Sean Steuart, managing director at TD Cowen, provided an economic outlook for the forestry sector earlier this week at the Ontario Forest Industries Association (OFIA) Convention in Toronto, to help the sector to navigate “emerging market trends and financial conditions.”
While Steuart’s background is largely in finance, commerce and business, he also previously worked for pulp and paper mills in Canada and the U.S., including the one now owned by First Quality in Dryden, Ont.
“In softwood market pulp, compromised economics for high-cost producers necessitate further capacity closures,” he said at the convention on Apr. 29. “Softwood mill inventories of 47 days of supply remain excessive.”
He said contractions have been led by graphic paper, including newsprint, printing and writing, where “structural demand had eroded” and domestic capacity has dropped 73%.
“Lumber and pulp supply reductions have accelerated since 2018,” he added. “Over the past eight years, Canadian softwood market pulp capacity has declined by 30% and softwood lumber by 18%, led by cuts in British Columbia.”
While Steuart explained European forest products companies are outperforming their North American counterparts in equity performance and “we’re not optimistic for a resolution to the long-running softwood lumber trade dispute with the U.S. in the near to mid-term, as they are not motivated to negotiate,” he also provided some optimism.
“This commodities sector gets a lot of bad press and some of it is warranted, but the worst is behind us for forest products,” he said. “In packaging, we’ve seen a sea change in North American containerboard capacity. Lumber prices are back above cash costs in the U.S. and near break-even for average Canadian sawmills. The 10-year average return on capital employed (ROCE) is 13% for North American wood products and 14% for tissue.”
Looking ahead–and again to Europe–Steuart pointed to opportunities in the growing bioeconomy.
“European pulp and paper companies develop growth in biomaterials and add margin stability,” he said. “Biochemicals, including additives for adhesives, coatings and personal care items, offer resilient margins during weak market cycles for pulp, paper and packaging.”
