Fitch Ratings, Chicago, has a negative outlook for the paper and forest products industry. It anticipates declining credit metrics and possibly some business failures. Revenues, earnings and cash flow will all be tested next year and cost reduction initiatives will be lacking, not able to compensate for a decline in product demand, it adds.

Focusing on the containerboard industry, it says that a saving grace this year was Chinese linerboard demand, which helped keep U.S. linerboard exports humming and mills operating at capacity even though North American box demand waned. Exports were a less important variable for paperboard and recycled boxboard producers. But now the China factor has diminished and indigenous producers such as Nine Dragons are putting mill expansions on hold. The slowdown in China’s growth is sure to turn U.S. exports back on shore and result in more mill downtime. Pulp and old corrugated containers costs have been plummeting. This benefits earnings but also makes current prices in corrugated boxes and linerboard indefensible to customers. As with paper, volumes and costs are expected to average lower next year, with prices lagging the decline, but the loss in volumes shipped will be the trumping variable that will sour earnings and will be additive to the packaging volumes that have been lost to lower-cost overseas venues.

With sliding earnings, capital expenditure budgets will take a back seat to cash flow preservation, particularly in view of constrained credit markets whose terms have tightened considerably. A number of companies have already announced capital expenditure cuts for next year, Fitch notes.