Friday, May 15, 2009

Pessimism the new norm for forest industry: PricewaterhouseCoopers

Pessimism the new norm for forest industry: PricewaterhouseCoopersA large clamp machine moves logs at a sawmill in Grand Forks, B.C., in 2007. Lumber production in the B.C. Interior fell 31 per cent in 2008.(Jeff Bassett/Canadian Press)

Low prices, low profits, and pessimistic forecasts are the "new version of normal" in the forest products industry, a PricewaterhouseCoopers expert said Thursday.

And Canadian producers are among the worst performers, Craig Campbell, an executive in the firm's global forest, paper and packing practice, said in a news release about international comparisons of 100 public companies.

The 100 companies reported a 2008 return on capital employed of two per cent, down from five per cent in 2007.

"B.C. and the rest of Canada are at the bottom of the pack (both at minus five per cent), and the only regions showing negative returns on investment as mills are shutting down and production moves to the southern hemisphere," the release said.

Canadian production is less diversified than elsewhere, and the key U.S. housing market, which buys much of Canada's lumber, has been severely depressed.

Lumber, pulp prices crashed

Lumber prices in 2008 were at 25-year lows, and have fallen in the first quarter this year. Canadian softwood lumber production fell 21 per cent in 2008, PricewaterhouseCoopers said.

In the B.C. Interior, which accounts for more than 45 per cent of Canadian lumber, production fell 31 per cent.

"But the reduced production has not kept pace with the decline in housing starts," Campbell said.

U.S. builders will start 750,000 houses this year, a step up from the current 500,000, "but a big stretch from the two million of a few years ago or even the pre-crisis one-and-a-half million," he said.

As for the pulp market, it hit a peak in early 2008 at $880 US a ton for a standard grade, which now fetches just $690 a ton.

"The economic tsunami that hit last fall washed away hopes of an upswing in the sector," said Campbell.

With the weakness in both lumber and pulp, the Canadian industry reported a combined 2008 loss of $4 billion, compared with a $900 million loss in 2007.

For the global industry, the $8 billion loss in 2008 represented a 157 per cent swing from a $14 billion profit in 2007.

Weaker loonie a positive

The drop in the Canadian dollar late last year helped Canadian producers, and "was the one bright light," Campbell said. The dollar averaged 98 cents US for the first nine months of 2008, but fell to 83 cents in the final quarter.

In the first quarter this year, the loonie slipped another 2.5 per cent, encouraging for the Canadian industry because every cent it drops generates $450 million Cdn more revenue for the industry.