Moody's: Outlook for global paper and forest products industry remains stable as costs offset higher prices

The outlook for the global paper and forest products industry remains stable, Moody's Investors Service says in a new report. Overall operating earnings will grow modestly over the next 12 to 18 months, though escalating costs will dampen the benefit of higher prices. Among subsectors, the paper packaging and tissue, timber and wood products, and market pulp segments all continue to carry stable outlooks, while the outlook for the paper segment remains negative.

"We expect the consolidated operating income of the 39 paper and forest products companies we rate globally to grow 2% to 4% in the next year or so," said Ed Sustar, a Moody's Senior Vice President. "Higher prices, productivity improvements and acquisition-related synergies, as well as stronger demand for wood product, paper packaging and market pulp will drive profit growth, but will be partially offset by lower demand for paper and rising freight, labor, energy and chemical costs."

In the paper packaging and tissue subsector, most Moody's-rated companies will see modestly stronger operating earnings this year, with growth above 3%, while improved e-commerce and demand for agriculture packaging, as well as higher prices for paper packaging, will more than offset higher freight, labor and input costs. Recycled fiber costs will likely stay flat or decline slightly in 2018, as restrictions on imports to China keep North American and European supply at unusually high levels.

Meanwhile, timber and wood products companies should see operating income grow about 4% as the expansion of the US housing market accelerates the need for wood products including lumber, plywood and oriented strandboard. Prices will mostly remain close to 2017 levels, however, while those for North American oriented strandboard will fall as additional supply exceeds demand growth. In Canada, lumber producers will see operating earnings decline, as duties levied on lumber exports to the US will be collected for the entire year.

For their part, market pulp companies will see operating income will grow by about 3% this year, as demand increases and average prices across most pulp grades remain flat. The strong prices seen at the beginning of the year will likely reverse during the second half, as the ramp-up of supply outstrips demand.

Moody's negative outlook for the paper subsector reflects declining operating income as a result of decreasing demand. Consumption of most paper grades will decline by about 5% as consumers continue to switch to digital alternatives to paper. However, in most regions this shift will be more than counterbalanced by higher prices as paper producers keep pace with falling demand by idling or converting paper-making machines. In Latin America, paper producers' operating earnings will rise as a result of improving economic growth and larger rated producers taking market share from smaller, unrated ones.

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