What actions should be taken in these times of inflation?
Expand assets by buying or building. Yes, this may even help increase inflation, but when one looks at the pulp and paper industry on a macro basis, it is tiny compared to, for instance, oil & gas. Also “yes”--it is important to watch FCF and avoid imbalance.
But one should buy and/or build as fast as possible. Forget the sticker shock of today’s prices versus yesterday’s. That is not relevant. What is relevant is what your assets will be worth relative to what they will likely cost in one, two or three years.
The key is to do all of this smartly. The pulp and paper industry is notorious for wasting lots of money investing in the wrong things. Obviously don’t do that.
Follow old Jim’s rule…paper is made of cellulose. If that cellulose is used for its structural properties (tissue, packaging) it is just fine. If that cellulose is used to create products that convey ideas (newsprint, books, printing & writing) it is deader than a doornail.
If you follow these principles, the worst you can do is soften product prices in the short term. In the long term you will have less expensive assets than those procured in the future.
The mistake is following the almighty quarterly earnings peer pressure. My approach may depress your earnings in the short term, but they will pay off in the long term.
Again, one’s guidance should be FCF, not quarterly earnings. This will build long term value.
