Published in: SC Forestry Magazine, Nov. 2003
Richard A. Harper, CF, RF
Forest Resource Analyst
Department of Forestry and Natural Resources
“Now that I have planted all these trees, what am I going to do with them?” said one forest landowner.
In light of the bust in softwood pulpwood prices, down 42% on the average (close to 1978 prices), many forest investors are not sure of the future value of their asset. Even the downturn in sawtimber prices has some a bit nervous.
Let’s take a look back at where we have been, assess where we are, and then look for clues to the future.
Out of necessity, true forest conservation began after the great depression. The Civilian Conservation Corps (CCC) and the USDA Forest Service reclaimed worn-out, abandoned crop fields by planting trees. Most of the timberland was second growth that had battled its way back from extensive harvest and uncontrolled fire since the turn of the century.
After WWII, the pulp and paper industry invested heavily in the Southeast. In 1953, there were 51 pulp and paper mills. By 1995 another 54 mills were constructed. The average mill capacity increased from 470 to 1325 tons/day (almost three fold)! The demand for wood fiber was high and the prices for pulpwood peaked in 1998. Sawmills fared differently. There were more than 1500 sawmills scattered throughout South Carolina in the 1950s. By 1978, there were 158 (including pulp and paper mills), receiving 418 million cubic feet of roundwood per year. Today there are 82 primary mills producing almost 528 million cubic feet per year. However, this production is down 15% from peak production in 1997. The efficiency of sawmills has increased 40% since 1952 with virtually no wood wastes.
In fact, all wood processing industries output per unit of roundwood has improved 39 percent since 1900, with most of that increase (35%) occurring during the last 50 years. This includes use of mill residues, recycling, a shift from solid wood products to more paper, composite and engineered wood products, and processing technology. With the virtual “shut down” of timber harvesting on USDA Forest Service land by the mid 1990s, the Southeast was faced with more opportunity to expand lumber markets.
Coupled with the booming economy of the 1990s, sawmills increased their capacity by upgrading equipment and/or adding shifts. As demand grew, informed landowners cashed in on higher stumpage value.
While the upswing in the economy and a bull market was providing surplus spending, several other factors were aligning to create a significant change in all manufacturing. Big corporations were making major decisions to consolidate in order to better compete in a global marketplace. While some created a stronger company, some were hostile takeovers. As the pulp and paper industry experienced steady growth since the 1950s, it became closely tied to global markets as it expanded capacity. The export market is often a major factor in profitability.
Peter Ince, with USDA Forest Service, Forest Products Lab in Madison, WI, describes the global cycle supply and demand in his article, “Global cycle changes the rules for U.S. pulp and paper.” According to Ince, U.S. pulp and paper experienced relatively steady growth and sales trends until its peak in 1995. The Asian economic decline since 1997 has contributed to product price volatility. In addition, the slowdown in all U.S. manufacturing and a slump in advertising sales reduced orders for paperboard and paper. Ince also states that U.S. pulp and paper is the most capital-intensive manufacturing sector in the U.S. economy. A large part of its manufacturing costs are capital recovery and fixed costs.
This works well when a mill is producing at or near its capacity to produce paper. However, when sales decline, a mill manager will still want to keep the mill running to cover these fixed costs, despite concern for over supply. This is also true in sawmills, especially since the increase in sawmill capacity during the 1990s. But, it is somewhat more cost effective to cut production at a sawmill than it is to slow or stop production at a pulp and paper mill that must maintain production around the clock.
In general, most manufacturing facilities work to produce within a range of 85 to 100% of their capacity to produce a profit. Ince goes on to say that when there is a fluctuation of just 12 to 13% in the capacity utilization (ratio of actual production to the available production capacity), the prices for the product can vary up or down by 30 to 40% or more! In other words, recent fluctuations in the global demand for pulp and paper products have had a significant effect on profits on an industry that has experienced relatively steady production and sales trends.
Another factor in the last two years has been the rise in the value of the U.S. dollar compared to other major global currencies. This has stifled exports, which are often the extra production that creates profits. The high dollar also allowed an influx of imported commodities which have competed with U.S. products. As the high dollar impeded U.S. exports, other countries stepped in to supply the pulp and paper demand on the global market that U.S. markets serviced. Lumber imports to the U.S. increased at a time of lower domestic demand.
The current trend is a weakening of the dollar that should encourage global sales from U.S. manufacturers and stifle imports. Ince says all this has created the following ripple effects:
Similar ripples could be felt in the timber producers’ pockets in South Carolina. With less production in wood and paper processing, loggers are faced with quotas, over capacity, and pressure to reduce their service rate. From 1999 to 2003, logging employment is down 19.6%.
If you are a forest landowner, you are painfully aware of the drop in pulpwood price for softwood. Since 1998, average softwood pulpwood stumpage price has declined 42% while hardwood stumpage price has remained stable according to Timber Mart-South. Chip-n-saw is down 25%, and sawtimber is down 8%.
While the global market has forced change in the local markets, there are a few other factors that have created change in the SC forestry community:
It is not yet clear what will be the effect of federal regulations on southern yellow pine (SYP) treated lumber, as the formula will change beginning 2004. Approximately 47% of SYP lumber is treated, but it equates to 80% of the lumber value. It is anticipated the cost of treated lumber will rise 20-30%, then adjust down slightly once in full operation. While some plastic and wood/plastic substitutes are cutting into the market, treated wood is still by far the most cost effective material for outdoor construction, ranging from 40 to more than 200% less. While softwood pulpwood price has plummeted, the paper industry can not sustain the stumpage highs of $35-$40/cord and be competitive globally.
Forest landowners need to generate profits, but keep in mind that pulpwood is a market that helps move the crop to sawtimber, peeler logs, and poles in less time. The final harvest is where profits are realized. It is more important for the first thinning to leave the best trees with a uniform spacing and minimal damage to residual trees. Even though softwood stumpage prices are down, please note that from 1993 to the peak average price in 1998, sawtimber rose 63% (an annual compound rate of 8%). Today, it is down only 8% from 1998, or it is up 49% since 1993. Remember, a contribution to this rise in price was the “shut down” of timber harvest from USDA Forest Service lands. Hardwood average stumpage prices have been stable since 1998 with some growth, especially for high grade oaks and pulpwood.
Recovery and Future:
A foundation for recovery seems to be in place as most manufacturing orders are up. Projections from the recent RPA data are predicting a rebound and modest growth out to 2050. The projections are careful to state it will take some time to return to mid 1990s levels. With recent increase in global pulp and paper capacity, it is clear that this industry will not see the growth experienced since the 1950s.
The good news is that the South is projected to remain the largest timber products producer in the world. It will continue to be dominant in pulpwood supply and in the best position to capture the majority of the growth. South Carolina has seven pulp and paper mills, with six more near our border. Growth is projected to be in containerboard (pine), tissue paper (hardwood), and printing and writing paper grades (hardwood).
Paper recycling is near the maximum mix for maintaining quality paper. This will give way to more demand for pulpwood. As long as housing starts remain strong, the increasing demand for OSB will increase the demand for pulpwood. There is one composite mill in SC with three nearby in Georgia. But with current levels of softwood pulpwood growing stock, don’t expect the price to return to recent highs any time soon.
However, hardwood pulpwood is projected to remain in strong demand, due to pressure on availability and accessibility, resulting from conservation and water quality issues, and inadequate management. SYP lumber is also expected to grow, but not at historical levels. The biggest challenge to solid wood products in the short run is reducing inventory and production.
In the long run, housing starts are projected to be less than recent levels. The development and acceptance of engineered wood, and solid wood imports will take some of the market, as well as substitutes of nonwood building products (steel, concrete, plastic, vinyl siding, metal cabinets). Canadian lumber imports are expected to remain around 30% to the U.S.; however, other imports are projected to increase to 15% of U.S. consumption.
Through this economic downturn, the forest community has gone through unprecedented change. There will be more to come as we adjust to an aggressive global economy. South Carolina has an abundant wood fiber supply, and the infrastructure (roads, rail, airports, and seaports) to move primary and secondary wood products to domestic and global markets efficiently. Most everyone understands that forests support competitive markets, but few realize the linkage that forest products support healthy forests and quality of life in South Carolina.
The greatest opportunity (and challenge) for the forest community in South Carolina will be to work together with local and state government and agencies. While this industry is mature, there are still opportunities that will require support from government agencies that fosters a competitive business climate. Key will be the understanding of how we keep existing markets (industries) and how to develop new markets with effective incentives.
Secondary wood manufacturing facilities compliment primary facilities and provide employment for the rural workforce. Proactive collaboration with policy makers will insure that primary and secondary industry stays and grows in South Carolina. The worst scenario is for existing mills to close shop or new industries locate to another state or country. Small businesses should be encouraged to upgrade operations and develop niche markets.
Engineered wood technology will be the fastest growing wood-using sector in the South and provides the greatest opportunity to help manage the wood fiber surplus. Much like the ecosystems we work with, we are all dependent on each other. Forest products must be affordable for the consumer, and the residual forests and associated natural resources must be sustainable. Each sector must continue to be aggressive in the management of forest resources and the operations of their businesses. No one sector can dominate the other without creating detrimental imbalances.
We are an independent lot, but it is time that we come together and speak in unison to the people who depend on forest products and enjoy the forest resources… everyone.