Moody's lowers outlook for global paper/forest industry
Moody's Investors Service on December 7, 2011 revised to negative from stable its outlook for the global paper and forest products industry. The change reflects Moody's belief that the sector's consolidated operating income will decline over the next 12 to 18 months as demand or pricing weaken for most grades of paper and forest products. Moody's doesn't expect that any cost-cutting measures companies take will be enough to offset these challenges.
The sluggish economic conditions in Europe and North America and reduced use of printing paper as consumers in developed regions continue to shift to electronic devices are behind the weakness. Additionally, new paper and paper-packaging supply coming on-line in China will likely exceed domestic demand, boosting inventory levels and further pressuring prices.
European producers have seen the most pronounced decline in demand over the past several months owing to weak economic growth and continued excess capacity. Moody's expects the region's operating income will fall in 2012 as pricing weakens with excess supply. Input costs have declined recently but are insufficient to offset the pricing decreases.
North American producers, which generate about two-thirds of operating income for the global rated industry, will see their consolidated operating profit decline slightly over the outlook period. Reduced use of printing and writing paper and the continued weak US housing market will keep pressure on demand and prices. Consumption of packaging and tissue will likely inch higher in 2012, but slightly lower prices will partially offset corresponding income gains.
In Latin America, prices for market pulp and most paper grades will likely weaken over the outlook period, but continued strong demand from China and stable input costs should keep the region's operating income relatively flat.
The global industry outlook would likely change back to stable if Moody's believed consolidated operating income would increase between 0%-4% over the ensuing 12-18 months. Growth would most likely occur if the net effect of pricing, demand and input costs was flat or slightly positive across most geographic regions.
Moody's would likely change the outlook to positive if operating income growth appeared likely to exceed 4%. Such growth would likely come from increased end-market demand, higher pricing through an improved supply-demand balance or lower operating costs, leading to operating margin expansion for most of our rated companies.
Moody's last changed the industry outlook, to stable from negative, in December 2009.
The outlook update, "Global Paper and Forest Products: Operating Income Will Decline As Demand, Pricing Weaken," will is available at Moodys.
Posted Date: 09th Dec 2011