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According to Moody’s, the paper and forest products industry’s EBITDA will decrease by 10-12% over the next 12 months, with significantly higher energy, transport, material, and labour costs counteracting most of the growth offered by high demand. Russia’s invasion of Ukraine is expected to exacerbate pressure on costs and demand, especially for energy.

A decrease in earnings across regions

Moody’s follows the EBITDA (earnings before interest, taxes, depreciation, and amortization) of 41 paper and forest product companies globally. Moody’s predicts that these companies will experience a decrease of between 10 and 12% in EBITDA over the next 12 months, with companies in North America, Europe, and Latin America all likely to be affected.

In North America, the region accounting for over half of the companies rated by Moody’s, will see a slightly higher decline that the overall average – between 14 and 16% across the year-long outlook period.

Meanwhile, Latin American producers will see a much smaller decrease of about 4% over the next 12 months, according to Moody’s. Pulp prices are also predicted to be lower in the region.

Moody’s says that European producers, like Latin America’s figures, will see a 4% fall in EBITDA in the next year. Earnings from paper and forest products companies are expected to be offset by declines in commodity paper, market pulp, and wood products, contributing to the overall fall in earnings.

In Europe, Moody’s notes that paper and forest products companies l will benefit from stronger prices, but escalating costs will partially undermine earnings in this segment. Cost inflation could also drive down earnings for some producers, Moody’s adds.

Supply is where challenges are most evident

Moody’s warns that rising wood prices will likely cause additional problems, with supply challenges expected to persist across the supply chain.

The emergence of the Omicron COVID-19 variant in late 2021 caused disruptions in mills and converting facilities as employee sickness rates jumped and quarantine and social distancing rules were re-introduced or tightened, Moody’s explains. This was apparently most evident in more labour-intensive converting facilities.

The wider COVID-19 pandemic has contributed to longstanding and worldwide logistical disruptions. Staff shortages in ports and unloading facilities have been a major challenge, resulting in the backlog of ships, while freight routes underwent changes to accommodate COVID-19 response efforts, such as the global distribution of personal protective equipment (PPE), and the economic slowdown as the world entered lockdown.

Even as economies made an unexpected economic rebound after the initial outbreak of COIVD-19, challenges including a lack of shipping containers, trucking shortages, and freight delays and backlogs remain, generating tensions across multiple supply chains. While there was some hope that these backlogs could be cleared by the end of this year, the uncertainties introduced by China’s COVID-19 outbreak in the context of its Zero-COVID policy have led some analysts to warn of another supply chain crisis presenting in the coming months.

In addition, new rules in the EU will now require trucks to be returned to companies’ headquarters every eight weeks, while drivers are expected to return to their country of origin every four weeks. Moody’s suggests that this could further aggravate driver shortages in Western Europe and contribute to further delays for road deliveries. Therefore, according to the company, freight costs will remain elevated overall because of the accumulation of these supply chain challenges.

Last month, the 112-day strike at UPM’s paper mills in Finland came to an end as a settlement was reached between the union and the company. FINAT, an organisation representing the label industry, warned even before the resolution that supply chain disruptions linked to the strike would continue even if it was resolved earlier. Nonetheless, this could help to ease some of the labour and supply challenges facing the paper industry and its downstream partners, such as print and labelling companies.

Further volatility as the war in Ukraine continues

As Moody’s outlines, energy, chemical, freight and labour costs are expected to remain elevated for at least the first half of the year. Specifically, freight and energy costs reportedly represent around 20% of total cash costs for companies and, Moody’s claims, will be high over the next 12 months.

“The direct effects from the Russian invasion are relatively small, but the indirect implications are significant,” Moody’s adds. Following the invasion of Ukraine by Russia, energy prices – which were already elevated – have escalated further, which is likely to have a ripple effect on energy-intensive industries like the forest products segment.

Therefore, Moody’s expects that high energy costs will persist for the paper and forest products industry at large as the war in Ukraine continues.

The post Moody’s: Negative outlook for the forest products industry in the next 12 months appeared first on Timber Industry News.