Report authors PricewaterhouseCoopers (PwC) said major sections of the industry were struggling to cope with the global economic downturn and tumbling demand. The group predicted the sectors would have to implement “major changes to remain competitive”. Industry consolidation, particularly in Europe and or a change in business models were two proposals put forward transform the sector.
The report found that while total sales among PwC’s top 100 firms rose seven per cent to $357m in 2008, overall operating income plummeted 19 per cent to $21bn and cash flow fell by around 16 percent to $26bn. The average Return on Capital Employed (ROCE) more than halved to 2.4 per cent, with only six companies earning a return of over 10 per cent in 2008, compared to 14 in the previous year.
Craig Campbell, of the accounting firm, said: "The sharp decline is mainly due to the impact of losses realized by major players in many of the mature markets as a result of low demand, goodwill and fixed asset impairments, restructuring, severance and high operating costs.
He said the company’s survey clearly showed net income “sliding deep into the red”, with ROCE levels crashing from previously low levels seen in 2007.
"Large sections of the FPP industry are struggling to survive in the current global recession and there can be little doubt that major changes will need to occur in order for companies to remain competitive in the face of falling global demand. Whether or not the industry will truly be transformed-either via long-overdue consolidation, notably in Europe, or a shift in business models, or both - remains to be seen,” he added.
The research found the two major trends in Europe were deep cuts in production and capacity. However, the report believes it will take “some time to establish a stable supply and demand balance in the European market”. Among the companies in the bloc included in the survey, net losses amounted to $1.5bn.
The severity of the situation appeared to be underlined yesterday as the Confederation of European Paper Industries (CEPI) launched what it called a “manifesto for competitiveness and employment” that sounded a “stark warning that unless solutions are found quickly to respond to the economic crisis and that a more rational policy making approach is introduced the competitive transformation of their industry, and indeed all European industry, will be not be sustained”.
In the US, many companies reduced or shifted capacity, with the American Forestry and Paper Association reporting an overall capacity reduction of 0.8 per cent for 2008. Net income decreased from a $5.6bn profit in 2007 to losses approaching $3bn last year.
US companies with positive results saw a decline in their net income, with the exception of Buckeye Technologies ($17 million increase, cellulose-based products) and Rock-Tenn (results unchanged from 2007, packaging). The net losses line was dominated by Smurfit-Stone's $2.8 billion loss due primarily to goodwill and other intangible assets impairment charges of $2.7 billion, and International Paper's $1.3 billion net losses, which include $1.8 billion of goodwill impairment charges and $179 million of restructuring and other charges, said the report.
Japan and Latin America experienced similar pressures of falling demand and oversupply.
China and India remained the region’s major players – although both faced challenges in 2008, said the report. Regional sales rose to $14bn – an increase of 19 per cent. However, three large companies – Nine Dragons, Ballarpur and Lee and Man - delivered their 2008 results prior to the slump that occurred in the second half of the year.
Return on Capital Expenditure (ROCE) amongst key players came on improvements in production and sales. Production was boosted thanks to “the continued closure of old capacity” with more efficient capacity coming on stream.