1 / 101

Forest Products Industry

Forest Products Industry. Chris Cook Insoo Park Elizabeth Juwono Rachel Zhu Evan Vahlas. Agenda. Industry Analysis Risks Faced Weyerhaeuser Company Domtar Inc. Industry Analysis. Forest Products Industry

cleo
Download Presentation

Forest Products Industry

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Forest Products Industry Chris Cook Insoo Park Elizabeth Juwono Rachel Zhu Evan Vahlas

  2. Agenda • Industry Analysis • Risks Faced • Weyerhaeuser Company • Domtar Inc.

  3. Industry Analysis • Forest Products Industry • Produces primary products valued at US$850 billion/year (PriceWaterhouseCoopers, 2003) • Global reach • Mature, capital intensive and cyclical industry • Highly competitive • Comprised of thousands of small and large enterprises

  4. Industry Trends • Oversupply of forest products in every industry • Due to stagnant economic growth in key countries such as the United States (largest consumer of forest products) • Decreasing sales across most companies • Emerging market influencers: • China • Russia

  5. Top Industry Performers Source: PWC, 2003

  6. Products World Wood Production (by volume) 3% Wood-Based Panels • Lumber & Wood Products • Roundwood Products • Industrial Roundwood • Fuelwood • Mechanical Wood Products • Sawnwood • Wood based panels • Global consumption of wood products: 767 million m3 (ICFPA, 2002) Sawnwood 36% Fuelwood 33% 28% Industrial Roundwood

  7. Products World Pulp & Paper Production (by weight) • Pulp & Paper Products • Wood pulp • Paper • Paperboard • Global consumption of paper products: 323 million tons (ICFPA, 2000) • Global consumption of wood pulp: 150 million tons (ICFPA,2000) • Substitutes: steel, aluminum, plastics Wood Pulp 36% Paper & Paperboard 64%

  8. Raw Material Evolution Roundwood Natural Forest or Forest Plantations Sale of whole unprocessed logs Wood Chips Mechanical Wood Products Paper Pulp

  9. World Consumption of Forest Products Source: XI World Forestry Congress, 1997

  10. Sales Growth • Demand and sales growth of lumber & wood products are closely correlated with construction, primarily residential construction (ICFPA, 2000) • Demand and sales growth of pulp and paper products are closely correlated with overall economic growth (ICFPA, 2000) • Sharpest growth increases across all product lines will be seen in developing countries (ICFPA, 2000)

  11. International Trade • Approximately 35% of forest and paper products are traded internationally (ICFPA, 2000) • Canada is the world’s leading exporter • US$43 billion in wood, pulp & paper per year (FPAC, 2003)

  12. Revenue Structure • Major sources of revenue: • Raw materials (logs, chips, timber) • Manufactured forest products • Interest income • Proceeds from sale of property & equipment • Proceeds from sale of timberlands

  13. Interest Expense: 4-5% of total sales revenue Major expenses compose 90-95% of total sales revenue Cost Structure

  14. Firm Strategy for Future Growth • Problem: Overcapacity • Lumber-mill capacity has increased at a rate of 2.25 times that of demand (Weyerhaeuser, 2002) • Future firm objectives • Close inefficient facilities and higher-cost producers • Streamline operations • Decrease operating costs • Optimize manpower utilization • Increase operating efficiencies • More consistent production

  15. Regulatory Environment • Sustainable Forest Policy • Conservation of biological diversity • Maintenance of the productive capacity of ecosystems • Maintenance of forest ecosystem health and vitality • International trade tariffs • Paper tariffs: Range from 0-2% • Wood tariffs: Range from 0-22%

  16. Regulatory Environment • Country-specific environmental regulations • Supported by national forest products associations • International Council of Forest and Paper Associations • Committed to the principles of sustainability • 39 member countries • Over 75% of the world’s paper producers • Over 50% of the world’s wood producers

  17. Risk Management

  18. Risk Management Environment • Types of risks faced • How they are measured • How they are managed • Conditions promoting active risk management • Potential hazards in active risk management

  19. Major Risks: General Business • Commodity Risk (Price Risk) • Changes in prices of the products of the company • Demands for forest products are cyclical • Pulp and paper industries are notorious for price volatility

  20. Major Risks: General Business • Commodity Risk (Supply Risk) • Adequate and timely supplies of raw material are critical • Especially wood, energy and chemicals • Dependence on a few key suppliers is risky, but often necessary • Constrained by availability, locality, price, quality, etc.

  21. Measuring Commodity Risk • Measured by sensitivity analysis

  22. Techniques & Products to Manage Commodity Risk • Forward Contracts • Commodity Futures • Commodity Swaps • Natural Hedging • Product Diversification • Efficient Cost Management • Vertical Integration

  23. Major Risks: General Business • Project Risk • Risk of investing in specific projects, ventures or companies • Can depend on many factors • Demand conditions • Poor management • Local political/economic environment • Measured by expected cash flow analysis and managed with efficient resource allocation

  24. Major Risks: Financial • Interest Risk • The risk that market borrowing rates may rise • Forest industry typically finances incremental capital investment with operating cash flow • Operating cash flow is volatile • Causes higher capital costs and uneven capital investment • Duration analysis can measure the exposure

  25. Techniques & Products to Manage Interest Risk • Interest rate futures and forward rate agreements • Interest rate swaps • Option products

  26. Major Risks • Foreign Exchange Risk • Assets and liabilities in foreign currency • Also known as balance sheet risk • Sales and purchases in foreign currency • Also known as transaction risk • Especially relevant to international firms • Global production facilities and customers • Large mismatch between revenue and cost

  27. Foreign Exchange Risk • Sensitivity analysis can show the extent of exposure • 1 cent gain in CDN $  Loss of $528 million in Revenue for Canadian Forest Industry • Equivalent to 1% Decrease in Total Industry Sales (Source: PWC, 2002)

  28. Techniques & Products to Manage Foreign Exchange Risk • Futures Hedge • Currency Options • Others • Cross-Currency Hedging • Invoice Currency Hedging • Currency Diversification • Natural Hedging (Exposure Netting) • Plant locations • Borrowing from foreign sources

  29. Major Risks: Financial • Credit Risk • Possibility of customers defaulting on accounts payable • A company typically set internal credit ratings of its customers to measure exposure • Funding Risk/Liquidity Risk • Difficulty of obtaining finance for operations at a given point of time • Expected cash flow analysis and comparison with competitors can measure future financing needs • Forestry companies have large capital expenditures

  30. Techniques & Products to Manage Credit & Funding Risks • Thorough Analysis of Customers • Letters of credit • Bank guarantees • Credit Insurance • Coordinating Debt Maturity • Requirements for minimum cash reserves

  31. Major Risks: Others • Operational Risk • Damages and Liabilities • Transportation • Physical Delivery of Goods • Political & Legal Risk • National political stability • Relationship with local government • Tariffs and trade feuds • Environmental regulations

  32. Available Techniques & Products • Insurance • General Liability • Shipping • Environmental • Strong internal controls over operation • Scenario-building • Lobbying

  33. Factors Promoting Active Risk Management • Many of the major risks faced can be hedged • Interest, Foreign Exchange and Commodity • Many leading companies are large and/or multinational • Large volumes of revenue and costs at stake • Stable cash flow desired by shareholders • Cash flow and balance sheet items denominated in different currencies

  34. Factors Promoting Active Risk Management • Most forestry companies are not diversified • Wood, pulp and paper products are mostly homogenous and thus price sensitive • Industry is heavily influenced by business cycles  Input & outputprices are volatile

  35. Potential Hazards from Risk Management Activities • High costs of purchasing derivative products • Takes away from the bottom line • Can cause liquidity problems • Potential Losses from Hedging • Inability to capitalize on favourable risks • Competitive disadvantage • Random Walk Nature of Risk? • Risks tend to even out in long-run • No long run benefits if risks are affordable in short run

  36. Weyerhaeuser Company “becoming the best forest products company in the world and a global leader among all industries…”

  37. Company Profile • Incorporated in Washington in 1900 • Engaged in the growing timber; the manufacture, distribution and sale of forest products; and real estate • Corporate strategy: vertical integration • Worldwide company serving domestic and international market • Has access to 42.7M acres of forestland

  38. Financial Situation • Increased net sales and revenues by 27% • Increased total asset by $1B • Increased operating income by 40% • Decreased net earning by 32% and earning per share from $1.61 to $1.09 • Increased 3 times as much as interest expenses compared with 2001

  39. Revenue Source

  40. Cost structure

  41. Interest Expenses

  42. Major Risks faced • Economic and Market risk • Political risk • Financial risk • Increasing debt (interest) risk Interest-bearing debt  by $7.6M , debt to capital ratio  from 37.7% to 55.6% • Commodity price risk • Foreign exchange risk

  43. Foreign exchange transaction (gains) losses

  44. Derivatives used to: • Achieve desired mix of fixed versus floating-rate debt • hedge commitments for short/long positions in commodities the company purchases/produces • manage exposure to forex rate changes

  45. Derivative Instruments Used • Forward contracts • Commodity swaps (notional value of $54M) • Commodity futures • Interest swap (notional value of $50M) • Investment swap (notional value of $160M, exposure size $7M)

  46. Designated FX contracts Commodity contracts Non-Designated Variable rate swap agreement Variable-to-fixed interest rate swap agreement Lumber and other commodity futures Designated and non-designated hedges for managing financial risks

More Related