The PwC Global Forest and Paper Conference is an annual must attend event for business leaders in the forest and paper industry, and this year's conference was no exception. Since the financial meltdown of 2007/2008, business leaders have been trying to get a grasp on when the global economy would start to pull out of the protracted recession. With US housing starts still well below the one million mark, a seemingly never-ending crisis in Europe, a slowdown in China, and the explosion in the digital media industry, there is no shortage of topics to address that impact the forest and paper industry.
Conference Chairman Bruce McIntyre, leader of PwC's forest, paper, and packaging industry practice in Canada, opened this year’s conference with a note of cautious optimism pointing out the industry seems to be on a slow but steady road back to profitability. He also noted many Canadian companies will return to profitability in late 2012 or early 2013, and that according to a recent PwC survey of 1,200 industry CEOs, most are confident about the prospect for future growth. “Globally, pricing will likely be flat over the next couple of quarters. Looking ahead though, stronger offshore lumber exports should help increase commodity prices and deliver some sustained improvement in lumber prices for 2013,” says McIntyre.
In the years following the financial collapse, global politics have become a major risk factor for corporate investment. Willis Sparks, global macro analyst at the Eurasia Group, offered sme key insights into global politics and the challenges facing forestry companies and their clients. With a painfully slow US recovery and Europe still in a quagmire of unstable member governments, not to mention a financial mess, emerging markets will provide most of the growth in the global economy for the foreseeable future. Interestingly, Sparks defined emerging markets as any country where politics are more important or as important as economics. China, India, and Latin America topped the list; however, China still remains the most important emerging market in the global economy. Sparks feels there are two critical issues China must solve to get its economy on the right path. First it needs to unwind its state capitalism to get more money flowing into the middle class; and second, activate that middle class to create a strong internal consumer market. Sparks also drove home the need for all Canadian corporations and governments to continue to diversify their export markets and commercial trading partners.
Finance
Financial performance is where the “rubber meets the road” and while financial reporting is always on past performance, this year’s financial panel did talk about some of the challenges and opportunities that may lie ahead for forest companies. Preliminary results from PwC’s Net Earning Summary showed that of Canada's top forestry companies only Mercer International and Resolute Forest Products posted positive earnings. US housing is still the backbone of the Canadian lumber market and Jock A. Finlayson, executive vice-president and chief policy officer of the Business Council of British Columbia does see the US housing market stabilizing and showing some small signs of growth. He expects US housing starts to hit 700,000 this year and continue to grow in 2013 and 2014. He believes there is a lot of pent up demand for housing and much of it will come in the form of affordable multi-residential housing. Asian markets continue to favour Western Canada as exports of logs and lumber outpace exports to the United States, but as B.C. faces the coming end of the mountain pine beetle epidemic this too may change the ebb and flow of forest products in Canada.
The Digital Impact
As the digital revolution continues at breakneck speed, publishers face a rapidly changing marketplace which has had serious and far-reaching implications for their businesses, and the pulp and paper producers that supply them. This year's panel on the future of paper and communications in a digital world featured John Cruickshank from the Toronto Star, Kevin Bent executive vice-president, Western Canada, PostMedia Network, and Douglas Knight, president St. Joseph Media. Each panelist cited a plethora of statistics surrounding the changing habits of consumers and they all agreed the digital revolution is the largest shock to the publishing industry in history.
Panel members also talked in depth about their challenges integrating the new media into their businesses and how they've adapted their print and digital businesses to survive. Daily free newspapers and specialty magazines are the bright spot in the industry, attracting new readers to traditional products and/or bringing them online. The panelists all asked the pulp and paper industry to work with them to create better print media products by creating new and better paper products that will help attract and retain new readers. All the panelists agreed that the future of digital media consumption is far from clear and that having a strong offering in both print and digital media is the key to successfully managing change.
Transformation
The Market Outlook session is definitely one of the most important sessions in the conference, and this year’s Outlook focused on diversification, markets, and certification. Don Roberts, vice-chairman and managing director CIBC World Markets addressed the emerging bio-energy and bio-electric markets. Roberts feels bio-fuels is a better market for North America than bio-electric in part because of on-going low natural gas prices, and he feels there is good growth potential in the European pellet market since Europe and China dominate the bio-electric market. The timber supply is still strong in North America and the expansion of exports of logs, lumber, and wood chips to China will continue to grow. While India is the fastest growing market for softwood lumber and logs, it is still only 2% of the volume China consumes and many exporters find it too difficult navigating the political and government systems. Many experts are predicting a continued strong Canadian dollar putting additional pressure on exporters to keep costs down and consider further consolidation on the industry.
Hans Sohlström, executive vice-president, UPM-Kymmene Corporation, presented the company's diversification efforts as it experiments with new markets and products such as bio-fuels, bio-products, and power generation. Sohlström sees UPM-Kymmene as a BioFore company producing a sustainable and environmentally diverse product line, including pulp and paper, bio-fuels, bio-materials, and bio-electric power. While these new products are still in their infancy they hold the key to maximizing the current infrastructure pulp and paper operations and diversifying their customer base in the future. Both financial analysts and forest industry leaders agree there is a great opportunity for forest companies to lead in the development of sustainable and environmentally friendly products consumers are starting to demand.
Summary
Diversity and value were the recurring themes throughout this year's PwC Global Forest & Paper conference. The type of products and services consumers are demanding is changing and we have all the tools necessary to be a driving part of that change. Sustainability and diversification of our markets and products are keys to growth and prosperity for all forest companies. The industry is clearly starting to recover, but this recovery will not look like it did 15 years ago, the companies—the products and the people will all be next generation.
Written by Joe Perraton, president of Forest Industry Network and Point One Media, Inc. He can be reached at jperraton@pointonemedia.com.
