Forestry & Paper

# Executive Summary * The Forestry & Paper industry is navigating a severe downturn, driven by a global economic slowdown that has broadly suppressed demand for packaging, pulp, and building materials. * Persistently high interest rates are constraining new construction, while input cost inflation continues to pressure margins across the sector. * Significant regulatory changes, including the EU's Deforestation Regulation and ongoing trade tariffs, are forcing costly supply chain adjustments and altering competitive dynamics. * In response to market pressures, companies are undergoing significant strategic shifts, including large-scale consolidation (International Paper) and portfolio divestitures to focus on core, less cyclical businesses (Greif). * The primary long-term growth opportunity lies in the shift to sustainable and bio-based products, with leaders investing heavily in innovative materials to meet consumer and regulatory demand. * Financial performance is bifurcated, with structurally advantaged cost leaders (Suzano S.A.) showing resilience while commodity-exposed players (Mercer International Inc.) face significant losses. ## Key Trends & Outlook The Forestry & Paper industry is currently defined by a challenging global economic slowdown, which has led to soft demand and significant pricing pressure across nearly all product segments. This downturn is reflected in widespread revenue declines, with companies like UFP Industries, Inc. citing "softness in residential construction" and International Paper noting a "challenging demand environment" in North America and EMEA. This directly impacts valuations by compressing revenue and eroding operating margins, forcing companies to focus on aggressive cost-cutting measures. The impact is broad, affecting industrial packaging, pulp, and lumber, with few segments immune to the pullback in consumer and industrial spending. The demand weakness is exacerbated by macroeconomic headwinds, as elevated interest rates directly dampen housing starts and construction activity. Simultaneously, producers face persistent margin erosion from high energy, chemical, and logistics costs. Adding to the complexity, new environmental regulations like the EU Deforestation Regulation (EUDR) and trade tariffs on products like Canadian lumber are imposing immediate compliance costs and reshaping global trade flows. The most significant long-term opportunity is the strategic shift toward sustainable and bio-based products, where innovation in areas like compostable packaging (Clearwater Paper Corporation) and biomaterials (Rayonier Advanced Materials Inc.) can unlock new, high-margin revenue streams. The primary near-term risk remains a prolonged economic downturn, which would continue to suppress demand and pricing power, potentially leading to further capacity rationalization and financial distress for higher-cost producers. ## Competitive Landscape The competitive landscape in the Forestry & Paper industry is currently shaped by ongoing consolidation and high concentration in some segments, such as the Cellulose Specialties market where three firms collectively control approximately 80% of the supply. Companies are employing distinct strategic approaches to navigate market pressures and secure long-term growth. Some of the largest players, like International Paper, compete primarily on global scale and integration. Their core strategy is to be a global leader in core segments, such as packaging, through massive scale, an integrated supply chain, and a comprehensive product portfolio that serves large multinational customers. This approach leverages economies of scale, significant purchasing power, and the ability to offer one-stop solutions to global clients, as exemplified by International Paper's $9.9 billion acquisition of DS Smith, explicitly aimed at creating a global leader in sustainable packaging across North America and EMEA. A different approach is taken by firms such as Suzano S.A., which leverage a structural cost advantage. Their core strategy is to be the lowest-cost producer of a commodity product, like market pulp, by utilizing unique, proprietary natural resources and highly efficient, vertically integrated operations. This enables them to remain profitable even at the bottom of the price cycle and generate strong cash flow. Suzano S.A.'s competitive moat is built on vast, highly productive eucalyptus plantations in Brazil, which provide a cheap and efficient fiber source, enabling it to achieve a pulp EBITDA margin of 49% even in a challenging market. Finally, other companies seek to differentiate through proprietary technology and niche products. Their core strategy is to avoid direct commodity competition by developing proprietary technology and value-added products that command premium pricing and serve specialized, higher-growth end markets. This leads to higher and more stable margins and insulation from the worst of commodity cycles. UFP Industries, Inc. exemplifies this by focusing on increasing its mix of value-added sales, highlighted by its proprietary Surestone mineral-based composite decking, a high-margin product where it is investing $77 million to double capacity and gain market share against traditional wood. The key competitive battleground is shifting towards sustainability and innovation as companies seek to escape commodity pressures and meet evolving consumer and regulatory demands. ## Financial Performance Revenue growth in the Forestry & Paper industry currently exhibits a sharp divergence, almost entirely dependent on M&A activity versus organic performance. The industry's organic trend is negative, driven by the global economic slowdown and soft demand. This wide range is not a reflection of differing operational success but rather of strategic actions. The revenue divergence is starkly illustrated by International Paper's +27.7% YoY growth in Q1-25, which was driven entirely by its acquisition of DS Smith, contrasted with the organic performance of companies like UFP Industries, Inc., which saw a -5.4% YoY decline in Q3-25 due to softness in its end markets. {{chart_0}} Profitability patterns clearly separate the industry's leaders and laggards. The divergence in profitability is a direct result of differing business models meeting macroeconomic headwinds. Companies with structural cost advantages can weather the storm of weak pricing and high input costs, while those without are seeing profitability evaporate. Suzano S.A.'s 49% pulp EBITDA margin in Q1-25 demonstrates how a low-cost structure can protect profitability, while Mercer International Inc.'s negative $(20.9)M operating EBITDA in Q2-25 highlights the acute pressure on producers without such a moat. {{chart_1}} Capital allocation has become defensive and highly strategic. Faced with a cyclical downturn, companies are prioritizing balance sheet strength and focusing capital on their most defensible businesses. Greif, Inc. exemplifies this trend, using over $2.2 billion from the sale of its containerboard business and timberlands to aggressively pay down debt. In contrast, a company under more severe pressure, Mercer International Inc., was forced to suspend its dividend in July 2025 to preserve cash. {{chart_2}} Overall, balance sheets are mixed, but many large players remain financially flexible. UFP Industries, Inc., for example, maintains a robust position with approximately $2.3 billion in total liquidity as of September 27, 2025, allowing it to continue investing and returning cash to shareholders even during a downturn.