjusting to a lack of fibre, and we’re finally biting the bullet and taking uncompetitive mills off the marketplace permanently. Mills will be competitive again, but it will be the ones that survive.” When asked how many further mill closures the Canadian industry will have to accommodate before a realistic return to profitability can be expected, Lopez was direct. “Three to six,” he said. “Three to six mills over the next few years need to close for the industry to be more healthy, for the fibre supply to balance.” Lopez also echoed Campbell’s earlier remarks that a lack of a secure fibre supply renders attracting international investment extremely difficult.
Russell Horner offered an interesting take on the contentious issue of the Canadian dollar commenting that it isn’t necessarily the value of the dollar that causes such tremendous strife in the industry, but rather the pace of change in the value that has created the biggest problem, as the lag-time in subsequent product price increases leaves the producer responsible for absorbing the loss. Horner feels the paper industry would be capable of contending with a loony on par with the U.S. dollar, if that change was made over a two-year period. He reiterated the need for government not to interfere with further consolidation and to avoid job-protection subsidies for uncompetitive mills. “What I worry about is skewed competition due to trying to keep uncompetitive mills open,” he said. “We don’t want government subsidies. We want the government to get out of our way and to move faster. We need competitive legislation; policy needs to change. Right now, it’s almost impossible to create one big company.” When asked whether the industry can anticipate any closure announcements made by Catalyst in the foreseeable future, Horner was direct, saying that a shutdown of a Catalyst site is unlikely, providing that municipal tax policy is made more competitive.
Andrew Garner of Andrew Garner and Associates Inc. contributed to this report.
PricewaterhouseCoopers 19th Annual Global Forest and Paper Industry Conference provides an excellent opportunity for delegates to convene and hammer out some of the issues plaguing, or promoting the forestry industry. Here is a small sample of some of the most hard-hitting, relevant and thought-provoking discussions heard at this year’s event.
“We need to get the tradition out of the walls. We’re not running a lean show, and private equity could have something to bear. What’s needed is to take capacity out, not put it in. The kind of help we’re seeing is being helped to death. A mill needs to be built on the basis of true profitability, not on whether or not it will be getting subsidies.”
— Robert Barnden, partner, global leader, forest paper and packaging practice, PricewaterhouseCoopers LLP.
“I will never, ever, ever say to anyone that this is a sunset industry. Because it isn’t. It’s a sunrise industry.”
— The Honourable Rich Coleman, Minister of Forests and Range and Minister Responsible for Housing, Province of British Columbia, Victoria.
“This industry is nepotistic. People have grown up in the industry, and they aren’t bringing in any new ideas.”
— Craig Campbell, partner, performance improvement, forest, paper and packaging practice, PricewaterhouseCoopers LLP.
“Environmentalism has proved utterly incapable of addressing issues dealing with humanity.”
— Tyler Elm, senior director, corporate strategy and business sustainability, Wal-Mart Stores.
“We like it when energy prices go up, because it makes our competitors’ costs go up.”
— Russell Horner, president and CEO, Catalyst Paper Corporation.
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