CHH feeling pinch of global slowdown

By PAULA OLIVER

Declining pulp markets and concerns over the future of the United States economy are likely to prevent Carter Holt Harvey from making any immediate improvement on disappointing third-quarter result, analysts say.

The timber, pulp and paper giant this week revealed a $42 million profit for the quarter to December 31 - well down on previous quarters and below analysts' expectations.

The result took on a particularly weak look because it followed two record results, an $86 million profit in the September quarter and a $90 million profit to June.

Much of the blame was laid on a boom-and-bust Australasian construction market that peaked before the introduction of GST across the Tasman in July and fell sharply at the end of the Olympics.

While chief executive Chris Liddell said he hoped the next quarter would be better, he painted a pessimistic outlook for the company, labelling its markets as difficult and pointing to the slowing US economy as another potential hurdle.

Analysts the Business Herald spoke to yesterday admitted being surprised by Mr Liddell's negativity, but agreed that the immediate outlook for Carter Holt was uncertain at best.

Early signs of a recovery in Australian and New Zealand building consents have emerged, but most in the industry agree it will be at least March before any solid effects are felt.

Carter Holt's Wood Products bore the brunt of the building slowdown.

The division, which supplies timber for framing and panels, returned earnings before interest and tax of just $6 million.

It was a dramatic turnaround from the previous quarter's $25 million, gained as Australian builders rushed to put up houses before prices rose after the introduction of GST.

But even if the Australasian construction market does recover, analysts predict that Carter Holt will still struggle amid declining pulp markets and a global economic slowdown.

"Everything for them is looking pretty average," one analyst said.

"It's pretty hard to see a pick-up in the near future."

The company is taking downtime at its Kinleith mill, and has tried a range of strategies that include making new products and changing export systems.

But those avenues have now been exhausted.

Carter Holt is not alone in feeling the pinch. Its parent firm, International Paper, yesterday revealed a 36 per cent drop in fourth-quarter earnings, and joined fellow industry giant Weyerheuser in warning of falling global demand for paper and timber.

"The impression across the board is that there is definitely a slowdown," said JP Morgan's Arthur Lim.

"Japan is still weak, and the view in the marketplace is that the US has gone from looking at a soft landing to potentially a hard landing."

The importance of the global outlook has not been lost on Mr Liddell, who this week described it as his biggest concern.

He said Carter Holt's feeling was that Asian markets were still reasonably good, although there was some dropping off.

Demand for pulp in China, which tended to rise after the New Year, could increase soon if stocks were as low as some predicted.

But Carter Holt, which exports logs to China, Korea and Japan, will undoubtedly be watching closely the economic situation in those countries. The last experience of an Asian slowdown, the devastating 1997-98 crisis, left log prices languishing at levels from which they have never recovered.

After peaking at $US185 ($423) a cubic metre in 1993, they fell to $US55. While they remain stable and export markets are described as steady, log prices still sit at almost 30-year lows.

Analysts agree that much of Carter Holt's woes come from the cyclical nature of its industries. It was at the mercy of world markets that were controlled by other countries, and while it could use its mixture of divisions to hedge against the cycle, that was not always going to be enough.

"When pulp prices go down, it's good for the Tissue division but bad for Pulp, and vice versa," an analyst said.

"They have natural hedges in their business, but being a mixture makes them unattractive to investors."

By remaining a conglomerate, Carter Holt was flying in the face of a global trend to consolidate and concentrate on one aspect of its business, said another analyst.

In doing so, it made drawing interest from investors difficult.

"Investors like to have single-focus businesses that they can compare and contrast," Mr Lim said.

"Carter Holt has tried to streamline by selling its Chile assets and building products, but New Zealand is so small that it is hard to be a single-purpose vehicle."

Mr Liddell's comment that Carter Holt's third-quarter result came from "a whole series of things coming together at one time," appears to reflect the difficulty of having such a widespread net.

But most analysts agreed that Carter Holt is now a good buy. Its share price fell to $1.56 yesterday - its lowest point since late 1998.

"Obviously we'd like to think it's at the bottom," Mr Liddell said.

Credit Suisse First Boston's Andrew Mortimer rated Carter Holt as undervalued. But others were more cynical.

"The last time a company talked a result down this much, it was trying to get a cheap buy for its parent company," said an analyst who would not be named.