Asia's crisis challenges forest product firms: S&P

Asia's crisis challenges forest product firms: S&P

HONG KONG (Reuters): Asia's crisis presents challenges for regional forest product companies, Standard and Poor's Corp said yesterday.

"Prices in the region are declining in line with falling demand, curtailing the ability of companies to pass on, in full, U.S. dollar-denominated prices to domestic customers," S&P said in a statement.

S&P said rated forest product companies in Thailand and Indonesia, particularly Asia Pulp and Paper Co (APP), Asia Pacific Resources International Holdings (APRIL) and Advance Agro Public Co, were the subject of the latest edition of its publication CreditWeek.

S&P said its speculative-grade debt ratings on forest product companies in Asia reflect the issuers' ability to service debt obligations in a timely manner under the current difficult economic and financial conditions.

In Indonesia, ratings on the lowest-rated companies reflect the likelihood that they may reschedule foreign debt payments under the voluntary framework announced by the Indonesian government.

"To service substantial foreign currency debt obligations, Asian forest product companies will maintain high operating rates without building inventories and seek to rapidly expand exports to Europe, the U.S. and Japan," S&P said.

Where necessary, companies are discounting product to establish a presence in new markets, creating downward pressure on global prices.

S&P said it expects global rationalization in the forest product industry to increasingly focus on Asia.

It said Asian-based companies have become more cost- competitive compared with those in the Northern Hemisphere.

Despite the constraints on margins posed by transport costs and inflationary pressures, Asian producers are expected to remain globally low-cost.

Furthermore, long-term growth prospects in the region are positive, reflecting rising living standards and literacy rates. As economic and financial systems recover in the next few years, S&P said it expects Asia to remain, on balance, a fiber-deficit region, boding well for the local forest product industry.

In addition, long-term regional growth prospects and the industry's cost position are highly attractive features to foreign investors, particularly those companies currently focused on mature Northern Hemisphere markets.

"Foreign investment is likely to increase in Asia if investors can obtain reasonable confidence in emerging-government policies on foreign ownership and control, especially fiber security, and if restrictive practices impeding operational efficiency are relaxed," S&P said.

In the short term, however, acute systemic problems that characterize financial systems in the region, especially Indonesia, are making it difficult for corporations to conduct business and service both domestic and foreign currency debt obligations.

The key factors underpinning individual ratings of Asian forest product companies and the prospects for further rating changes include: debt leverage and maturities; liquidity reserves; ability to generate foreign currency revenues through exports; dependence on imported raw materials and capital goods; risk default among debtors and customers; and, capacity of the domestic banking sector to provide necessary financial services.