The ratings agency expects the consolidated operating income of the 46 paper and forest product companies that it rates globally will increase by 0%-2% over the next 12-18 months – weaker prices across most grades will limit operating earnings growth.
While the income of the 28 North American companies it rates will remain essentially flat, Moody’s indicated that operating earnings growth for producers in Latin America will also remain unchanged at 1%-3%.
Matthias Volker, vice president – Senior Analyst at Moody’s, said: “In Europe, earnings growth for Moody’s rated European producers will be 0%-2%. The producers account for nearly 25% of the industry’s total operating income. Within the region, increased operating earnings from packaging and tissue operations will outweigh those from paper operations, which continue to face the continued secular decline of paper consumption in developed markets.”
He added that the ratings agency expects to see an increase in operating income from European wood-based building producers as larger investments in homebuilding and renovations strengthen demand for lumber and panels. Packaging volume is also expected to grow as the European economy improves.
Moody’s also said the outlook for the paper packaging and tissue sub-sector remains stable. Most companies in this sector will generate flat to modestly stronger operating earnings (0-2%) in 2016. Product prices will decline as excess supply that entered the market last year is absorbed, offsetting modest increases in demand. Cost improvements and synergies from recent acquisitions will contribute slightly to operating income growth, offset partially by slightly higher recycled fiber prices
“Our outlook for the market pulp sub-sector remains stable. In Latin America, additional pulp capacity and currency depreciation will offset lower international prices for bleached eucalyptus (BEK) pulp. Meanwhile, operating earnings for most North American producers of market pulp (hardwood, softwood and dissolving pulp) will decline as prices fall because capacity increases outpace demand,” added Volker.
Ed Sustar, Moody’s vice president, said: “Outside of wood product companies that are positioned to capitalize on the US housing recovery, weaker prices across most grades will limit operating earnings growth for most rated paper and forest products companies,” said. “The continuing weakness in the euro, Brazilian real and other currencies against the US dollar should boost exports from companies operating in these currencies into markets where the commodity price is denominated or pegged to the US dollar, as the strong dollar erodes the cost competitiveness of US producers.”
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