International Paper Company (IP)

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[edit] Corporate Overview

[edit] Business segments

[edit] Printing paper

[edit] Industrial packaging

[edit] Consumer packaging

[edit] Distribution

[edit] Forest resources

[edit] Specialty products and other

[edit] Trends and Forces

Timber and most timber products are a commodity good, which means that trends usually impact the industry as a whole, not affecting just one company. As a result, changes in the timber market and fluctuating demand for wood products are the largest forces that can impact International Paper's profitability. The way in which International Paper deals with production is very important to its success among its competitors.

For details on the timber market, see timber prices.

[edit] Timber market cycle

The timber market is influenced by the general business cycle and the health of other markets that demand timber. Although an enormous variety of industries use wood-derived products in some form, some external factors that influence demand include:

• The housing market - The largest end market for timber products is the construction market, particularly the residential construction market. An average new home built in the U.S. contains over 14,000 board feet of lumber. As such, conditions in the housing market can have a significant impact on lumber-grade timber prices. Increases in residential construction would increase demand and prices for lumber, while housing slumps can put downward pressures on prices as demand declines.

• Interest rates - Rising interest rates can decrease consumer spending, especially in the housing market. As interest rates rise and it becomes more expensive to purchase a home, residential construction will likely slow, decreasing demand for lumber. Similarly, decreased interest rates would increase the demand for lumber.

• The publishing industry - A large amount of paper demand stems from the publishing industry - books, magazines, newspapers, etc. With the rising popularity of digital media, the publishing industry is facing increasing competition. Many newspapers are considering going digital because of declining subscriptions and considerable loss of advertisements to internet sources.

However, the nature of timber production offers companies in the industry some unique advantages to weather fluctuations in demand. Since trees increase in value over time, companies can choose to harvest more during periods of high demand. By reducing production with low demand, companies reduce costs while their investments continue to increase in value, independent of economic influences.

[edit] Chinese overcapacity

Declining demand doesn't necessarily lead to lower prices. Timber companies can somewhat offset lower demand by reducing production capacity, thereby tightening the supply of timber goods as well. Due to the organic nature of its products, the timber industry has a particular incentive to cut production and wait out periods of low demand. Instead of harvesting more trees and producing more end products to compensate for lower prices, timber companies can reduce output and wait for market conditions to improve. By the time demand for timber products increases again, the companies' timberlands will have grown in both size and value. Though it requires patience and a belief that the timber market will rebound, many companies take this approach, as it maximizes per-tree profitability.

Chinese timber companies, however, have not scaled back production in times of low demand. They have instead increased production capacity, building more plants and mills despite declining global demand. The Chinese demand for timber goods, particularly paper products, is currently stronger than in the global market, and much of the extra production is consumed domestically. In spite of this, the fact that China is importing less paper from other countries exacerbates the already-decreasing demand facing U.S. timber companies. Increased Chinese production capacity can put downward pressure on timber and paper prices around the world.

[edit] Natural disasters

Timber prices can be significantly impacted by natural disasters. Domestically, timber-producing regions are located in several parts of the country, exposing them to various natural disasters, including forest fires in the West and hurricanes in the East and Southeast. The risk of damaging insect infestations can also pose a substantial threat to timber companies across North America. In the case of hurricanes and wildfires, demand for timber is likely to increase as well because of the need to replace or repair damaged property, pushing timber prices even higher.

[edit] Environmental legislation

Environmental conservation groups often criticize the timber industry, claiming that its logging practices are harmful to U.S. forests. These groups lobby for increased legislation governing the actions of timber companies and protecting certain areas of forest lands. Congress has responded, and there are several federally protected forests throughout the country. The timber industry is always at risk of increased governmental regulation, though there have been few instances of this happening in recent years. A Democratic victory in the 2008 presidential election could spur a rise in the number of bills aimed at conserving forests. Legislation such as this would likely decrease the size of commercially harvestable timberlands and drive timber prices upward.

[edit] Cellulosic ethanol

Ethanol is being touted as the new alternative to oil and gas. Traditionally, ethanol has been produced from corn through a rather inefficient refining process. Cellulosic ethanol, however, is a new form of ethanol that can be produced from a variety of plant products, including wood. The entry of cellulosic ethanol onto the renewable energy market creates the possibility of a new revenue source for International Paper. In the past, wood chips and sawdust from timber production were considered to be waste materials and discarded. If cellulosic ethanol were to popularize, International Paper would be able to sell its wood waste to ethanol refineries and monetize what was previously waste. The demand for cellulosic ethanol is being driven by a number of trends, including rising oil and gas prices and public concern over environmental degradation.

[edit] Electronic applications displacing paper

The paper a timber industry has faced the pressure of a shrinking market as an increasing amount of transactions and records are shifting to a digital format. This trend has a direct negative impact on International Paper's paper business, which brought in $2.47 billion in revenue in 2006. In addition, the company's timber market that supplies raw material to paper mills will be affected.

[edit] Comparison to Competitors

[edit] References