Global Paper and Forest Demand to Strengthen through 2010

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Positive indicators suggest that demand in the global forest, paper, and packaging (FP&P) sector will strengthen during 2010, according to a new report by the Toronto, Ont., Canada-based Deloitte Global Manufacturing Industry group titled Compass 2010: Global forest, paper, and packaging sector outlook. As the global economy shows signs of improvement, a moderate rise in sales from key end markets including construction and pulp will help the sector to fare better in 2010, the report notes.

"Companies are taking a more disciplined approach in executing their corporate strategies," says Luc Martin, Deloitte's FP&P sector leader. "As a result, companies are better able to combat challenges of overcapacity and manage prices to anticipate future demand."

According to the report, consolidation activity is expected to continue this year in certain product lines such as containerboard. Restructuring through bankruptcy is expected to continue in North America and Europe while companies with the financial health to do deals will still face distressed credit markets and the need to look for alternative financing options. In this depressed market, assets are undervalued and private equity will look to take advantage of the potential upside once restructuring of the industry is completed. Private equity will increasingly be involved in the industry over the next few years with likely deals emerging in forestry markets such as Uruguay and Argentina. A strong appetite among investors for paper-type assets that can provide shorter-term attractive valuations is also an emerging trend.

Out of the tough economic conditions, industry players will likely refocus efforts towards innovation as a source of growth. Biofuels is just such an opportunity. "Growing investments in biofuels from wood residues could improve operating margins and create a lower dependence on fossil fuels for producing energy internally," says John Dixon, Deloitte's Paper & Packaging leader in the U.S. "Several European and North American companies are placing bets in biofuels for future revenue growth."

Martin adds that "with biofuel, sustainable products and wind generation, the traditional FP&P company has begun to peek beyond the traditional offerings and embrace the next generation of growth while continuing to maintain a diligent focus on operational effectiveness in their mills. Broad growth may be difficult to come by this year in North America and Europe, but the global FP&P sector in 2010 will likely see recovery in key subsectors with stronger growth in markets like South America and China,". A copy of the report is available on Deloitte's website.