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Forest Products Industry Spending in 2011 Geared to Energy Investments

The outlook for the North American Pulp, Paper & Wood Industry for 2011 reads much like the forecasts of recent years and contains many of the same elements that have led to a continuous flat-line trend in capital spending. Demand for most products remains fragile, pricing structures are weak, and spiraling operating costs, particularly toward raw materials and energy, continue to weaken profitability. As a result, the spending forecast for many companies will continue to decline.

Despite shrinking capital budgets, the spending outlook for the next 12 months forecasts several billion dollars in capital and maintenance expenditures. Most of the in-plant expenditures are geared toward energy investments: Companies are investing in increasing electrical generation, improving operating efficiencies by adding new units and rebuilding boilers.

While energy concerns account for a large number of planned projects, some companies are actually investing in capacity expansions. The towel and tissue segment will see the addition of several new machines and a handful of new mills this year. Investments in containerboard mills are on the rise as a direct result of improvements in the pace of the economic recovery. Although market pulp prices have held up, manufacturers do not plan on making major investments toward additional capacity.

Environmental mandates have plagued the industry and resulted in plant closings and investments that do little to improve profits. The EPA's Boiler MACT has the potential to drastically cut into capital expenditures and could ultimately lead to plant closings. Early estimates place the impact of the Boiler MACT on pulp and paper mills at more than $400 million.

Industry consolidation has been a mark of past years, but there are low expectations for large mergers and acquisitions for 2011. Beyond the recent announcement of Rock-Tenn Company (NYSE:RKT) (Norcross, Georgia) purchasing Smurfit-Stone Container Corporation (NYSE:SSCC) (Chicago, Illinois) for $3.5 billion in cash and stock, there are no transactions of scale on the radar for the rest of the year.

According to Randy Godet, VP of Research for the Pulp & Paper Industry, "Manufacturers of pulp and paper products are optimistic about capital expenditures for 2011 and expect to see many of their plans come to fruition. In Canada, mills have until March 2012 to complete energy and environmental improvements as part of a $1 billion government-sponsored program, and in the U.S. five new tissue machines represent nearly $1.5 billion in new investments." Click here to hear this and other "Navigating the Currents of Change" webcasts.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.