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Moody's: Global paper and forest products industry outlook to remain stable on steady operating income growth

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Higher prices and stronger wood product, paper packaging and market pulp demand offsetting rising input costs and lower paper demand will keep the outlook for the global paper and forest products industry stable, says Moody's Investors Service in a newly published global outlook for the sector. Consistent with the stable outlook, the rating agency expects consolidated operating income increases of 2-4% for its 46 globally-rated forest product companies over the next 12-18 months.

Moody's expects that the consolidated operating income of the 29 North American companies it rates will remain essentially flat, with 2-4% growth over the outlook period. Such growth is consistent with analysts' expectations of modest operating income growth from North American paper packaging, wood products and timberland producers being partially offset by lower operating earnings from pulp and paper companies. Significantly, these same companies account for about 60% of the global rated industry's operating income.

"Notably, despite flat operating incomes overall for the North American subset, US timberland and wood products companies including Weyerhaeuser Company, Rayonier Inc., and Potlatch Corporation stand to benefit as the demand for new US housing increases about 8% in 2017 and as lumber prices escalate with the implementation of duties on Canadian lumber exported to the US," said Moody's Senior Vice President Ed Sustar.

With respect to the rating agency's five rated Latin American pulp producers, Moody's says their operating income growth will increase by 2-4%, as local players benefit from the concurrent positive effects of their low cost base and price hikes implemented in the past six months. And with international pulp prices being priced in US dollars, local currency depreciation will be a continued benefit to producers. In Brazil, Moody's forecasts real GDP to increase about 0.9% in 2017 and 1.5% in 2018, which will support local paper and packaging demand growth.

For its part, of the 11 rated European producers, analysts expect consolidated operating income to increase 1-3% over the outlook period.

These producers account for approximately 25% of the Moody's-rated operating income for the industry globally. Such an increase is consistent with expectations that stronger operating earnings regionally from rated packaging companies will outweigh those from paper producers, which continue to face secular declines. Nevertheless, in the report, Moody's analysts underscore expectations of an increase in operating income from European wood-based building producers, as larger investments in homebuilding and renovations bolster demand for lumber and panels. Packaging volume is similarly expected to grow as the European economy improves, and continuing weakness in the Euro should strengthen European exports in 2017. Moody's forecasts modest economic growth of about 1.4% for the Euro area in 2017 and 2018.

Moody's outlook for the global forest and paper products sector reflects expectations for the fundamental business conditions in the industry over the next 12 to 18 months.

The outlook could shift to positive if consolidated operating income increased by more than 4% over the next 12 to 18 months, most likely as a result of higher prices across several grades and regions due to a tight demand-supply balance or stronger demand from higher than expected GDP growth. Conversely, the outlook could be changed to negative if consolidated global operating income declined over the next 12 to 18 months, stemming from increased input costs that cannot be passed on to customers, for example, or reduced pricing driven by operating capacity exceeding demand for several grades and regions.

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(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, March 27 2017. 11:54 IST