By Tarmo Virki
HELSINKI (Reuters) - Most paper makers' credit ratings had dropped below investment grade as they struggled with overcapacity, and slowing economies had put further pressure on ratings, Moody's forestry analyst said.
Moody's sector analyst Martin Kohlhase told Reuters Paper Summit on Wednesday this could continue for the next 12 to 24 months.
"There is still negative rating pressure -- this is coming from structural issues and increasingly from cyclical issues," Kohlhase said.
"Most likely it will be more of a struggle," he said, adding there were no positive factors in sight to help paper firms.
"When we look at the variables that are driving the sector, we cannot really come up with any positive driver on its own that could have an overall positive impact on the financial performance of the sector," Kohlhase said.
Oversupply has held back hopes of raising paper prices for more than five years, and increasing costs of wood and energy have eaten into the firms' already low margins.
Now the European and U.S. vendors are facing rapidly worsening economies in their home markets.
"We are probably about to enter a period of cyclical weakness, which comes on top of the structural issues. That would mean downside or negative pressure for the industry if we look at the next 12 to 24 months," Kohlhase said.
Paper firms have talked about the need for consolidation -- which could enable them to cut excessive capacity -- but Kohlhase said tapping equity or debt markets to finance acquisitions would be difficult due to the current market situation and the state of the sector.
"Given the track record of being free cash flow negative in the instance of some of the players, and the cash flow being under pressure, and given the negative returns on capital employed or low returns on capital employed, it would probably be challenging to access equity and debt markets," he said.
He noted there would still be room for joint ventures or asset swaps which would have little impact on firms' capital structure.
MORE CLOSURES AHEAD
"Some market players are currently taking action to align the supply to the demand," Kohlhase said, but noted there was still "moderate overcapacity" in the market.
Some of this is likely to happen in Nordic countries as Kohlhase put the likelihood of Russia sharply raising lumber export duties from 2009 at more than 50 percent, which would roughly double lumber prices for Finnish mills.
"We attach the likelihood in excess of 50 percent that the additional increase in the Russian export tax is coming in January 2009," he said. Continued...
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