SpecialReport
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SpecialReport
SpecialReport Authors: Pöyry Management Consulting, Wood Product Practice: Cormac O’Carroll, Head of Global Wood Product Practice, [email protected] Ania Krolak, Consultant, [email protected] Tomi Hartikainen, Senior Consultant, [email protected] How to Survive a Double Dip Recession in Wood-Based Panels? Tomi Hartikainen, Senior Consultant, Global Wood Product Practice, Poyry Management Consulting A double dip recession seems almost inevitable and its effects will be felt throughout Europe’s wood-based panels industry. Furniture manufacturers and their suppliers are currently working out the best strategies for avoiding the crunch. Demand is likely to slow markedly and companies will need to take action to mitigate the impact. By 2016, Pöyry Management Consulting expects to see an industry which will look very different with clear winners and losers emerging in the restructuring process. Unfortunately, the feared double-dip recession in the Eurozone is very likely to become a reality. Its impact on the demand for wood-based panels and consequently, surfacing materials will be significant but how big the decline will be is still unclear. Wood-based panel demand correlates strongly with construction and furniture output which are in turn driven by the GDP growth rate. Based on the latest IMF (April 2012) and OECD (May 2012) updates, the majority of wood panel producers are likely to lose volume in 2012. Pöyry has developed a number of scenarios for the future of the wood-based panels and surfacing materials sectors. The most likely scenario sees Western European panel demand declining by 2% in 2012. Eastern European growth will remain positive albeit at a lower rate than foreseen even a year ago. How Pöyry Management Consulting sees the world in 2016: Business critical questions for the woodbased value chains are: • • • Will the demand grow? When will the industry regain profitability? What are the best strategies to weather hard times? One of Pöyry’s Thought Leadership streams analyses the profitability of the wood panel value chain and addresses the industry need to find better ways of running their businesses during difficult times. july / aug 2012 21 SpecialReport Table 1 Major industry deals, 2011 Acquirer Target Deal Deal value Munksjö, Sweden Arjowiggins Decor, France and Germany decor, abrasives, thin and fine arts papers EUR 95 m Yildiz Entegre, Turkey Masstas Mudurnu, Turkey particleboard and LPM capacity not disclosed Schattdecor, Germany Tura, Russia furniture impregnation not disclosed Egger, Austria Gagarinskiy Fanerniy Zavod, Russia particleboard and LPM capacity not disclosed Egger, Austria Roma Plastik, Romania edge banding not disclosed Kajo Neukirchen, Germany Coveright Surfaces, Germany impregnation not disclosed Source: Pöyry (based on company press releases) Dr Cormac O’Carroll, Head of Global Wood Product Practice, Poyry Management Consulting Demand development will play out differently depending on surfacing material and geography. As the Eastern European wood panel market is forecast to continue to perform better than its Western European counterpart, growing on average by 7%/a during 2012-2016, compared to a more modest 1.5% in Western Europe, the surfacing market will be strongly correlated with this trend. The fastest growing surfacing material continues to be LPM which is forecast to grow at 3%/a CAGR until 2016 in Western Europe and at 6%/a in Eastern Europe, increasing its dominant market share among surfacing materials. The laminates market in Western Europe will suffer most, declining by 1%/a over the period. Figure 1 shows the Pöyry medium term outlook for various panel surfacing materials. Industry profitability and the business cycle The recession has impacted strongly on EBIT development (Figure 2), but with the 22 july / aug 2012 exception of impregnators, capital turnover has remained reasonably stable which reflects significant capacity closures and divestments. Capacity utilisation is a key profitability driver across the value chain. The road to recovery in 2010 followed different pathways depending on the sector. Position in the value chain continues to play an important role in determining profitability and resilience to market downturns. The recovery for panel producers has been less robust compared to, for example, decor printers whose business is less capital intensive and asset utilisation less critical. Pöyry believes the probability is increasing that the macro-economic environment will continue to deteriorate throughout 2012. Dynamic scenario planning is the most effective way for companies to capture this uncertainty in their strategic planning. Pöyry’s scenario planning model forecasts demand and pricing year on year based on the latest leading economic indicators. Three ways to survive “a double dip” Industry profitability is determined by a number of factors. Some can be influenced by industry players directly, others only partially. An example of the latter is industry consolidation. A fragmented industry tends to be inherently less profitable. The wood panel industry remains fragmented while the decorative surface materials sector is relatively more consolidated but neither can be considered as having an optimum industry structure. Increased M&A activity drove some industry consolidation in 2011 but this followed a period of relative inactivity as industry players and financial sponsors adopted an attitude of “wait and see” due to the lack of investment capital and a very difficult financing environment. Although M&A initiated by an industry leader can help drive consolidation it is an uncertain and risky strategy to follow. Consolidation can also be achieved by capacity rationalisation which accelerated in SpecialReport 2010 and continued into 2011. As a result, some wood panel production capacity was closed down in Western Europe, particularly in Germany (e.g. Pfleiderer shut three sites with a combined capacity of 800,000 m3 and Kronospan’s closure of Bischweier resulted in an additional 800,000 m3 taken off the market). The second largest capacity closures occurred in Spain but some countries have been slow to recognise the need for further rationalisation. Although the correlation between capacity reduction and profitability is clear, it is not entirely within the control of an individual industry player. Therefore, the industry as a whole needs to behave “rationally” if this strategy is to result in a sustainable improvement of industry profitability. About Pöyry Management Consulting and Pöyry Group Pöyry Management Consulting is part of the Pöyry Group and active in strategy and operations consulting to the wood products sector globally. The company is one of the most authoritative sources of knowledge and thought leadership in the forest industry value chain. Pöyry is a global consulting and engineering company dedicated to balanced sustainability and responsible business. With quality and integrity at our core, Pöyry delivers best-in-class management consulting, total solutions, and design and supervision. Pöyry’s in-depth expertise extends to the fields of energy, industry, urban & mobility and water & environment. Pöyry has 7,000 experts and a local office network in over 50 countries. Pöyry’s net sales in 2011 were EUR 796 million and the company’s shares are quoted on NASDAQ OMX Helsinki (Pöyry PLC: POY1V). For more information about us, please visit www.poyry.com. There are, fortunately, some strategies which companies can adopt which can have a direct impact on their profitability and have proven to be both defendable and resilient; • Diversification Diversification requires both business foresight as well as courage, especially when the market environment is tough and the temptation is to just “batten down the hatches”. We have seen new frontiers being developed with bold decisions to diversify into emerging markets as well as to adopt new concepts and technologies (such as digital printing). In Pöyry’s view, the key success factors for diversification are synergies with existing operations, organisational readiness and alignment, and product portfolio management. • Innovation A good example of innovation is Medite’s partnership with Accsys Technologies to develop and commercialise the first ever Medite Tricoya Extreme Durable MDF. This could potentially define the next generation of panel products and compete with traditional materials used for exterior and interior wet applications previously inaccessible to MDF. However, innovation for innovation’s sake will not take you far without a detailed and robust market entry and product commercialisation strategy. • Cost optimisation No matter how lean a business operation, there is always scope for improvement. Typically, manufacturing and maintenance operations are the two lowest hanging fruit where cost reductions can be achieved. Operations Excellence programmes run by Pöyry identify an average saving potential of 5-10% of the company’s turnover. These savings are not just one-off but sustainable year-on-year cost reductions achieved through optimisation where no capital investment is required. The double-dip recession is undoubtedly going to have a negative impact on the profitability of wood panel and decorative surface producers but there are nevertheless strategies that companies can adopt to maintain position should the more pessimistic scenarios prevail. july / aug 2012 23