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Moody’s revises outlook on paper, forest products industry to negative

Moody’s Investor Service has changed its outlook for the global paper, packaging and forest products industry to negative. This change comes three months after Moody’s analysts downgraded the industry outlook from positive to stable.

The firm predicts that global operating income will decline over the next 12 to 18 months, as wood product and pulp prices ease from recent peaks.

“The negative outlook for the global paper and forest products industry reflects a two to four per cent decline in industry operating income over the next year or so,” says Ed Sustar, a Moody’s senior vice-president, in a release. “Increasing paper packaging prices and demand for paper packaging and pulp will only partially offset rising input costs, declining demand for paper and lower wood product and market pulp prices.”

Focusing on North America, the consolidated operating income of the 23 North American companies that Moody’s rates (which account for about 53 per cent of the global rated industry’s operating income) will decline two to four per cent over the outlook period.

Modest operating income growth from North American paper packaging and tissue producers will be offset by lower operating earnings from commodity paper, pulp, wood products and timberland companies.

North American consumer paper packaging companies such as WestRock Company (Baa2 stale) and Graphic Packaging (Ba1 stable) will benefit from the flow-through of recent price hikes, while containerboard paper packaging companies, such as International Paper (Baa2 stable) and Packaging Corporation of America (Baa2 stable), will primarily benefit from the remaining flow-through into their converting business of the March 2018 containerboard price hike.

Despite higher prices from recent mill closures and conversions, North American paper producers such as Domtar Inc. (Baa3 stable) and Resolute Forest Products (Ba3 stable) will continue to face demand declines across their commodity paper grades as digital alternatives continue to replace paper.

After several years of increasing housing starts, North American timberland and wood products companies, including Weyerhaeuser Company (Baa2 stable), West Fraser Timber Co Ltd. (Baa3 stable) and Norbord Inc. (Ba1 stable), will face flat demand from a leveling off of housing starts and renovation and remodeling activities and a fall off from peak wood product prices experienced in 2018.

Similarly, operating earnings will decline for North American pulp producers, such as Mercer International (Ba3 stable), as average 2019 prices drop below higher-than-normal 2018 levels.

Moody’s says it would change the outlook back to stable if analysts believe that consolidated global operating income would grow between zero and four per cent over the next 12 to 18 months. This would most likely result from either lower costs or higher prices across several grades and regions due to a tight demand-supply balance (for example, some of the expected new capacity expansion projects are delayed or canceled) or slightly stronger demand from higher-than-expected housing starts or GDP growth.