Alarm bells are ringing around the world in the timber and wood products industry. Events in the wider economy have combined to hit the sector hard and many of the major corporations are taking measures to combat continuing depressed market conditions.
Slowdown in the US economy and rising energy prices have been felt across North America. The UK is bracing for a knock-on effect, while sterling’s levels against the dollar and the euro have pushed down the profitability of British industry.
And in Asia, which has been in the doldrums for more than a year, there is risk of serious economic setback if the downturn in the US develops.
The UK is already under threat of economic slowdown after notching up its fifth consecutive quarterly decline in company profitability. According to the latest Corporate Health Check by business information experts Experian, average return on capital – a leading measure of profitability – was 12.48% for June 2000 after peaking at 14.18% in March 1999.
Report author Peter Brooker said: ‘This is the longest sustained period of declining profitability since the last recession. While productivity has generally improved, the strength of the pound against the euro has continued to hit exports, while its weakness against the dollar has made imports from the US, as well as commodities priced in dollars, more expensive.
Added problems
‘There is now the added problem of the slowdown in the US economy. While the US only accounts for 15% of UK exports, the knock-on effect of a slowdown on economies more dependent on the US, will inevitably have an impact on jobs at UK companies which operate in, and export to, those markets.’
Profitability was down across 19 of the 23 UK industrial sectors. Building and construction was up slightly at 15.53% from 14.51%; building materials, however, were down at 9.65% from 10.11%.
In the latest company results for Heiton Holdings, which owns Heiton Buckley and Atlantic Homecare, chief executive Leo Martin said: ‘The overall performance in the UK has been disappointing due to a combination of adverse market conditions. Trading remains a challenge, but growth in this market is forecast to improve in the months ahead.’
The strength of sterling, which makes UK products more expensive abroad and encourages imports into the UK, hit Nexfor‘s prospects. The US lumber and panel producer revealed 2001 fourth quarter profits of US$1m, down from US$36m in the same period in 1999.
It said UK demand for MDF grew 11% in 2000, but was outstripped by new supply, and profits from OSB and value-added operations were offset by operating losses from MDF and particleboard at Cowie.
Nexfor believes these competitive market conditions in the UK were partly to blame for increasing losses in its European panel operations to US$10m from US$2m.
Nexfor says its priorities for 2001 are to improve margin, including the OSB expansion at Inverness to complete the reconfiguration of the Cowie particleboard operation.
This effort has to be made against a backdrop of US manufacturing activity consistent with recession. The US economy generally grew at 1.4% in the fourth quarter, the slowest in five years. The purchasing manager’s index dropped from a near record high 61.1 in December to a record low 50.1 in January. A rating of 50 indicates economic contraction.
Below expectations
Georgia-Pacific, Louisiana-Pacific and International Paper all reported earnings below expectations. Economic slowdown and higher energy costs are blamed and many of the majors acted to reduce production and costs with mill closures and restructuring.
International Paper, the world’s largest paper and wood products company, which recently bought Champion International, saw fourth-quarter earnings slide to US$145m from US$227m.
Chief executive officer John Dillon said: ‘The slowing economy and rising energy costs hit during a period in which demand is traditionally soft for most of our product grades. We maintained our commitment to keep our production in line with customer orders, which negatively impacted overall sales.’
Pricing pressure
The company’s wood products group blamed pricing pressure and weak demand from lower housing starts. Carter Holt Harvey reported fourth earnings almost halved at US$10m. Forestry slid as prices from pulpwood and sawn timber continued to fall. Earnings were down to US$110m from US$176m.
Georgia-Pacific reported a net fourth-quarter loss of US$3m, compared with income of US$175m, taking out one-time disposal and closure charges.
Building products lost US$49m, compared with profits of US$200m in the same 1999 period. Average selling prices were down 12-18% in OSB, plywood, wallboard and softwood lumber.
Chief executive officer Pete Correll said: ‘Despite our efforts to match production with demand during the fourth quarter, we were unable to overcome the effects of the slowing US economy and higher energy costs as well as overwhelming declines in building products prices.’
Boise Cascade blamed rising energy costs with the economic slowdown for blunting sales. Chief executive officer George Harad said weak market conditions in its building products and increased product costs played a part in cutting back earnings to US$178.6m from US$200m. He added that he was expecting Boise Cascade’s results in the first quarter to be similar to the fourth quarter.
For Louisiana-Pacific the fourth-quarter loss was US$28m on sales of US$569m, against a profit of US$32m on US$764m. ‘Very weak building products prices have continued to affect our results. Prices on key commodity products were down as much as 50% from the fourth quarter of last year and 10% from the previous quarter,’ said chief executive officer Mark Suwyn.
‘Sharply higher energy costs and extensive downtime also had a negative impact.’
LP responded to poor market conditions by curtailing production and permanently closing several non-competitive, high-cost mills. With restructuring this has led to a 15% cut in the workforce to 1,800 employees.
Sales boost
In Europe, the acquisition of Consolidated Papers in August boosted Stora Enso‘s sales for the year by 22% to €13bn and pre-tax profits by 59% to €1.6bn.
But its timber operations suffered in the fourth quarter with profits down 32% in a flattening market. This was affected by oversupply in Europe, especially the Nordic countries and Russia.
The company said: ‘Worldwide demand for wood products is forecast to remain flat and oversupply in the market is expected to persist through the first half of 2001.’
UPM-Kymmene, though, was upbeat about 2001, forecasting a recovery in the US economy and continued economic growth in Europe and Asia. It had a record 2000 – despite a slowdown in the final quarter – producing 2.1 million m³ of sawn timber, up 11%, and 793,000m³ of plywood, up 9%.
A spokesperson said: ‘Given the large share of European sales and high proportion of late-cycle businesses, the demand for the company’s products is expected to remain relatively stable.’
Weak profits
The South African turned international corporation Sappi reported weak profits from North America and a sharp decline in orders in November and December.
Chairman Eugene Van As said: ‘The outlook for 2001 is uncertain. There is no reason to panic, but I cannot predict what will happen to pulp prices this year.’
The first signs of softening demand have already been felt from Asia after pulp list prices fell US$40 a tonne in December. And it is the Far East economy that is at serious risk if the US slowdown develops. A US recession would trip up the fragile recovery in Asia.
Malaysia, for instance, exports 27% of its gross domestic product to the US and difficulties in the US furniture sector have already been felt. Furniture manufacturers in Malaysia, which had enjoyed strong orders, have been looking for work to keep their factories running. The slow market conditions in the Far East that were present for most of last year persist.
