Moody's Investors Service has downgraded its outlook for the global paper and forest products industry to negative, from stable, over concerns about fundamental business conditions in the next 12 to 18 months.
The agency expects operating income for the industry will weaken slightly because of declining demand or prices for most grades of paper and forest products.
"The sluggish economic conditions in Europe and North America and reduced use of printing paper as consumers in developed regions continue to shift to electronic devices are behind the weakness," it said in a report released Thursday.
New paper and paper-packaging supply coming online in China will likely exceed domestic demand, boosting inventories and putting further pressure on prices.
"We don't expect that any cost-cutting measures companies take will be enough to offset these challenges," Moody's said.
The ratings service expects conditions in Europe will worsen. Demand and prices deteriorated over the past several months because of weak economic growth and excess capacity.
North America, which accounts for about two-thirds of global operating income, is also expected to weaken slightly.
"Reduced use of printing and writing paper and the continued weak U.S. housing market will keep pressure on demand and prices."
Consumption of packaging and tissue will likely improve but slightly lower prices will partially offset income gains, the service said.
Latin America is expected to remain stable as strong demand from China offsets lower prices for market pulp and most paper grades.
Moody's said it could revert its outlook to stable if operating incomes increases by up to four per cent.
In September, a report by the Toronto-Dominion Bank suggested there is a light at the end of the tunnel for the Canadian lumber industry because of growing demand from China and a recovery in the U.S. home-building market expected late in 2013.
TD economist Leslie Preston said patience would pay off for the sector, which is suffering with prices still 36 per cent below the previous cyclical highs, despite gains in other commodities.
The sector was hammered as the bottom fell out of the U.S. home-building market and demand evaporated in the wake of the financial crisis.