Wood Product Growth Supports 2018 Stable Outlook, Offsetting Commodity Paper Decline

The likelihood of strong profits from the wood products business, alongside higher prices and growth in paper packaging from increased e-commerce demand, will help to offset the secular declines in the printing and writing paper segment, says Moody's Investors Service (Toronto, Ont., USA) in its annual sector outlook published earlier this week (Tuesday, Dec. 12, 2017). As a result, the outlook for the global paper and forest products sector will remain stable in 2018.

"The stable outlook for paper and forest products globally next year is underpinned by an expected 2%-4% growth of our rated paper and forest products companies, as strength in the wood products and paper packaging subsectors offset decreased demand for commodity paper as the shift to digital-first alternatives continues," said Ed Sustar, a Moody's SVP and author of the report.

On a subsector basis, the positive outlook for wood products and timberland is buoyed by improving strong end-market demand for timber, lumber, oriented strand board (OSB), and engineered wood products as U.S. housing starts increase about 6%, or approximately 1.28 million units, in 2018.

Bolstered by the robust demand emanating from the U.S. homebuilding market, average lumber prices are expected to remain strong, with increased production capacity aligning to support the demand, Moody's said. Nevertheless, analysts caution that the tight lumber markets will allow countervailing anti-dumping duties assessed on Canadian lumber exported to the U.S. to be passed on to consumers. The issuers most expected to benefit from a combination of higher lumber prices and little-to-no lumber tariffs include Potlatch Corp., Georgia-Pacific, Weyerhaeuser Co., and Rayonier Inc.

The paper packaging and tissue and market pulp subsectors will have stable outlooks for 2018, with projected operating earnings growth of about 3%. Modest operating earnings growth in both North America and Europe is anticipated for producers of most grades of paper packaging and tissue, stemming from a combination of economic and e-commerce growth and the flow-through of announced price increases. Similarly, modest operating earnings growth is expected in the market pulp subsector, as increased production offsets price declines across most grades in most regions. Even so, analysts caution that the ramp up in global capacity of hardwood and softwood pulp will outweigh annual market pulp demand growth near-term, reversing recent price increases across most grades in 2018.

Conversely, weighed by a projected 4% decline in operating earnings, the printing and writing paper segment will have a negative outlook for 2018, as secular paper consumption continues to decline in mature markets. And even while capacity reduction through machine closures or conversions to other grades will likely match or exceed demand declines, thereby leading to flat or slightly higher prices across most grades, weaker paper demand overall will more than offset the modest price increases across most grades.

Moody's report Paper and Forest Products -- Global: 2018 Outlook is available online.