Improving cost structures

Margins can only be improved by increasing sales prices, or reducing costs. As prices in real terms for many of the industry’s staple products have eroded over many years, the focus has long been on reducing costs. Indeed, in our recent report CEO Perspectives, Viewpoints of CEOs in the forest, paper & packaging industry 2010 virtually all CEOs report that their companies have been actively cutting costs. These measures do not guarantee increased margins, if they do not offset increases in the cost of raw materials or in other key inputs such as energy and transportation. The industry tendency to pass cost savings through to customers rather than building returns for its investors will need to change.

The volatility of energy costs is of particular concern, and potentially affected more by government action than by market forces. Many executives attempt to hedge against this volatility by increasing energy efficiency and their own capacity to generate power internally.

Transport costs represent another significant line item, largely linked to oil price fluctuations. For some, locked into high transport costs, it may mean a shift in production locations.

Improving cost structures means reducing the cost of inputs and processes through savings and efficiencies and not competing away those gains by chasing sales prices down. It means a change in mindset away from volume and capacity utilisation, to focus on margin. It therefore means the closure of both unprofitable capacity and even currently profitable capacity if that enhances the overall return on the remaining assets. In short, a radical overhaul of business models may be necessary to achieve real and sustained margin improvement from existing product platforms