Industry issues
Some of the key issues facing companies in the UK forest, paper and packaging sector include:
Margins in the industry remain under pressure. For the industry as a whole, returns on capital continue below the cost of capital. The rise in material and other operating costs remains inexorable and the inability of the industry to recover these costs through sales price increases reflects disaggregated decision-making within the industry, continuing industry over capacity and end user resistance to price increases.
In recent years energy costs and other costs directly or indirectly related to oil and gas prices have been a priority; more recently, fibre costs have been rising sharply.
Accordingly, the industry must continue to focus upon reducing costs, in particular the "cost to serve" customers, together with capacity management.
The industry which has traditionally focused on volume and capacity utilisation, must also focus more on margin, and in turn this requires more innovation, in process, in an attempt to drive margin improvements.
The global forest, paper and packaging industry continues to face great upheaval. Macro-economic factors affecting the industry include foreign exchange fluctuations, increased energy and transportation costs, lacklustre demand at best in North America and Europe and the impact of developing markets on global competition. Traditional value chains are undergoing a transformation which is causing the break-up of vertically integrated providers, a phenomenon that is fuelling M&A activity. Companies are selling off underperforming and non-core businesses and the leading players are seeking to extend their global reach, whether the driver is growth, lower cost inputs, or ultimately, shareholder value.
In this changing industry landscape, new entrants are playing their role. New strategic investors into traditional markets who believe they can drive superior returns to existing players; private equity investing into the industry's fibre base or buy-out funds seeking high cash returns from more active asset management or finance structures.
All of these factors will continue to drive widespread restructuring and consolidation.
Read more about deals activity in the industry and about our credentials in transactions in our thought leadership paper entitled Branching Out - Global deals activity in the forest, paper & packaging industry.
Sustainability and climate change
Maintaining a sustainable business has moved from the peripheries of the corporate mindset to centre stage including legal and sustainable fibre sourcing, managing carbon footprints and communicating practices that are economically, environmentally and socially sustainable.
The emerging markets remain the growth driver in the FPP sector. With the suboptimal returns realised by traditional regions (North America, Western Europe, and Japan) for several years capital, continues to migrate to the higher growth and higher return regions of the emerging markets. This influences capital allocation decisions by producers, and equity investment decisions by portfolio managers. The key emerging markets for FPP are Asia, notably China, Latin America, and Russia. On the supply side, competitive advantage continues to shift towards South America and to a lesser extent other emerging low cost fibre producing regions; on the demand side, growth in the industry continues to be driven by the emerging markets, especially China.
With the momentum of fast economic growth and rising concerns about climate change set to continue, there is expected to be increasing pressure upon fibre resources. Regions with fibre deficits such as Asia are seeking fibre, both virgin and recovered from regions in surplus; competing demands for these same resources are beginning to arise from providers of renewable energy and fuels, often as a result of government policy designed to stimulate alternatives to fossil fuels. On the one hand, this is leading to the global trading of fibre on unprecedented levels; on the other, it is leading to localized fibre problems and more widespread increases in fibre prices.
As economic growth and the drive to harness renewable resources continues, the FPP industry can expect to become challenged in securing sustainable and reasonably priced fibre. On the one hand a threat, this also provides opportunity for the FPP industry, such as those with secure access to fibre.
