Market fundaments for pulp producers are expected to be weak in 2013, according to a new report by Fitch Ratings. According to Joe Bormann, Managing Director and lead author of the report, ‘Pulp prices should remain under pressure due to growth of global market pulp capacity by about 8% over a 12 months period, while demand growth should remain around 2%. For pulp producers in Latin America, free cash flow should show improvements vis-a-vis 2012, but remain negative. Capital expenses should begin to taper off after reaching high levels during 2012. Acquisitions should also decline, as companies continue to seek to improve the strength of their balance sheets.’
In contrast to the pulp market, the underlying fundamentals are favorable for Latin America paper and forest products companies. Demand should be strong in the region for boards, lumber, tissue, and paper products due to projected GDP growth of 3.8% in Latin America. Exporters of boards, lumber and remanufactured wood products should benefit from a gradually improving U.S. housing market.
Most downside risks associated with the weak pulp market and negative free cash flow have been captured in the existing ratings through various negative rating actions in 2012. Some of the companies have substantial operations in Argentina and Venezuela, which remain susceptible to increased political intervention and economic turmoil. An economic crisis in either of these countries could lead to additional negative rating actions, especially if it hinders growth in the region.
Positive rating actions are unlikely to occur during 2013 unless a better pricing environment develops, which would allow the companies to generate enough free cash flow from operations to materially lower absolute debt levels. Catalysts for better prices could be: the closure of several high cost pulp mills in the Northern Hemisphere; an improved pricing environment in China; or a turnaround in demand for paper in Europe and the U.S.
Applicable Criteria and Related Research: 2013 Outlook: Latin America Pulp, Paper and Forest Products Companies