Moody's 2020 outlook for the global paper and forest products industry remains negative

6 January 2020

Global paper and forest products - Negative

Drivers of negative outlook

» Operating earnings to decline 2%-4%

» Paper packaging earnings decline driven by lower corrugated packaging prices, partially offset by lower recycled fiber costs

» Paper earnings decline driven by secular commodity paper demand decline and lower prices

» Market pulp earnings decline driven by lower commodity hardwood and softwood pulp prices

Consolidated operating income of rated paper and forest products companies will decline 2%-4% over the next 12 months. North American paper packaging and tissue companies generate most of the global rated sector’s operating income. 2020 subsector outlooks are mixed but mostly negative.Wood product operating earnings growth is offset by operating earning declines in paper packaging, commodity paper and market pulp.

Negative

Paper Packaging and Tissue

» Operating earnings to decline about 2%

» Lower corrugated container prices as capacity additions not absorbed by weaker demand growth

» Consumer packaging and tissue prices will remain flat at current levels

» Recycled fiber costs will remain lower than long-term average

Negative

Commodity and Specialty Paper

» Operating earnings to decline about 5%

» Commodity paper consumption to decline about 5% due to digital substitution

» Prices will decline across most commodity paper grades as curtailments have not kept pace with demand decline

» Specialty paper and non-integrated commodity paper producers will benefit from lower pulp and recycled fiber costs

Positive

Wood Products and Timberland

» Operating earnings to increase about 7%

» North American wood product prices will rebound in 2020 as capacity curtailments remove some slack in the market

» US housing starts likely to be flat at 1.25 million units in 2020

» US South log prices remain flat as excess standing timber inventory remains high

Negative

Market Pulp

» Operating earnings to decline about 9%

» Although pulp prices will start to trend up as excess inventory levels normalize, average prices for 2020 will be below 2019 levels

» Pulp demand growth will remain muted with slowing global demand growth – especially China

» Few pulp expansion projects in the pipeline until after 2020

 

Paper packaging and Tissue - Negative

Key credit themes

Paper packaging earnings will decline due to lower corrugated packaging prices, which will be partially offset by lower recycled fiber costs. Consumer packaging and tissue earnings will be flat. » Most paper packaging and tissue prices will be flat or down slightly in 2020 – North American average containerboard prices will fall 4% in 2020 – Consumer packaging and tissue prices likely to remain flat at current levels. However, the sustainability of recent price increases are uncertain with the addition of new capacity – Weaker demand and over-capacity across most paper packaging grades in Europe will continue to pressure prices » E-commerce growth and environmental pressures to replace plastic packaging with paper-based alternatives will increase paper packaging demand, offset partially by right size packaging » Average North American and European recycled fiber costs will remain significantly lower than average as China’s contamination restriction lessens imports of recycled fiber » Beyond 2020, containerboard prices could fall significantly if most of the announced machine conversions to packaging grades occur at the same time

Subsector outlooks and projected trends by region We project a modest operating earnings decline for most grades of paper packaging across North America and Europe. Our outlook for North American and European tissue is stable

 

North American containerboard capacity will exceed demand:

Approximately 1.2 million tons of new North American containerboard capacity (about 3% of North American capacity) will start up in late 2019 and early 2020, above annual 1.5% demand growth » Beyond 2020, containerboard capacity growth will continue to exceed demand growth if most of the announced expansion and machine conversions occur as currently anticipated » Market-related downtime and capacity closures will need to continue to keep supply in balance with demand

 

European containerboard will also exceed demand

Approximately 3.7 million tons of new European containerboard capacity (about 9% of European capacity) will start up in 2020, well in excess of annual 1.5% domestic demand growth » Market-related downtime, rationalization of higher cost capacity and growth in exports will be required to balance supply growth with demand » Beyond 2020, the pace of containerboard capacity growth appears to be more in-line with demand growth

North American Tissue supply outpacing demand:

About 280,000 tons of new tissue capacity (about 2.5% of North American capacity) will start up in 2020 versus annual demand growth of about 1%-2% » We expect that higher-cost capacity will be shuttered to balance market » 2021 supply growth appears to be in-line with demand growth

 

Commodity and Specialty papers - negative

Key credit themes Secular decline in demand for commodity paper and lower prices will drive decline in paper earnings. However, specialty paper and non-integrated commodity paper producers will benefit in 2020 from lower pulp and recycled fiber costs. » Commodity paper operating earnings in North America and Europe will decline across most grades as individuals and businesses increasingly turn to digital alternatives » North American uncoated freesheet (UFS), coated paper and newsprint demand will decrease by approximately 3%, 5% and 12% (respectively) per year as consumers turn to digital substitutes like electronic storage and e-books » Expect price declines across most commodity paper grades in 2020 as curtailments fail to keep pace with demand decline » Demand for several specialty paper grades will increase as consumers switch to paper-based substitutes for singleuse plastics, such as paper cups and straws – Capacity conversions from commodity paper grades to specialty paper grades will continue » Non-integrated and recycled paper based producers will benefit from lower fiber costs

Wood products and Timberland - Positive

Key credit themes Wood product earnings will strengthen driven by a rebound in North American wood product prices as capacity curtailments remove some slack in the market and drive higher operating rates. » Average North American lumber prices will increase 10% in 2020 after weak demand growth and oversupply led to lower than expected prices in 2019 » Canadian lumber margins will continue to be hurt by countervailing and anti-dumping duties on Canadian lumber exported into the US – We expect that most of the duties will be refunded after a new lumber deal is negotiated » Average oriented strand board (OSB) prices will increase by 20% in 2020 as capacity curtailments remove excess supply from the panel market » US South log prices will remain flat as excess standing timber inventory remains high from years of harvest deferral and tree growth, while Pacific North West log prices decline due to weaker export markets caused by trade tensions » End-market demand for wood products will moderate as US housing starts expected to remain essentially flat at 1.25 million units in 2020 and renovation and remodeling activity level off after several years of growth

 

Market Pulp - negative

Key credit themes Market pulp earnings will decline in 2020, driven primarily by excess inventories and lower average commodity hardwood and softwood pulp prices. » Prices for most grades of pulp in 2020 will rebound from the troughs experienced in 2019. However, average commodity pulp prices for 2020 will be lower than 2019 average prices » Market pulp inventory levels still high, but continue to trend closer to balance levels – High inventory levels primarily due to weakening growth of Chinese demand, as global GDP growth slowed and trade tensions with the US remain – Softwood pulp days of supply fell to 33 days in October 2019 (from a peak of 46 days in July 2019), which is approaching balanced levels of 28-30 days – Hardwood pulp days of supply was at 50 days in October 2019 (versus a peak of 71 days in February 2019), which is still well above balanced levels of 38-40 days » Pulp demand growth will remain muted with slowing global demand growth – especially China » Few pulp expansion projects in the pipeline until after 2020 » Latin American hardwood pulp producers will continue to enjoy structural cost advantages due to their large efficient mills and short tree-harvesting cycles



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