Global paper and forest product demand remains weak

The fundamental credit outlook for the global paper and forest products industry remains negative as weak credit conditions in North America and Europe continue to outweigh slightly better industry conditions for Latin American issuers, Moody's Investors Service said in a new report.
"The most important determinants of a company's profitability and creditworthiness are its supply/demand balance and its cost position," said Moody's VP-Senior Analyst Ed Sustar. "We anticipate continued excess supply and weak demand across most grades and regions in the global paper and forest products sector over the near term," he added.
Despite the paper and forest products industry's changing dynamics, the sector's overall credit conditions continue to see a number of influences worldwide. Some of these include the migration from printing and writing paper to digital media, and the general trend toward consumption of less, and lighter, paper packaging materials. In addition, competition from developing markets, with new paper and packaging capacity is also eroding the existing manufacturing base in more established markets.
Different regions face different pressures over the near term: in North America, demand and pricing across most grades is expected to improve as the economy picks up, offsetting some negative credit trends. U.S. housing trends and the weakness of the broader U.S. economy remain key to the sector's progress, said the report.
"Demand remains weakest for companies with wood-based building products operations and producers of certain grades of printing and writing paper," Sustar noted.
Europe however, remains the most challenging area which continues to show pricing pressure as many long-term pricing contracts are expected to be renewed over the next few months at lower pricing levels. On the whole, European issuers' internal restructuring and cost-saving measures have so far failed to offset the impact of these severe cyclical market conditions, and their cash flow is expected to tighten in the near term.
Industry conditions are expected to remain relatively good for many Latin American producers, however, export-oriented pulp producers are expected to struggle for the rest of 2009 given the likely decline in Chinese consumption over the remainder of the year and the appreciation of local currencies placing pressure on operating margins and cash flows.