Timber and wood products companies have been trying to gauge the outlook for their sector as poor economic indicators spread around the globe and British manufacturing reports an ongoing squeeze.
The decline of the US economy continued to be the headline news but there were mixed reports from countries and sectors. Talk was of caution in the Far East, but possible rebound in Scandinavia, while building materials generally fared well, but softwood slipped.
Financial reports for the second quarter showed larger companies well into strategic plans to reduce reliance on the general economic situation. Many have been pushing through sell-offs or acquisitions, exiting marginal sectors, changing product mix or refinancing debt.
In the UK, National Statistics unveiled the news that everyone had been anticipating. Manufacturing output fell by 2% in the second quarter – the worst performance for 10 years and the second consecutive quarter of decline.
An industry forecast has predicted two years of slow growth – 1.8% this year and 2% the next. The slowdown in manufacturing also began to hit the service sector, sending UK profits into the longest period of decline since the early 1990s. Firms are also taking longer to pay bills – an average of 60 days, up from 59.
Timber products and furniture producers appear to have fared better than the rest of manufacturing. A CBI report showed sales were flat, rather than sinking. UK wood machinery suppliers have also refuted claims of a recession. Most say sales are level with last year or slightly below.
The latest findings of Plimsoll business information publishers are that 31% of timber firms believe they are in recession while the same percentage say they are not. Another 13% say they are preparing for the worst by looking at debt and other fixed costs. The remaining 26% say they aim to win as much business as they can, while they can, but are hit by low margins.
Construction strength
The good news was in construction. This sector continued to reap strong sales and profits growth. Heiton Holdings recorded another year of double-digit growth with group turnover up 15.8% to £222m and pre-tax profits up 13.2% to £13.3m.
‘Timber is still a very strong part of our portfolio in the Irish market, representing 35% of our turnover, and it will certainly continue to be centre stage for us,’ said chief executive Leo Marvin.
‘We have had seven years of incredible growth in construction so we are at an extremely high plateau and I don’t think we will see double-digit growth continue. But there is more confidence in timber in construction and that will continue to grow.’
A surge of business created by the buoyant housing market led MDF mouldings manufacturer W Howard in Manchester to invest £1m in new facilities. The firm is confident in increasing demand for high specification products and this month is installing new machinery and increasing warehouse space.
Sales of OSB and chipboard into construction have remained healthy, but overall the sector still had major problems. Prices remained weak, some say at levels seen 18 months ago, and many producers claim to be working at cost or below.
OSB fears
Demand for OSB in the US held up. However, concerns about overproduction increased with the opening of four big plants and a fifth expanding capacity. European OSB mills such as Kronospan also stepped up exports to North America.
Louisiana-Pacific suspended production at its OSB mills in July. It said OSB prices dropped US$50 per thousand square feet, US$40 per thousand square feet for plywood and lumber was off by US$75-100 per thousand bd ft. Although prices have begun to increase, wet weather delayed home construction activity and caused inventories to expand.
German panel products giant Hornitex disclosed sales rose by only 6% this year before it filed for bankruptcy protection. It blamed the general economic slowdown, exacerbated by debt for a new power station.
Georgia-Pacific was also cautious about panels. Its building products segment recorded second quarter profits of US$69m, but the company warned: ‘Although housing construction continues to fuel solid demand for structural panels and lumber, chronic overcapacity will likely prevent any dramatic changes in prices.’
Consumer product sales helped the company show profits of US$29m for the second quarter, although this was hit by a US$67m charge for plant closures in gypsum wallboard.
Last month the company sold four paper mills for US$1.65bn to pay off debt.
Chief executive officer Peter Correll said: ‘Our consumer products business carried the quarter, further demonstrating that our strategic investment in growing this segment was the right for the long term.’
Nexfor improved second quarter earnings but for the first six months profits were US$9m compared to US$112m in 2000.
‘Our sawmills and low-cost OSB facilities benefited from the recovery in prices in North America during April and May,’ said CEO Dominic Gammiero. But he added that a strong balance sheet, disciplined capital spending, reduced working capital and continuing margin improvements would be the keys to maintaining financial health.
Louisiana-Pacific also looked at financial adjustments to fight the economic tide. It proceeded with a debt refinancing to raise money for its ‘corporate strategy’. It got a three-year US$200m bank credit facility, secured against some of its timberlands in Texas and stock in certain subsidiaries. The proceeds will be used to refinance the company’s existing borrowings and credit facility.
Nordic adjustments
In Europe, especially Scandinavia, companies were turning to acquisitions and restructuring. There was still oversupply and Scandinavian timber giants UPM-Kymmene, Finnforest and Stora Enso all slashed sawmill production.
UPM introduced cutbacks of 20% for August, September and October, and there could be more. A spokesperson said: ‘It’s no use producing timber at the level we are doing currently.’
Output at Finnforest’s 12 sawmills has been reduced by 12% until the end of the year and Stora Enso, Europe’s biggest sawmilling group, is reducing output by 10% in Sweden. Stora Enso also agreed to spend E500m improving its paper mills and put in place a new strategy and development team.
Surplus supplies of sawn timber and high log prices helped push Finnforest into the red in the first half – almost e1m, compared with a profit of €30.6m.
Finnforest had been busy creating a new e2bn turnover timber giant with the takeover of Norwegian timber company Moelven. The deal provides consolidation and scope for expansion. Also in Norway, Norske Skog has increased its share capital, primarily to acquire paper and pulp interests in Germany, the Netherlands and Asia, to boost cash flow and make it more attractive to international investors.
Part of the money went toward financing a follow-on deal from UPM-Kymmene’s purchase of German paper producer Haindl. UPM spent €3.64bn on the six paper mills before it sold on two to Norske Skog for €1.1bn.
Combining the assets is expected to bring UPM savings of e70m a year until 2003 and an immediate improvement in cash flow.
UPM’s wood products turnover was up 4%, largely because of acquisitions, but overall second-quarter profits slipped 12% at €353m. Although overall profits were up 15%, SCA also made a 4% increase on pulp, timber and solid wood products.
AssiDomän reported half-year timber profits down 50% at SKr13m and said the outlook for sawn timber remained uncertain, with falling prices for both redwood and whitewood.
