06 Peter Adams 2004

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MAJOR MAIL USERS Updated 8 June 2004 2004

Economic Trends Leading Indicators for Europe & USA: 

Economic Trends Leading Indicators for Europe & USA The composite leading indicators for Western Europe and USA, which point to short-term general economic development, show that following a low point in early 2003, there is a positive trend

Economic Influences U.S.A. Economic Sentiment: 

Economic Influences U.S.A. Economic Sentiment

The Forecast is for Global Growth: 

The Forecast is for Global Growth

Economic Influences Australia is doing OK: 

Economic Influences Australia is doing OK Until the 1990s Australia actually lagged behind other countries in terms of per capita GDP growth. Australia has lifted its ‘ranking’ among OECD countries from 15th to 7th over the past decade. Australia’s inflation rate has also been lower than the OECD average for the first time since the 1960s. In purchasing power terms, Australians have a per capita real GDP which is 112% of OECD average, compared with USA 150%, Euro Area 105% and New Zealand only 88%

Woodfree Paper Demand and OECD Leading Indicators : 

Woodfree Paper Demand and OECD Leading Indicators This chart compares total Woodfree paper demand with the composite leading indicator from the OECD. The leading indicator confirms a market upturn is taking place.

Paper Demand vs GDP: 

Paper Demand vs GDP Up to 2000, paper demand corresponded closely to GDP development, but the paper markets suffered a serious setback in recent years.

Economic Influences Sharemarkets - An indicator of Advertising Spend: 

Economic Influences Sharemarkets - An indicator of Advertising Spend Share prices in major markets are now trending upwards after major falls. They are still below the levels of 1998-2000. An improvement in Share Prices is a good indicator of higher expectations for Corporate Profitability and hence Advertising & Marketing spend. After several false starts, the US share market appears to be on an uptrend.

The Advertising Driver Advertising to GDP Ratio: 

The Advertising Driver Advertising to GDP Ratio Despite strong upwards movements in the 1980’s and late 1990’s, in recent years, Advertising Expenditures have declined seriously relative to GDP. The ratio of AdSpend to GDP in West Europe has recently fallen, from a high of 1.05% to about 0.9%; That is about the same level as 1987. The fall in the US ratio is even larger, from 1.1% to 0.87%.

The Advertising Driver Advertising vs Coated Woodfree Demand: 

The Advertising Driver Advertising vs Coated Woodfree Demand This chart shows a relationship between the role of Advertising in the economy and the resultant market for Coated Woodfree demand in Europe. When the upturn does come we might be surprised by the strength in the recovery of paper demand ...

Demand Trends European Coated Woodfree: 

Demand Trends European Coated Woodfree European coated woodfree markets showed strong growth until 2000 and since have shown negative growth, primarily due to a collapse in the advertising market

Demand Trends European Uncoated Woodfree: 

Demand Trends European Uncoated Woodfree Uncoated woodfree reels and sheets are a mature market with essentially no growth (and an emerging contraction). Cut reams have retained strong growth until recently but growth since 2000 has also been close to zero. Growth may now be beginning to re-emerge. While the growth pause in cut reams is unlikely to be structural, the cannibalisation of UWF sheets and reels markets by cut reams must exhaust itself at some point.

Historical Market Growth: 

Historical Market Growth This chart shows that growth in 2002 was 3.4% following -3.6% in 2001, which was the worst growth period for many years. The chart also shows that previously following recessions the following years have been the strongest for growth. This pattern may be repeating itself again

Global Paper Market Grade Growth: 

Global Paper Market Grade Growth Global paper market demand was forecasted to grow moderately in 2003, following the drastic declines in 2001, and for growth rates below historical averages going forward.

EMGE World Demand Forecast by Region: 

EMGE World Demand Forecast by Region

Technological Influences A Paperless Society?: 

Technological Influences A Paperless Society? Only a few partial successes so far in creating a paperless office. Up until now, the more office automation, the larger the demand for paper Display technology & high speed wireless communications is the key to paperless for a new generation who have grown up with screens & electronic transactions. The technology is becoming affordable & will soon be cheap. Schools are beginning to replace paper textbooks with CD Roms, Universities are going on-line with texts, the finance & insurance industries are introducing ‘minimum paper’ policies. Is major change is moving nearer?; There are clear clues to a future with a low need for printing papers. Is reduction of secretarial work a lead indicator? Are companies being held back by their IT departments? More computers = More paper More electronic storage = More paper More e-mail = More paper More Internet = More paper

Technological Influences The BCG Predictions – As true now as in 1999: 

A 1999 Boston Consulting Group study predicted that by 2003: Of the three office paper sectors considered in the study, cut-size, special repro and envelopes/forms/labels, only cut-size will grow significantly - others will shrink: A rise in e-mail will result in a significant loss in envelopes; Paper for forms will drop and there will be a significant shift away from pre-printed; The shift from offset printing, the rise in colour and demand for smaller product units will fundamentally alter the landscape of distribution, calling for strong retail/distribution skills, appropriate branding and knowing what the end-consumer wants. Direct substitution by on-line access will reduce demand of magazine paper by 6.4% when compared with the trend line - the biggest impact will be financial magazines; Paper for catalogues will be reduced by 12%; 9.5% of total 1996 paper consumption by books will be lost to electronic substitutes: Traditional reference books are already the biggest losers - encyclopaedias have been all but wiped out - and the study predicts technical, scientific, travel and education books will follow as electronic databases continue to expand; Entertainment-oriented books will be the least affected, with fiction least likely to go online. Technological Influences The BCG Predictions – As true now as in 1999 Recent data indicates that these BCG predictions are quite accurate

Technological Influences Paperless office?: 

Technological Influences Paperless office? The US market trend for Office Paper is similar to the Australian trend – a decline in office use, but continuing strong growth in home use. An underlying question is…Did the figures in this graph take into account a fall in the total number of office workers?...the lb/worker/yr figures are not without some unanswered questions.

Maybe things aren’t that bad … at least in office: 

Maybe things aren’t that bad … at least in office This graph, from The Age/SMH Employment Forecast, indicates that the fall-off in office paper demand we have seen is primarily due to a temporary levelling/fall-off in the number of office workers. This is now recovering.

Comments on 2003: 

Comments on 2003 Market Growth – P&W papers Western Europe +1.3% North America +0.1% Rest of World +3.7%

Industry Consolidation: 1990 - 2003: 

Industry Consolidation: 1990 - 2003 This chart highlights the dramatic development in industry consolidation, by comparing the Top 5 producers in 1990 and 2003. The size of leading companies has changed so much that the size of the Top 5 in 1990 would account for less than the Top 2 leading players today.

Trade Influences Globalisation & Integration: 

Trade Influences Globalisation & Integration The world fine paper industry is restructuring Larger groups continue acquiring eg Stora Enso; Similar aggregation has occurred in merchants; > 66% of European (& world) production have their own pulp within the group; Only just over 30% of pulp is market pulp Massive growth in Asia (mainly China) is still the wildcard This can facilitate: Decoupling of pulp & paper prices; Action to prevent price collapse; A pulp price squeeze on unintegrated companies to force closure or sale to large groups; Rationalisation of production with closure of less efficient assets and single product operation of remaining assets;

Trade Influences Regional Trade Trends: 

Trade Influences Regional Trade Trends There are wide differences in trade between different world regions. Significant developments are expected in trading patterns, especially for Japan and North America. Japanese paper companies now looking to establish world scale machines in China and close old, uncompetitive machines in Japan.

Trade Influences P&W - Nth. America vs W. Europe, 1990 - 2003: 

Trade Influences P&W - Nth. America vs W. Europe, 1990 - 2003 Capacity in N. America has been shutting down in both P&W and packaging Exports from Europe to USA have increased USA paper companies have poor profitability European mills have bigger, newer, better machines which are generally kept more up-to-date The value of paper to the customer is trending towards the same prices wherever - in Western Europe or in North America

Trade Influences P&W - Nth. America vs W. Europe, 1990 to 2003: 

Trade Influences P&W - Nth. America vs W. Europe, 1990 to 2003 Size is an emphasis for the Big European companies Europe is investing in maximising capacity of existing machines US is Closing out of date assets and NOT reinvesting Short term vs long term sharemarket and corporate focus Short Term Share Price vs Long Term Value Generation driver

Trade Influences Capacity Growth: 

Trade Influences Capacity Growth This chart compares annual paper machine capacity growth in the 1990’s with the forecast. In the coming years, the rate of capacity growth is expected to decelerate sharply, to just 1.0% pa. Growth in China is still very high, but there is a net reduction in capacity in USA, Japan and some other Western countries.

Capacity Increases are Slowing: 

Capacity Increases are Slowing The growth emphasis is on existing machines for quality improvements, grade substitution, efficiency & productivity

Demand is now growing faster than Capacity: 

Demand is now growing faster than Capacity For the coming three years, EMGE suggests that world P&W paper demand is likely to grow at a faster pace than capacity

Demand-Supply Balance Uncoated Woodfree: 

Demand-Supply Balance Uncoated Woodfree Market oversupply in uncoated woodfree is relatively minor and should be addressed within the next few years. To some degree, this is dependent on the greatly oversupplied coated woodfree sector tightening, as some CWF capacity is being diverted to UWF.

The Industry Dilemma Volume Growth without Revenue Growth: 

The Industry Dilemma Volume Growth without Revenue Growth Although the forecast trend for paper volumes shows a long-term positive growth of 3.1%, the monetary value of the global paper market is, at the best STAGNANT. The implications of this dynamic for business strategy in the industry are major. More Tonnes, Less Revenue !!!!

The Industry Dilemma Continuously Falling Prices: 

The Industry Dilemma Continuously Falling Prices Our industry has a 30 year history of prices falling by 2 - 3% pa in real terms

The Industry Dilemma Destroying Shareholder Value !: 

The Industry Dilemma Destroying Shareholder Value ! World Share Index Forest Products & Paper Since 1994, the industry has been destroying shareholder value ... ... But Forest Products hasn’t been much affected by recent world share price falls

The last 2 years seen very poor results: 

The last 2 years seen very poor results In 2002 and 2003, only UPM-Kymmene had acceptable operating margins in fine paper production in Europe. Over the last several years, the average industry return has only PEAKED at 6.5% and has generally been below 5%. The paper industry is the most capital intensive of all industries… without exception.

Pulp Price Cycles: 1982 - 2003: 

Pulp Price Cycles: 1982 - 2003 The chart shows the cyclical development of market pulp prices. The two-decade repeatability of market prices is quite amazing The forecast is for another pulp price cycle in 2004 - 2006, with a peak in 2005. Present across the board pulp price rises may be a precursor to the next cycle. The pulp price trendline is at about USD 500/ADt and falls at about USD 10 per year.

Paper Price Cycles: 

Paper Price Cycles Paper prices in this business cycle delayed their fall, but have now fallen in a similar way to previous cycles. Consolidation among the leading suppliers initially led to better capacity management and more proactive implementation of machine downtime in the face of slack orders.

EMGE World Price Forecast: 

EMGE World Price Forecast The EMGE pulp and paper price forecast is summarised in this table. Expectations are for low prices in 2003-04, but strongly increasing prices in 2005-06. Thereafter, in 2007, prices are expected to tumble Overall, paper price volatility is expected to play a key role in the forthcoming market cycle, especially during the period 2005 to 2007.

In Summary: 

In Summary