The Wood and Fiber Supply Chain Experts
Wood Chips Put the Squeeze on Northwest Mills
From the February 2009 Forest2Mill newsletter.
In the Pacific Northwest, already beleaguered forest products
producers are confronting sagging global demand for wood pulp and paper. Suffering as a result of
the lowest lumber prices since the 1980s, mill owners in the region are now being challenged by a
freefall in wood chip prices.
Weak lumber markets always create a decline in the volume of wood chips generated as a
by-product of lumber production, and the diminished supply then leads to higher prices. While not
great news for pulp and paper producers seeking furnish for pulp mills, sawmill operators in this
region depend heavily on these higher returns from residue, particularly wood chips, to serve as an
offset to production costs. When lumber prices are low, chip revenue can mean the difference
between running and shutting down.
In the third quarter, we wrote about the potential for a shortage of chips in this area as a
result of the fading availability of windstorm damaged timber and stiff competition for remaining
residue chips. What changed over the last quarter?
Throughout 2008, pulp and paper producers dramatically increased their wood chip inventories
in the Northwest because they feared a shortfall. To prepare for the coming winter, these companies
supplemented residue chips with high cost whole log chips in order to build chip piles rapidly.
During this period, whole log chips were being produced at record levels.
By November, however, the flagging economy and resulting worldwide slowdown in demand for
paper and packaging brought deep cuts in the prices of paper products. Northwest paper mills, cast
in the role of the high cost producer, rolled back production. Many were forced to take major
downtime and several curtailed capacity indefinitely.
With deep curtailments of pulp mills throughout the region, wood chips became a drag on the
market overnight. Over the last couple of years, ownership of a number of pulp mills (of all sizes)
has changed or evolved, and these mills are operating with a different strategy than in the past —
filling orders rather than filling their warehouses. In the south-end, Southwest Oregon and
Northern California in particular, buyers are placing delivery quotas on wood chips. Long-time
buyer-seller relationships have suffered as a consequence of this just-in-time philosophy. Because
chips, in some cases, are languishing without a home, many mills are directing wood chips be burned
as hog fuel out of necessity. At year-end, chip inventories were falling quickly, though supply
still outstripped demand.
The future for wood chip supply and pricing is uncertain. Soft worldwide demand is likely to
continue. Demand for wood fiber will strengthen when the economy rebounds, though this could be one
to two years away. While wood fuels and pellets will continue to emerge as strong players seeking a
steady resource for a growing industry, this will be a gradual process.
First quarter 2009 Northwest chip prices will trend lower and pulp logs will continue to
experience deep price cuts.
With no economic turnaround in sight, everyone is double checking their hole cards. Sawmill
operators need to evaluate the future of traditional wood chip buyers and the pricing structure
with which they’ve become accustomed. Pulp mills operating in high cost fiber areas will need to
balance whole log chips and residuals to ensure a secure supply. The ability of individual
companies to recognize and adapt to changes in traditional raw-material patterns will determine the
winners and losers in the supply chain.