The outlook for the global paper and forest products industry is stable, says Moody's Investors Service. The ratings agency noted its outlook reflects expectations that the consolidated operating income of the 46 paper and forest product companies that Moody's rates globally will increase by 0%-2% over the next 12-18 months.
Moody's expects that the consolidated operating income of the 28 North American companies it rates will remain essentially flat, with 0%-2% growth over the outlook period. These companies account for about 60% of the global rated industry's operating income. Flat to modest operating income growth from paper packaging, pulp, wood products and timberland producers will be offset by lower operating earnings from paper companies. Within this group, the eight North American timberland and wood products companies, such as Rayonier Inc. (Baa2 stable), West Fraser Timber Co Ltd (Baa3 stable) and Norbord Inc. (Ba2 stable), will benefit as the demand for new US housing increases about 10% in 2016.
Moody's indicated that operating earnings growth for producers in Latin America will remain unchanged at 1%-3%. The depreciated local currency will continue to mitigate weak international prices and support local operating margins. Weaker than normal economic expansion in Lain America will limit local paper demand growth. This will be partially offset by higher per capita paper use, as paper consumption in this region increases towards global average levels.
In Europe, earnings growth for Moody's rated European producers will be 0%-2%. The producers account for nearly 25% of the industry's total operating income. Within the region, increased operating earnings from packaging and tissue operations will outweigh those from paper operations, which continue to face the continued secular decline of paper consumption in developed markets.
Moody's analysts said they expect to see an increase in operating income from European wood-based building producers as larger investments in homebuilding and renovations strengthen demand for lumber and panels. Packaging volume is also expected to grow as the European economy improves.
"Outside of wood product companies that are positioned to capitalize on the US housing recovery, weaker prices across most grades will limit operating earnings growth for most rated paper and forest products companies," said Moody's Vice President Ed Sustar.
"The continuing weakness in the euro, Brazilian real and other currencies against the US dollar should boost exports from companies operating in these currencies into markets where the commodity price is denominated or pegged to the US dollar, as the strong dollar erodes the cost competitiveness of US producers," he concluded.