Increasing housing starts and higher consumer spending will drive anticipated operating income growth for the global paper and forest products industry of 1%-3% in 2016, underpinning the current stable outlook for the sector for the next 12 months, said Moody's Investors Service (Toronto, Canada) in a report published this week. However, the outlook for the printing and writing paper segment is negative as digital alternatives continue to curb paper demand.

"Our outlook for the global paper and forest products sector over the next year remains within our stable range as increasing home construction and economic growth drive wood product, packaging, and market pulp earnings growth in the low single digits in 2016," said Ed Sustar, a Moody's VP--senior credit officer and author of the report.

The outlook for the Paper Packaging and Tissue segment will be stable with operating earnings forecast to grow by 0%-4% on the back of increased (1) packaging demand, driven by modest economic uptick and stable food consumption; and (2) tissue demand, driven by population growth and improving hygiene standards.

Expected improvements to U.S. housing starts will likely prop up end-market demand for timber, lumber, oriented strand board, and engineered wood products in 2016, which will in turn support the stable outlook for the Wood Products/Timberland segment. However, lower Chinese infrastructure spending is pressuring North American log and lumber exports. Operating earnings in this sector are expected to grow by between 0%-4% in 2016.

Operating earnings growth for 2016 in the 1%-3% range will support the market pulp segment's stable outlook. Prices across most grades (hardwood, softwood, dissolving pulp) will remain flat or decrease as capacity increases outpace demand. As additional pulp capacity comes on-line, inventory management across the fragmented global pulp industry will remain critical to balancing supply and demand.

The outlook for the printing and writing paper segment in 2016 is negative with operating earnings expected to decline by 1%-4% as paper demand in mature North American and European markets is expected to continue to fall by approximately 5% per year for the next several years. This decline is driven by individuals and businesses increasingly turning to digital alternatives, such as tablets and e-readers. Capacity reduction across several paper grades will lead to sustained or improved prices. Fiber, energy, and transportation costs will remain flat.