Story by David Knight,
Co-Publisher/Executive Editor
Going forward, the outlook for the U.S. forest industry is more optimistic as the economy tries to find solid footing. Here are some thoughts to chew on:
After falling 60% last year from peak production in 2006, wood products manufacturing should gradually improve. Analysts expect housing starts to begin inching up again, slowly lifting lumber, plywood and OSB production. News of sawmill shuts is quietly being replaced by news of scattered sawmill and structural panel plant re-starts and additional operating hours/shifts. And late last year, lumber and panel prices began slowly advancing again as capacity and demand became more synchronized. Now, log supply is a problem for many, particularly in the South, where ground conditions are soggy.
However, mortgage foreclosures continue to weigh on the housing industry and may temper any noticeable uplift. A respected forest industry information provider recently noted that a 2009 federal program intended to help forestall more foreclosures is not working well. This situation, along with stubbornly high unemployment, could lead to another wave of distressed mortgages. Let’s hope not.
Don’t expect all wood products plants that closed during the economic freefall to resume operations in the short-term. Significant capacity has disappeared and will not return any time soon, but new U.S. capacity could emerge in the wake of western Canada’s pine beetle epidemic, as that area and the U.S. Pacific Northwest respond to a growing Chinese lumber/log market and as the South’s thinned pine plantations transition from pulpwood to sawtimber assets.
Pulp and paper’s prospects appear to be heady, at least in the short-term. Pulp, in particular, is enjoying a bull run that began late last year, thanks to a tight global supply/demand situation that sent prices scooting ahead. And when the late February earthquake in Chile impacted the power, water, road and port infrastructure there, some mills temporarily went down, exerting more upward pressure on the market. That helps explain why some mills in the south-central U.S. are reportedly paying $90 a ton at the gate for hardwood.
While down, pulp and paper outperformed wood products last year. One reason was that the sector never reached the lofty pinnacle achieved by wood products a few years ago, and its slide, while steep, started at a lower altitude and stopped on a higher ledge. Still, production was throttled in keeping with demand, and wood fiber consumption in the sector was the lowest in 20 years.
Even so, companies that made certain types of paper products performed quite well largely because they received a controversial federal subsidy that was available through December 31. The U.S. Treasury paid out billions in blended fuels tax credits after IRS ruled that their burning a small amount of diesel fuel with black liquor, a pulping byproduct that the companies have used as boiler fuel for decades, qualified the manufacturers for the payments.
To be sure, this money helped keep many companies in the black. For example, despite taking considerable downtime at several mills, announcing the closure of others and absorbing higher raw material costs, International Paper reported a 12% profit for the year on sales of $23.4 billion, down about 5% over 2008, according to International Woodfiber Report. Many other companies took the money, including Smurfit-Stone Corp., which remains in bankruptcy. Whether or not the pulp and paper industry skated on thin moral ice in finding a way to qualify for the money, the subsidy undergirded some giant firms and helped sustain countless other small businesses operating in the nation’s rural economy. That was Act 1.
Today Act 2 is on the stage in the form of the Biomass Crop Assistance Program (BCAP), created by Congress in 2008 and put on a fast track by the Obama Administration in 2009 to promote alternative energy development. Once again, many pulp and paper companies, along with entities from other industries, are feeding on tax dollars at the federal trough, taking a new subsidy they claim they are entitled to because they burn biomass in boilers to produce in-plant electricity. In doing so they appear to be violating Congressional intent: to benefit the collection, harvest, storage and transportation of biomass and those individuals and companies so involved. (See page 24 for the American Loggers Council’s perspective on phase one of the program.)
The pulp and paper industry exhibits hypocritical behavior when it decries the availability of federal and state subsidies for wood-based alternative energy as it pushes aside its small business allies to tap subsides clearly intended for the latter group.
Perhaps this merely reflects just how threatened the pulp and paper sector apparently is. The industry began declining not many years after the nation’s last greenfield mill came on line in 1991 and the slump has accelerated since 2000. The reasons include the proliferation of e-commerce; consolidation; aging high-cost plants and a gradual production shift to South America and Asia. Energy, environmental regulations, feedstock costs, capital and labor continue to weigh on the sector, which consumed about 200 million tons of roundwood and chips last year compared with about 257 million tons in 1994. To be fair, a ramp-up in waste paper recycling is one reason for the virgin fiber consumption pullback, but this has been overshadowed by a decline now entering its third decade.
Unfortunately, the capacity contraction is not stabilizing. Dr. Richard Phillips, a retired IP executive and adjunct professor in the Dept. of Wood and Paper Science and executive in residence at the College of Natural Resources at North Carolina State University, is a well known and highly regarded paper industry authority. Phillips says forces and trends not related to the current downturn continue to impact the paper industry. He predicts that within five to 10 years the consumption of graphics papers—those used in newspapers, catalogs, magazines, books, greeting cards, etc. and for copy paper and such—will be 50% lower than the peak production year of 2000. He indicates that packaging products should fare better, assuming that China doesn’t make off with most of the remaining U.S. manufacturing activity. Overall, Phillips predicts more machine and plant shuts, noting that older, high-cost mills will go first. However, he also says that some mills may be spared if their owners upgrade products and/or change to different ones.
Potentially offsetting this trend, at least in part, is the budding wood-to-energy market, which exasperates the pulp and paper industry but excites loggers, suppliers and landowners. Perhaps it will eventually fill some of the supply chain space being vacated here and there by the weakening of traditional markets.
As the cut-and-run era of big lumbering was winding down some 80 years ago, it was the coming of age of modern pulping technology that brought about a big demand for pulpwood that led to greater forest resource recovery and a remarkable upswing in tree planting and reforestation. Pulp and paper helped incubate the forest management technology and techniques that manifest themselves in today’s sustainable forests. Ironically, as the pulp and paper sector adjusts to a new age and downsizes, these forests are fueling yet another badly needed market.