The latest annual Global Forest and Paper Industry Survey from PricewaterhouseCoopers’ Forest and Paper Industry Group (FPIG) takes a long hard look at the sector’s 100 largest companies.

The study covers businesses which have more than 50% of their operations somewhere in the forest chain – from ownership or management through to packaging or paper to a company processing timber for use as a construction grade material.

“It is an enormous task because no information can be taken at face value,” said Clive Suckling, who heads up the UK FPIG team. “We obtain, review and tabulate it for some broad consistency and there is no other review like it.”

He added that the latest report “shows the industry is staggering forwards on the financial side”. “Return on capital peaked at 6.5% in 2000 and dropped to 4.2% in 2003,” he said. “The cash flow has been remarkably consistent at US$30bn, but sales are down because of fluctuations in currency and there has been very little growth. We are talking about a mature industry that is growing at best in line with GDP, which globally is about 3%.”

The industry’s low return on capital is attributed to a failure to improve margins.

“There is much greater determination among the Scandinavians who focus on shareholder value by investing,” said Mr Suckling. “In North America they have stopped investing because the returns have been very poor.

I think a great deal more consolidation is needed on the lumber side.”

Low earnings

Overall, the FPIG concluded, the forest products sector is earning less than the cost of capital.

“The expectation is that the performance should be better this year, but if you have a look across the cycle, this lacklustre performance has prevailed whether prices have peaked or troughed. Prices could start coming down again in 2005.”

North American companies are beginning to sell their forest land, which Mr Suckling believes makes sense. And, he said, the same is starting to happen in Europe.

“If you have a lot of capital tied up in forest land then you are going to struggle. Just because you need timber, you don’t need to own the land the trees grow on. Your business is about processing timber or making pulp or paper, it’s not about forest ownership or management. So one thing you can do is reduce the amount of capital tied up in forest land to improve performance.”

Russian impact

He also predicted that Russia would increasingly flex its timber sector muscles.

“There is only one Russian company in the top 100 and we feel there should be more. But Russia is definitely starting to get its act together and will have more of an impact on a survey like this year on year.”

The survey looks at global lumber cost benchmarking too and Mr Suckling said: “If you look at the elements of getting a log from the forest – the cost of the timber, the cost of processing in the sawmill, and the cost of logistics – there is very little difference globally in the cost of processing, but huge differences in the cost of the log.

“Russia had the lowest cost and the west coast of Africa the highest.”

He said benchmarking gives participating mills an opportunity to do some very hard comparison against mills both in their region and elsewhere.

Another area covered by the survey is sustainability reporting. Mr Suckling said: “There is not a conflict between operating successfully for profit and operating sustainably and there are considerable merits in reporting what you are doing economically, socially and environmentally – the triple bottom line.”

He added that the FPIG works with companies to help them meet performance standards, and audit their operation against them.

In British Columbia, he said, the provincial government has outsourced the issue of licences to harvest timber. “We audit the performance of the operators against the standard set in the licence – for example, ensuring that they are cutting down the right trees,” said Mr Suckling.

Sustainability is an issue the FPIG has been involved with, not only with forest and paper companies, but also end users, including some of the majors.

“We’ve run education programmes for them because they believe their customers want assurance that timber has come from sustainably managed forests and we help them put in place processes to ensure they are procuring certified timber,” he said.

“There isn’t a huge opportunity to make a better return from operating sustainably – there are some high costs involved – but it is increasingly a cost you have to incur and in due course it will become second nature.”